Has 2013-2018 mostly been a "Hope" trade?

Thought for the day

"Meeting people unlike oneself does not enlarge one's outlook; it only confirms one's idea that one is unique."

—Elizabeth Bowen (Irish, 1899-1973)

Word for the day

Scrutator (n)

A person who investigates

Malice towards none

Nirav Modi has reportedly taken shelter in UK!

Would be interesting to know how far behind is UK from Pakistan in harboring people wanted by Indian police?

 

First random thought this morning

The biggest fake news doing round on social media is about how the quota for SC/ST/OBC is undermining the merit in professional courses like engineering, medical and law.

As a recent TOI article highlighted (see here) it is the money power and feudal dynastic tendencies that are harming the merit more than anything else. Successful doctors make sure that their heirs get medical degrees (regardless of merit) so that they can inherit their Clinics and Patients. It is true for successful and famous lawyers and architects also. CAs have no quota or reservation system. Can anyone speak confidently about supremacy of merit in accounting profession? The merit is totally compromised in case of temple priesthood,

An Investor's Diary

In my view, the potential growth of India under current circumstances is not more than 8%. Growing at 6.5-7.5% in the current direction would not lead to enough employment opportunities. Agriculture, as we have seen in past few years, is still “God” driven. Basing an investment strategy on God’s alone is not advisable in my view.

The consensus growth estimates indicates that the recovery seen in past couple of quarters may sustain and gather some momentum. From sub 7% in FY18, the growth may recover to ~7.5% in FY19 and FY20.

As per a recent report by CRISIL, "We expect the Indian economy to expand at 7.5% next fiscal. After two consecutive years of deceleration, this looks like a strong recovery. But here’s the sobering thought: that would still be below the average growth of 7.6% seen over the past 13 years. To boot, it would come on a weak base of this fiscal.

 

However, much more than the quantity of the growth, it is qualitative aspects of the growth which are matter of serious concern. The structure of the growth as partly manifested in direction and constitution of growth remains weak and is expected to remain so for better part of next five years (More on this later)

The current estimates of the modest recovery in growth are overwhelmingly dependent on the steady global growth environment, continued high public expenditure and favorable weather conditions.

For a structural improvement in the economy we need our manufacturing and construction sectors to grow at a much faster rate. The current estimates of industrial growth service sector growth of cannot and will not lead to any material improvement in the structural weaknesses of the economy, e.g., high level of unemployment/underemployment, poor physical and social infrastructure, low tax to GDP ratio, declining private sector investment, etc.

All the indicators are highlighting that the modest recovery in growth will probably come from higher public expenditure and micro adjustments like correction in inventory levels, higher capacity utilization, higher exports, & improvement in project execution etc, .

This may not lead to any material improvement in employment conditions. On the contrary there are sufficient indications that many employers may actually further rationalize their work force to protect their margins. Historically, the work force rationalization in India, especially in manufacturing and construction sectors, has been more permanent in nature. Household savings and investment may therefore remain constrained in next few years at least.

The investment environment is not likely to improve in any substantive measures. Higher inflationary expectations shall keep rates at elevated level; producers are not likely to gain much pricing power as the demand domestic environment continues to remain weak; balance sheet stress that has eased in some pockets, may begin to show up again.

Insofar as the current medium to long term growth trend in India is concerned, in my view, the trend growth decline that began from FY09 may not bottom in FY19, even