Vijay Kumar Gaba

“Generation gap” has perhaps been a subject of study, discussion and debate ever since beginning of civilization. The new generations have been adopting new ways and methods of living, and the older generations have been rejecting these ways and methods as degeneration. The human civilization has evolved, regardless of this persistent conflict between experience and experiment.

It could be matter of debate whether experience is good as a guide or driver. But in my view, there is no doubt that the innovation (experiment) of new ways and methods of living and doing things has been the primary driver of the human civilization so far.

With the advancement in science and technology, the life span of people has increased materially in post WWII era especially. This expansion in life span has material impact on the dimensions of “generation gap”. The gap which was historically visible mostly between grandfather and grandsons is now sometime visible even in siblings born 5-6yrs apart.

In Indian context, the people who grew up in the socialist ear of 1970s had a very different mindset from the Maruti generation of 1980s. The star war generation of satellite television era of 1990s abandoned the 80s mindset; was soon rejected as outdated by the Google generation of 2000s. The people growing up in post global financial crisis era skeptical about the idea of globalization and free markets, but are free from the constrained mindset of thinking in local terms. They are at ease with creating global corporations and thinking in terms of billion dollars. The generation that will grow up in post COVID-19 era, may have a very different outlook towards life and work.

In this context it is interesting to note the results recent study conducted by Bank of America (BofA) Securities’ Global Research. The key highlights of the study could be listed as follows:

·         The Zillennials or ‘Gen Z’ (as BofA refers to the current generation) have never known a life without Google, 40% prefer hanging out with friends virtually than in real life, they will spend six years of their life on social media and they won’t use credit cards. They’re the ‘clicktivists’: flourishing in a decade of social rights movements, with 4 in 10 in our proprietary BofA seeing themselves as ‘citizens of the world'. The Gen Z revolution is starting, as the first generation born into an online world is now entering the workforce and compelling other generations to adapt to them, not vice versa. Thus, about to become most disruptive to economies, markets and social systems.

·         Gen Z’s economic power is the fastest-growing across all cohorts. This generation’s income will increase c.5x by 2030 to $33tn as they enter the workplace today, reaching 27% of global income and surpassing Millennials the year after. The growing consumer power of Zillennials will be even more powerful taking into account the ‘Great Wealth Transfer’ down the generations. The Baby Boomer and Silent generation US households alone are sitting on $78tn of wealth today.

·         Gen Z could be EM’s secret weapon. APAC income already accounts for over a third of Gen Z’s income and will exceed North American and European combined income by 2035. ‘Peak youth’ milestones are being reached across the developed markets – Europe is the first continent to have more over-65s than under-15s, a club North America will join in 2022. In contrast, India stands out as the Gen Z country, accounting for 20% of the global generation, with improved youth literacy rates, urbanisation, and rapid expansion of technological infrastructure. Mexico, the Philippines and Thailand are just a few of the EM countries that we think have what it takes to capitalize on the Gen Z revolution.

·         Gen Z is the online generation: nearly half are online ‘almost constantly’ and a quarter of them will spend 10+ hours a day on their phone. In our survey, over a quarter of Gen Z’s top payment choice was the phone, while credit cards weren’t even in their top 3. This generation is the least likely to pick experiences over goods, and values sustainable luxury – choosing quality over price as their top purchase factor.

·         Only half of US teens can drive, while our survey finds that less than half of Gen Z drink alcohol, and more than half have some kind of meat restriction. A third of them would trust a robot to make their financial decisions. Gen Z’s activist focus filters into their interactions with business, too – 80% factor ESG investing into their financial decisions, and they have also driven consumer-facing sustainability campaigns, such as single-use plastics. Harmful consumer sectors, such as fast fashion, may be the next focus.

SEBI relaxes cash segment margin norms for non F&O stocks

SEBI has increased the margining requirement for the non F&O stocks traded in cash segment, vide circular dated 20 March 2020. SEBI had also tightened the rule regarding market wide limits for individual stocks available for trading in F&O segment. The objective of increasing the margin requirements and tightening the exposure limits was to control the volatility, ensure market stability and orderly conduct of the market in view of the COVID-19 related concerns.

With effect from today, the enhanced margining norms for non F&O stocks traded in cash segment stands withdrawn. The restrictions on exposure to F&O stocks have also been relaxed. This implies that the market regulator now see lesser risk of market disruption due to COVID-19 related events and news.

The move has generally been received as positive for a rally in mid and small cap stocks. In past couple of weeks, many brokerages have published report favoring investment in mid and small cap stocks. For example, Edelweiss recently revised its outlook for small and mid cap stocks. A note from brokerage stated:

“The Q2FY21 earnings as well as the outlook beat expectations for most Small- & Mid-caps (SMIDs). Importantly, this led to 5–20% earnings upgrades for FY22 for nearly 63% of our coverage SMIDs; another 10% of SMIDs wallowed in 20%+ earnings upgrades. We like category leaders and—so far—this has helped our model portfolio outperform SMID indices by ~4% (over the past 12–15 months). We now include more recovery plays as sequential improvement plays through, having a bearing on stock performance.”

 The classical Bollywood blockbuster Mother India (Mehboob Khan, 1957), was one of many Indian movies of that era that exposed the ugly realties of Indian society, especially feudal dominance, repression of destitute, and exploitation of women. But made Mother India a classic was the courage and grit of a destitute woman, who stood not only against the oppressor but also against her own son who decided to rebel and take the path of crime and violence. One particular instance from the movie that has stuck to millions of minds is about the pledge of gold bangles by the protagonist Radha (played by Nargis) to the unscrupulous money lender Sukhi Lala (played by Kanhaiya Lal) to repay an old debt. In the end, the rebel son of Radha, Birju (played by Sunil Dutt), attacks Sukhi Lala’s household and forcibly takes the bangles and kills Lala to avenge the atrocities done by him to his family, especially his mother. The pair gold bangles thus became the symbol of feudal repression, women exploitation, rebellion by poor and oppressed, and revenge.

Traditionally, gold has been an important means of social and financial security for rural and semi urban population in India, due to poor availability of banking facilities. The success of financial inclusion program in past one decade (especially in past 6years) has however changed the things in many respects. Gold has emerged as key collateral for working capital and emergency credit in past one decade. Though still there is no dearth of exploiters like Sukhi Lala and oppressed like Radha in hinterlands, but conditions have improved materially from 1950s and 1960s. Especially in past one decade, the business of gold loans in organized sector has recorded remarkable growth. Lower rates, easy access, convenient and fast disbursal has made gold loans popular amongst the middle and lower middle class households.

A recent report published by World Gold Council (WGC) highlighted how gold loans are helping Indian households to weather storms, like global financial crisis (2008-10) and Covid-19 (2020).

The following points highlighted in the report are noteworthy for investors, especially the investors in gold loan companies.

·         As of 3Q2019, 52% of investors owned some form of gold, with 48% having invested in the 12 months preceding 3Q2019. The average Indian household holds 84% of its wealth in real estate and other physical goods; 11% in gold and rest 5% in financial assets. Dependence of rural households in physical assets such as gold has been a result of not just love of gold, but also poor banking penetration till lately.

·         Digitalisation of economy and e-commerce penetration are fundamentally altering the age-old scenario, so an element of option beyond gold and real estate in asset portfolio is setting in – though this may take time and may need some catalyst to show tangible results. As of now, love for gold and a window to accumulate wealth without much of the disclosure that financial assets ensue, keeps gold central in rural wealth.

·         Gold loans are popular in both urban and rural areas. They compare favourably with personal loans regarding quicker processing time, no requirement of income proof or prior credit history, and low processing fees. With such advantages, the overall gold loan market has grown from INR 600bn (US$12.6bn) in FY 2009-10 to INR 9,000bn (US$122.6bn) in FY 2019-20, a compound annual growth rate (CAGR) of 31.1% over the last decade.

·         Unorganised gold loan market still accounts for 65% of the gold loan market but organised gold loan market has grown with the market penetration and geographical expansion of financial service institutions and financial inclusion.

·         Gold jewellery kept as a collateral against gold loan by top three gold loan NBFCs (Muthoot Finance, Muthoot Fincorp and Manappuram Finance) totalled 298.8t at end of FY20. The combined gold holdings of these three NBFCs would rank in the top 20 gold reserves of central banks and supranational organizations.

·         Gold loan NBFCs became a de facto choice of consumers during 2006-10 due to their convenience, quick disbursals of loans, and lower interest rates. The growth was also supported by rising gold price during the period.

The organised gold loan market has opportunity to grow with collateralised gold holdings of 1,280t, equivalent to approx. 5% of the total outstanding gold stocks in India. The organised gold loan market can continue to provide lending against gold jewellery both to individuals and small businesses, potentially helping to meet their financing needs. Technology has also become a key enabler in spreading the reach of gold loan business, increasing the penetration of financial inclusion through gold loan industry. The digital offerings in the form of online gold loan (OGL) scheme had become popular since inception.

·         Technology can become a key enabler in the growth of the gold loan market in India. Gold loan NBFCS have already embraced online gold loan scheme which has increasingly become popular since its launch. But more can be done in this area with launching of self-servicing kiosks in branches and public location, launch of gold valuation machine. e-KYC and loan disbursement and repayments using e-wallets and prepaid cards.

S&P expects NPAs to rise

The rating agency S&P Global, has cautioned that the Indian bank NPLs will rise to 10%-11% of gross loans as forbearance is phased out. The rating agency however believes that Top-tier private sector banks and finance companies have sufficient capital buffers but public sector banks would need more capital to tide over the crisis.

“India financial institutions will likely have trouble maintaining momentum after the amount of new nonperforming loans (NPL) declined in the first half to Sept. 30, 2020. S&P Global Ratings believes forbearance is masking problem assets arising from COVID-19. With loan repayment moratoriums having ended on Aug. 31, 2020, we expect to see a jump in NPLs for the full year ending next March.”

Monetary policy at critical juncture

In past few days the weather in India has changed rather swiftly. The winter has set in couple of weeks of early. The higher mountains are already covered with snow. North of Vindhyachal, the air has distinct chill; in South the weather is pleasant. The atmosphere is generally hazy, with heavy cool air not letting the pollution fly away.

In political troposphere also, the heat has subsided with conclusion of intensely contested elections for Bihar assembly. However, the political stratosphere continues to remain hot and dusty, as the political leaders move further east towards West Bengal with their retinue.

In financial markets also the season has changed. Past couple of months has not seen any noticeable disaster in corporate debt sphere. Hopes of recovery have been rekindled with many beleaguered borrowers (DHFL, IL&FS, Jet etc.) showing some encouraging signs. The suspended debt schemes of Franklin Templeton have also given hopes to investors that a significant part of their money may be returned in next 6months.

In stock markets, the quarterly result season has just ended. The market participants were keenly watching the financial results of companies for the July-September quarter, as it was the first quarter after the state of total lockdown imposed in March ended and the economy began to open up. The corporates have mostly surprised the market participants positively. The results and commentary for the forthcoming quarters have been mostly encouraging. The markets have not only warmed upto the idea of normalization in growth in 2021, buy heated up significantly, rising to new highs.

I find the following views and opinions of various brokerages noteworthy:

GDP in 2QFY21 to decline, farm sector to do well

There is near unanimity amongst analysts and economists that the GDP data for 2QFY21, to be released this Friday, will show a negative YoY growth; though there is no consensus on the extent of GDP contraction. The estimates vary widely between 5% and 11%. It is also a consensus that farm sector has done remarkably well in 2QFY21.

I find the following views of Nirmal Bang Institutional Equity Research nearest to my own estimate:

GDP in 2QFY21 is likely to decline by 8.2% YoY. Agriculture & Allied sector is likely to do well with a growth of 4% YoY in 2QFY21. Industry (excluding Construction sector) is likely to witness a decline of 4.6% YoY. The Services sector (including Construction sector) will likely decline by 11.2% YoY in 2QFY21 with the sharpest contraction of 25% YoY in Trade, hotels, transport and communication sector. We expect a sharp improvement in the Construction sector, which will decline by 6.5% YoY in 2QFY21 after declining by 50.3% YoY in 1QFY21.

We continue to factor in a protracted economic recovery. For FY22, on a low base, we are working with a GDP growth of 6%. In our view, containment measures may well get extended into 1HCY21, making us maintain our cautious view on growth.

On top of a bumper Kharif (monsoon) crop that has likely aided the 2QFY21 GDP growth, the latest sowing data indicates that Rabi (winter) crop is also likely to be doing well. As per Prabhudar Liladhar research Fertilizer and farm chemical growth data for Rabi crop is quite encouraging. There is 18% growth in total sales in October driven by 34%/8% growth in Urea/NPK. SSP placements up 21% YoY. Sale of domestically manufactured fertilisers are up 13% while that of imported fertilisers are up 34% YoY, driven by Urea.

IIFL securities recently wrote, “…the sudden recent rally in crop commodities could prove a significant tailwind for CY21. In the broader specialty chemical industry, Indian companies reported mixed results, but still far better than their leading global counterparts, who remained under serious pressure.”

2QFY21 earnings, broadly buoyant

As per Motilal Oswal Securities - The Sep-quarter (2QFY21) corporate earnings season was a blockbuster one, with big beats and upgrades across our Coverage Universe. With an upgrade (>5%) to downgrade ratio (<-5%) of 4:1, this has by far been the best earnings season in many years. 63%. Nifty sales declined 6.7% YoY (est. -5.2%), while EBITDA/PBT/PAT reported growth of 8%/14%/17% YoY (est. -0.3%/-7%/-5%). 62% of Nifty-50 companies reported a beat on our PAT estimates, and only 18% posted results below our expectations.

HDFC Securities, also confirmed this view. A recent note by the brokerage stated - Q2FY21 was a strong quarter. Key highlights of the quarter: (1) Q2 margins beat estimates across multiple sectors due to sharp cost-cutting initiatives and improved pricing power in the wake of lower competition; (2) positive management commentaries on Sep/Oct exit run-rate of revenues as unlocking led to sharp demand rebound in multiple sectors; (3) market share gains for the larger companies; (4) much improved collection trends for lenders; (5) continued uptick in capital markets activity, leading to strong performance for brokers and exchanges.

Consensus turning bullish on markets

As the benchmark indices regain the entire loss from January – March 2020 and trade at their all time high levels, the brokerages seem to be turning bullish on Indian equities.

Morgan Stanley write in a recent note: “COVID-19

infections appear to have peaked, high-frequency growth indicators are coming in strong, government policy action is beating expectations, and Indian companies are picking up activity through the pandemic. Thus, we expect growth to surprise on the upside, rates trough to be behind, and real rates to remain in negative territory for several months. We lift our F2021,F2022, and F2023 EPS estimates for the BSE Sensex 15%, 10%,and 9%, respectively – we are now between 6% and 7% above consensus estimates. By our estimates, the market will be trading at 16x forward earnings at our new BSE Sensex target of 50,000 in December 2021 (our old index target was 37,300 for June 2021).

Sector wise outlook

Motilal Oswal Securities published a compendium of management commentary post 2QFY21 results. The key highlights of the commentary are as follows:

Banking: Commentaries of banks suggest there was an improvement in growth and asset quality. The asset quality outlook is much better than initially feared as collection efficiency picked up sharply in 2QFY21. Collection efficiency in the Top 4 private banks was above 95% and for SBI it was 97%, excluding the Agri segment.

Consumer: Rural demand continues to outperform urban demand. Some of the cost-saving measures implemented by companies during the lockdown are likely to sustain going forward.

Auto: A preference for personal mobility, pent-up demand, and normalization of the supply chain have led to demand recovery. However, most companies mentioned being cautious due to uncertainty regarding demand sustainability post the festive season.

IT: management commentaries indicated the pandemic has acted as a tailwind for the sector - as enterprises are undertaking cloud adoption at a faster pace and digital transformation at the workplace has accelerated.

Cement: companies have informed that cement prices have firmed up across regions in Oct'20 and were up by INR10/bag over Sep'20 on average - despite the quarter being a seasonally weak one.

Healthcare: Despite the COVID-led impact on the Domestic Formulation (DF) segment, the intensity of YoY decline is gradually reducing in Acute therapies with an increase in patient-doctor-MR connect. Operational cost-saving benefits are expected to continue over the medium term.

Capital Goods: Managements across the board attributed to recovery in the Products business being faster v/s the Projects business.

Textile sector outlook

As per a recent note by Motilal Oswal Securities, earnings visibility has improved across players in the textile sector. The Home Textile industry witnessed a strong demand revival during 2QFY21 on high demand from big retailers. Apparel/Fabric/Yarn players are tail-riding on an industry revival: These players may benefit from a paradigm shift in demand to India, huge build-up of pent-up demand and benign raw material prices. The USD:INR is depreciating at a faster pace than the USD:RMB, which has made Indian exporters competitive v/s the Chinese. demand, Indian manufacturers are increasing capacities and focusing on increasing utilization levels.

Production linked incentives (PLI) seen as game changer

The recent measures taken by the Indian government to promote manufacturing in India as structural positive for Indian economy. Goldman Sachs in a recent note mentioned—

“We see the “Make in India” (MII) initiative potentially having a profound impact on India’s economy. Plans to make India more self-reliant could see the share of manufacturing in GDP rise from 17% to 25% over the next few years, creating 100mn new jobs. Knock-on impacts could see India better develop its consumption potential, boosting earnings for domestic companies over time.

In a scenario of full implementation, our Macro team expects real GDP growth to pick up to 8% in the next five years, vs their base case of 5-6%. The team does not bake full implementation of MII into their numbers, given the undoubted challenges: improvements in manufacturing competitiveness, implementation of production-linked incentive (PLI) schemes, better infrastructure, reforms in labour/land laws, more private sector participation, continued political will, and growth in exports. In a recent note, the team noted that Vietnam and India were the most mentioned destinations as alternates to China for manufacturing.”

Global Macro

USD Outlook: Goldman Sachs featured views of three experts in a recent note about the outlook for the US Dollar.

It’s not just the rate of global growth that matters for the Dollar's value, it’s how global growth compares to US growth. Even if the global economy is recovering, if US growth outpaces global growth, the Dollar will remain supported. - Barry Eichengreen (UC Berkeley)

The Dollar’s value surged at the beginning of the coronavirus recession… but it has lost ground since as the global recovery has gained traction. This pattern will likely persist... with good news on the global economic recovery probably weighing on the Dollar… almost regardless of how the US economy is performing relative to key trading partners. - Zach Pandl (Goldman Sachs)

By all logic, the Dollar’s dominance in the global monetary system should be declining… But the reality is that the Dollar’s position remains as dominant as ever. - Eswar Prasad (Cornell)

Bitcoin: JP Morgan in the meanwhile admitted its mistake in rejecting Bitcoin as a scam. From there recent notes however it appears that the brokerage is now inclining towards accepting the cryptocurrency as an attractive asset.

Eric Peters, CIO of Hedge Fund One River Asset Management, reportedly proclaimed (about Bitcoin) that "There Is A Vague Sense That Something Powerful, Apolitical, Transnational, Is Emerging".

Gold: After major underperformance of Gold ETFs in past three months, many analysts have started questioning the rally in gold.

Regulation

RBI: Over weekend, a committee set up by RBI submitted its report, suggesting major changes in the regulatory framework for private banks, including the ownership structure and promoter holding norms. The market seem to have received the recommendation as a major positive.

A dissenting note however came from none other than the former RBI Governor (Raghuram Rajan) and Deputy Governor (Viral Acharya). The duo, who are now academicians in the USA, questioned the very rationale of the proposal. As per them, allowing Indian corporates into banking sector would be a bombshell. They argue that in the present times, it is even more important to stick to the tried and tested limits in corporate involvements in banking.

SEBI: SEBI is reportedly targeting analysts meets and conference calls hosted by various listed companies to apprise the participants about the latest developments in their respective company. SEBI feels that this creates some sort of information asymmetry as the managements many share some unpublished price sensitive information with the analysts and large investors participating in such calls or meets. SEBI is considering making it mandatory for the companies to share transcripts, notes and details of all such calls to the public withjin stipulated time in the interest of investors.

Some food for thought

“One can know a man from his laugh, and if you like a man's laugh before you know anything of him, you may confidently say that he is a good man.”

— Fyodor Dostoevsky (Russian Author, 1821-1881)

Word for the day

Fidelity (n)

Loyalty

It is a tradition amongst local brokerage houses, which primarily cater to the domestic household clients, to present a list of their top stock ideas to their clients on every Diwali. The ideas are presented usually with one year investment period, i.e. till next Diwali.

Reading through the presentations of various brokerages this year, I found the following key messages:

Kotak Securities

As we advance towards getting the vaccine (by middle of next year) and economy gets back to normalcy, we can expect the economy driven sectors to outperform the defensives in Samvat 2077. Banks, NBFCs, automobiles, oil & gas, telecom, utilities, capital goods, cement and metals could come into focus in Samvat 2077. The potential upside in most of these sectors based on our one year price targets ranges between 20 & 39% (Vs single digit potential upside in Nifty50). Since most of the economy driven sectors are prone to market correction one should have an accumulation strategy in them rather than investing at one go.

ICICI Direct

Given the scenario, we see value emerging across the market cap spectrum with the key filter being quality. We continue to advise investors to utilise equities as a key asset class for long term wealth generation by investing into quality companies with strong earnings growth and visibility, stable cash flows, RoE and RoCE.

Motilal Oswal Securities (Retail)

As we enter Samvat 2077, the markets have seen a complete recovery from the Covid lows. We expect Nifty EPS growth of 4% in FY21 while expecting a sharp rebound in FY22. Thus, the overall structure of the market remains positive. At 18x FY22 earnings, Nifty valuations is also not very expensive as it is trading closer to its long-period averages. With the economic activity recovering fast, more earnings upgrade cannot be ruled out. Further strong global markets can keep the liquidity abundant in the system, thus providing support to the overall market. However, intermittent corrections cannot be ruled out as there is a risk of second wave of Covid-19 and thus sustenance of economic recovery holds the key. From next 12 months perspective, we are positive on IT, Healthcare, Rural-Agri, Telecom, Consumer along with select Financials. We believe another round of fiscal stimulus could help elevate sentiment further.

HDFC Securities

India still is not out of woods as far as the Covid pandemic is concerned or its impact on macro or micro is concerned – though latest macro and micro data are encouraging.

In the new Samvat, investors need to look at asset class diversification, sector diversification, spreading investments over time (by way of SIP or staggered investments). Also going by the way Global investing has picked pace, MNIs and HNIs need to look at this asset class to check whether this suits their risk profile and skillsets.

All in all after a turbulent past year, we can look forward to a relatively sedate but selectively rewarding year.

Sharekhan (BNP PARIBAS)

Stepping into Samvat 2077, the threat of the pandemic is not over yet and the fear of a second wave in big geographies is a potential risk. Further, the overhang of US election outcome will keep equity market on its toes.

For Samvat 2077, we have hand-picked 12 quality stocks to create a portfolio, which is a mix of both large-caps and quality mid-caps. All the 12 companies in the portfolio have all the ingredients to outperform the broader market indices over the next 12 months and at the same time withstand volatility and emerge stronger.

SMC Global

It is an opportune time for the investors to tweak and tighten portfolio for the next Bull Run, by embracing buy on dips strategy in frontline quality stocks. Quality stocks with structural story will be the right recipe for a good investment and wealth creation.

Reliance Securities

In Samvat 2077 we recommend the investors to focus on sectors, which are considered to be defensive or prone to prolonged economy slowdown. Further, the companies having sound execution expertise, brand equity, quality management, lean balance sheet with consistent cash flow generation, sound corporate governance, healthy return ratio and better margin of safety are likely to deliver better alpha for the investors.

Axis Securities

Our themes for Samvat 2077 are:

·         The small and midcaps are picking up steam and they should deliver solid returns in 2021 as economic uncertainties will reduce and volatility will decline.

·         Housing and banking will be major themes to watch out for in 2021 because of correction in real estate prices and lower interest rate regime.

·         Digital and telecommunications will continue to remain major long term structural themes.

·         Growth is now a more certain theme, but growth at a reasonable price will be an even bigger theme to invest which will deliver solid returns over the next one year.

Yes Securities

The year 2020 is largely about survival, both health‐wise and finance‐wise. It is also an opportune time to tweak and tighten your portfolio for the next bull run. Vikram Samvat 2077 could well be akin to the year 2003, from a market standpoint.

As is evident from the above cited views of various brokerages, the consensus view is generally buoyant, with a few words of caution here and there. There appears to be a consensus that growth will pick up in 2021.

However, there are strong differences about the ideas that may work in next 12 months. Brokerages like Kotak are advising investors to accumulate cyclical; HDFC, ICICI and Reliance etc are suggesting investors to focus on high quality defensives; while Motilal is advising a diversified portfolio of sectors that worked in 2020, e.g., IT, healthcare, rural/agri an select financials etc.

Some like Axis Securities are forecasting strong midcap outperformance; and some like ICICI Direct are advising focusing on quality large caps; most other have suggested a multicap strategy with a judicious mix of large and small cap.

One striking feature is the disconnect between the broader view and the suggested stock ideas. For example, Axis Securities is bullish on Housing, but the list of recommended stocks does not include any real estate company.

Bharti Airtel, HCL tech, L&T, ICICI Bank, are some of the most common ideas in the list of stocks presented by most brokerages.

 For past many years, it has become a tradition for popular market participants (brokers, fund managers, large investors, analysts etc.) to don finest attires and appear on special Diwali shows hosted by various TV channels to announce their prophecies for the traditional Indian New Year. In the spirit of the festivals of light, they enthusiastically speak about their outlook about the economy, financial markets, and investment opportunities.

In earlier years, these prophecies were taken seriously by the audience, mostly household investors. However, based on my interaction with several people from the targeted audience, I feel, now days most people listen to the experts for validating their own positioning rather than for guidance. Whether in consonance of their positioning or otherwise, these prophecies are drowned in the noise of firecrackers on Diwali night itself.

However given the mobility restrictions and popularization of digital media due to Covid-19 this year, most experts have presented their views from their homes (instead of TV studios) rather early. Therefore the audience has got 4-5 days, against the usual 2 days, to digest the expert views and react to these, even though there is no change in these views for past 15years.

Besides, the experts draped in fine silk Kurtas spreading the message of positivity and hope, another thing that has dominated the financial media in past one week is the state of automobile sector in the country.

First, the CEO & MD of Bajaj Auto Limited, rattled the markets with his rather despondent commentary about the state of economy in general and the state of automobile industry in particular. He categorically stated that the retail sales this Navratri have been disappointing this year, and even the present level of sub optimal demand is not sustainable after the accumulated demand post “unlocking” is met.

The rival Hero Honda management however calmed the ruffled feathers, presenting a buoyant picture saying that demand has remained robust during the festival season and is likely to sustain in coming months.

The management of the commercial vehicle major Ashok Leyland appeared confident that demand shall pick up steadily from hereon. Both the tractor majors, M&M and Escorts, also continue to show robust growth and margins.

One of the large non banking lenders, Mahindra & Mahindra Financial Services, recently said that the market for cars is limited by supply and not demand. They told analysts that against 39000 cars in September, they financed 50000 cars in October.

The Federation of Automobile Dealers’ Associations (FADA), in a press release issued on Monday, advised caution for OEMs and dealers. The apex body of auto dealers categorically stated that “Dealer Inventory for both 2W and PV are at its newest highs in this Financial Year. FADA requests all OEMs with a special request to 2W OEMs to assess the on-ground inventory level and curb production accordingly.” The near term outlook of FADA, as stated in the said press release, is extremely cautious. It reads as follows:

“As we enter the last leg of festivals and with Covid getting into its 3rd wave in many cities, there is a sense of cautiousness amongst customers. Due to the lockdown announced in few European Countries, procurement of spares will also be a cause of hinderance for smooth supply of vehicles in Indian markets. This will create a supply and demand mismatch thus affecting the passenger vehicle sales.

FADA once again cautions both OEMs and Dealers to keep a check on vehicle inventory as post festivals, demand may remain subdued. Since Inventory levels are at its highest during this Financial Year, it may impact Dealers financial health thus leading closures and job losses.”

In my view, the divergence of views in Auto sector, aptly reflects the state of overall economy as well. At this point in time it is extremely difficult to make a correct assessment of the state of Indian economy.

The general view that rural economy is resilient to the slow down while the urban economy continue to struggle may not be relevant for one year perspective. The fiscal challenges of the government ought to eventually reflect on the support extended to the rural sector also. But as I said, it is very complex at this point in time. Making a prophecy about the economy and market for next 12 months requires a certain degree of both audacity and apathy. Unfortunately, I have none.

 The benchmark Nifty retraced to it all time high level recorded on 14 January 2020. It erased all the losses incurred due to a disappointing budget (from market expectations perspective) and outbreak of Covid-19 pandemic leading to a nationwide shutdown. In a year full of disappointments and despondency, this small and seemingly irrelevant event brought cheers and ignited hope for a better new year. Not to undermine the enthusiasm and positivity around the event, I would just like to highlight three small points:

1. On a longer horizon, after spending a decade in a flat channel, equity markets had been broadly moving higher in a widening channel since 2003. There could be multiple reasons for this strong up move, punctuated with multiple deep corrections. However, if we have to narrow our search, I would list the following three reasons as the primary drivers of markets:

(a)   Mostly easy monetary policies of the global central bankers.

(b)   Change in valuation dynamics due to dominance of technology and innovation in business rather than the conventional man & material factors of production.

(c)    Globalization of markets due to digitalization & dematerialization (of money, trade & commerce, securities, material, labor, information, etc.)

There is no reason to believe that this widening channel will contract or get sustainably violated anytime soon. Though there could be some temporary violations on either side like 2007 and 2009. The important point to note however is that going forward, as the channel widens further, the market moves could be even larger and volatile. The investors and traders therefore need to brace up for that.

2.    The retracement of Nifty to its all time high is led by only two sectors, viz., Information Technology (IT) (up 32%) and Pharma (up 44%). The financial sector which had driven markets to its all time high in January is still down 15% since 14 January 2020 level. PSU Banks in particular are down 44%. Public sector in general is down 30% from 14 January 2020 level.

Again there is no evidence to suggest that this trend may not prevail for next many months also.

3.    The market breadth in this period is materially negative even though the broader market indices have not materially underperformed the benchmark. This implies huge divergence in performance in the broader market also.

 I have always believed that “equity investment” is a serious business but mostly done in a casual manner. In past three decades I have observed that most investors take equity investment decisions based on factors that are not related to the underlying business of the company they are investing in. While this may be more true for the small household investors (Retail) and High Networth Individuals (HNI); the professional fund managers (Institutions) and large traders are also seen taking decisions based purely on factors like politics, geopolitics, and monthly or weekly data (trade, jobs, production), etc. No wonder the “breaking news” on TV channels causes more volatility in stock prices than the management guidance about the business of the company.

I have seen many Retail and HNI investors spending less effort and time in taking equity investment decisions than they would normally spend on buying a shirt. And worst, they spend much less effort and time in taking a decision to dispose an investment than they would do for disposing an old shirt.

From the interviews and comments of some reputable professional fund managers it appears that they usually assign significantly higher weightage to the macro factors, especially political promise of policy reforms etc., than required, especially when the empirical evidence is materially against placing reliance on such political promises.

I am raising this issue this morning, because I believe that even in normal times, investors face numerous uncertainties and challenges. The consequences of these uncertainties vary vastly and are difficult to assess. Investors have to consistently struggle to assess the impact of fast changing technologies, markets, processes and methods on their investment portfolios. The consistently changing macro environment, e.g., interest rates, inflation, liquidity, demand etc., needs to be incorporated in assessing the sustainable valuations of their portfolio. The information asymmetry, regulatory changes, product innovation and debasement of governance standards at business entity level, are some of the regular challenges that an investor has to face. The challenges rise multifold in the uncertain times, like the present one.

The outbreak of pandemic has created enormous uncertainty in almost all spheres of life; especially businesses. A large number of businesses are struggling for survival. Multifaceted challenges have subjected a host of businesses (and some industries) with extreme uncertainties having material and severe consequences. Unlike the previous crises (dotcom bubble of 1999-2000 and global financial crisis of 2008-09), which mostly impacted one set of businesses, this crisis is more pervasive.

The impact of crisis led disruption is exacerbated by the fact that prior to the crisis the global economy was witnessing massive technology transition. Artificial Intelligence and clean fuel technologies were changing the landscape for many businesses. To make the matter more complex, the widespread trade war (involving USA, China, Japan, EU, and UK) was redefining the global trade and terms of trade. As per some reports, the IMF’s GDP contraction forecast for 2020 is more than double the estimated contraction that took place in 2009, the worst year of the global financial crisis.

The equity investors in India have made sub-optimal returns in past five years. Many investors are indicating that the past five year returns for them are in low single digits, with some reporting even negative return for past three years. In these circumstances, it is critical that investors make a holistic review of their investment process. Especially, those investors who have made material changes in their portfolio in view of the 2014 & 2019 India general elections and 2016 & 2020 US general elections, need to immediately sit with their respective advisers, if any, and make necessary amends.

 My dilemma this morning is whether I should be concerned about the internal politics of the United States of America, as most of my colleagues and financial market participants appear to be! In past 20yrs, we have seen George Bush Jr. (Republican, 8yrs), Barak Obama (Democrat, 8yrs) and Donald Trump (Republican, 4yrs) as presidents of United States. In these 20years, India witnessed Atal Bihari Vajpayee (NDA, 3.5yrs), Manmohan Singh (UPA, 10yrs) and Narendra Modi (BJP, 6.5yrs) as India’s prime minister.

Evidently, a Socialist India (UPA) has lived well with Republican US (Bush); and a free economy supporter India (BJP) has lived well with Democrat (Obama) US. In past two decades, we have achieved progress in our civil nuclear program and we have been able to materially enhance our relationship with key US allies like Japan, Australia, UAE, Saudi Arab, and France; while maintain our strong relationship with Russia and Iran. The relationship with China has been volatile all through these years; though US has supported us in the rough patches of Sino-India relationship.

The issue of VISA, especially H1B VISA, has frequently made news in these past two decades. The volume and profitability from US business of our IT companies has grown manifold in these two decades, despite all this noise. The issue of FDA being particularly strict on Indian pharmaceutical exporters to US has also made to the headlines frequently. The US business of our pharmaceutical industry has also grown multifold in these two decades. The number of USFDA approved facilities in India has grown exponentially in past two decades.

Of course we can debate that the trade could have been much higher; or we did not do as well as we could have due to VISA restrictions, FDA actions etc. But, then we will have to answer some tough questions like lack of ethics and discipline at some of our pharmaceutical manufacturers, protectionist policies of Indian government, misuse of H1B and L1 VISA by some of Indian IT services companies, etc. It is therefore better to go with the empirical evidence rather than dwelling upon some hypothetical outcomes. And the empirical evidence is that Indo-US trade and strategic relations have been widening and deepening consistently. George Bush had famously expressed his “respect” for Atal Bihari Vajpayee, and “Love” for Dr. Manmohan Singh. “Barak” visited India twice (most by any US president) and expressed his reverence to Gandhi, admiration for Prime Minister Modi and commitment to relationship with India. Trump has gone much ahead in showing bromance with Prime Minister Modi and expressing love for “Hindu”. Biden has chosen Kamala Harris as his running mate and has promised favorable H1B regime for Indian IT companies. Regardless of who gets to live in White House for next four years, 2020 election may end up with highest number of Indian American elected as federal and state law makers.

I feel, worrying about the outcome of US elections may be out of habit of worrying too much. I believe, in broader context, the question “Trump” or “Biden” may not be any different from “Suicide” or “Murder” (of SSR).

 The work on developing as crypto currency started in early 1980s. The idea was to create a medium of exchange that is independent of any central authority, is based on trust and is accepted by distributed consensus. The process was formally commercialized in 2009 with release of Bitcoin, the first decentralized crypto currency. May be uncertainty over future of fiat currencies post global financial crisis (which led to printing of unprecedented amount of new money) prompted adoption of an independent currency as medium of exchange. Since then, the crypto currencies based on block chain technology have been gaining popularity. Presently, besides Bitcoin, over 6000 variants of crypto currencies are in vogue. The present value of all bitcoin in circulation is over US$250bn and the average daily trading value of bitcoins id over US$23bn. It is clear that Bitcoin is emerging as a serious challenger to Gold as an alternative currency or medium for exchange of value.

In India, RBI issued a circular in 2018 directing all entities regulated by it (Banks and NBFCs) not to deal virtual currencies or provide services for facilitating any person or entity in dealing with or settling those; thus virtually banning use of crypto currencies in India. The Supreme Court quashed the said RBI circular in March 2020, on the appeal of the Internet and Mobile Association of India, representing various crypto currency exchanges. The SC accepted the argument of the appellant that in the absence of any specific law banning crypto currencies, dealing in these is a “legitimate” activity, hence RBI’s circular banning these is untenable.

In August various media reports suggested that a “note” had been forwarded to the concerned ministries for inter-ministerial consultation to promulgate a legislation banning the use of crypto currencies in India. Reportedly, the inter-ministerial committee headed by the former Finance and Department of Economic Affairs (DEA) secretary, Shri Subhash Chandra Garg (who has been in news recently for criticizing the government for backtracking on reforms) had drafted the Bill of the law to ban crypto currencies. In the meantime, as per various media reports, since March 2020 SC order quashing the 2018 RBI circular, the local crypto exchanges have reported as much as 10x trading volume growth and a significant increase in the number of signups.

The question therefore arises are we blind to the opportunity and numb enough to not sense the winds of change blowing across our faces! The answer is a categorical “No”.

In January 2020 itself, NITI Aayog (the think tank of the government of India on policy matters), had released part 1 of the discussion paper on “Blockchain: The India Strategy”. The well-researched and well-presented paper unambiguously stated that the government recognizes the opportunity, importance and need for blockchain based crypto currencies. For example, note the following excerpts from the discussion paper:

“‘Blockchain’ has emerged to become a potentially transformative force in multiple aspects of government and private sector operations. Its potential has been recognized globally, with a variety of international organizations and technology companies highlighting the benefits of its application in reducing costs of operation and compliance, as well as in improving efficiencies.”

“Blockchain is a frontier technology that continues to evolve. In order to ensure that India remains ahead of the learning curve, it is important to understand the opportunities it presents, steps to leverage its full potential and such necessary steps that are required to help develop the requisite ecosystem.”

“Blockchain technology has the potential to revolutionize interactions between governments, businesses and citizens in a manner that was unfathomable just a decade ago.”

“Blockchain is seen as a technology with the potential to transform almost all industries and economies. It is estimated that blockchain could generate USD3 trillion per year in business value by 2030.”

Obviously, the government recognizes the potential, opportunity, need and importance of crypto currencies. Apparently, however, it wants to tread with extreme caution. For example, the following excerpts from the discussion paper highlight the cautious stance of the government.

“Blockchain has been positioned as a revolutionary new technology, the much needed ‘silver bullet’ that can address all business and governance processes. While the promise and potential of blockchain is undoubtedly transformative, what hasn’t helped this technology, that is still in nascence of its evolution, has been the massive hype and the irrational exuberance promulgated by a bevy of ‘Blockchain Evangelists’.”

“Despite the fact that the technology is still in a nascent stage of its development and adoption as it continues to evolve, it is important for stakeholders such as policy makers, regulators, industry and citizens to understand the functional definition of the entire suite of blockchain or distributed ledger technologies along with legal and regulatory issues and other implementation prerequisites. Equally important is the fact that this technology may not be universally more efficient and thus specific use cases need to be identified where it adds value and those where it does not.”

“Any transformative technology, in its initial stages of development, as it moves out of research / development phase to first few applications to large scale deployment, faces several challenges. Part of the problem is that such technologies are initially intended to solve a specific set of problems. Bitcoin, which has led to the popularity of decentralized trust systems and has powered the blockchain revolution, was intended to develop a peer-to-peer electronic cash system which could solve for double spending problem without being dependent on trusted intermediaries viz. banks. As Bitcoin started gaining prominence, the potential of underlying blockchain technology started getting traction. However, some of the early design features that made Bitcoin popular, primarily limited supply and pseudonymity, have become potential challenges in wide scale implementation of blockchain.”

Given the nascent stage of evolution of block chain technology and crypto currencies based on it, the cautious approach is understandable. However, the caution must be pragmatic and should not transgress to typical dogmatic bureaucratic paradigm. We may avoid rushing to capture a still uncertain opportunity; but we should not arrive too late either.

(The NITI Aayog discussion paper “Blockchain: The India Strategy” could be read here.)

 There was this very famous soccer player. He was one of the main strikers for his country as well as club team. He won many matches for his teams. He was very popular amongst sports enthusiast, and as such attracted many corporates to become brand ambassador for their respective products. Unfortunately, one day he met with a serious accident in which many of his limbs were fractured. He remained in intensive care for many months. Doctors had to perform several surgeries to keep him alive and make him walk again.

After spending two years in bed, the striker took his first step with the assistance of his wife and walking stick. The hospital management immediately broke the news to the media. The fans were ecstatic and celebrated the news by popping up champagne and ringing church bells. The doctors informed the team management and sponsors (who were keeping a close watch on the health conditions of their star striker), in confidence that their star would never be able to play again and need a stick to walk for rest of his life. They were obviously not as happy as the family members and army of fans. They also knew it well that the fans will hardly take any time in forgetting this star, once they know that he is not stepping on the filed again.

Recently, the finance ministry, informed the media that GST collection crossed Rs1trn mark after eight months, as the consumption in the economy picked up ahead of the festive season. The financial media highlighted this piece of information and presented as a definite sign of economic recovery. The financial market participants received the news enthusiastically and celebrated it by writing buoyant reports of an imminent economic revival.

The finance ministry however did not specify that in each of past two years, the GST collections have failed to meet the budget estimates and this year also there is no possibility of budget estimates being achieved. For past many months the state governments have been at loggerheads with the central government over the issue of GST compensation. The government has been drastically cutting spending on consumption as well investment to save the fiscal conditions becoming unmanageable that could trigger a rating downgrade and panic reaction from foreign investors. In September Government spending was just Rs2.32trn vs Rs3.13trn (yoy).

One can understand the enthusiastic response of traders to each bit and piece of data improvement, but the moot point is whether the investors and businesses should also be celebrating it! This question is pertinent to answer, because the fact is that the Government of India has indulged in the fiscal repression of worst kind, when the states world over unleashing fiscal stimulus of unprecedented proportion.

As per some reports, “Centre will earn an additional Rs 2.25 lakh crore from new taxes on petrol, diesel and other fuels imposed since lockdown began. This is despite global crude prices touching record lows.” It may bbe recalled that the Centre has increased excise duty by Rs 13 per litre on diesel and Rs 10 per litre on petrol during lockdown besides  increasing road cess on fuel by Rs 8 per litre. State governments have also increased their value added taxes on fuel to make up for revenue loss amid the COVID-19 crisis. The additional tax on fuel is estimated to be 50% more than the GST revenue lost during April – October 2020. If we add to this the additional taxes imposed on alcohol etc., the figure of additional taxation would be much higher than the revenue lost due to lockdown. This is fiscal repression of unsuspecting people, who are still under the impression that the spending cuts etc. are due to shortfall in tax revenue.

The fact is that Indian economy (striker), which was one of the major drivers of global recovery post 2008 global financial crisis, is on crutches. There is little visibility that it will become driver of global economy again in next 3-4years at least. The team management (businesses) and sponsors (investors) may have little to celebrate in the monthly GST or auto sales numbers. Traders (army of fans) may though pop up champagne to celebrate Diwali.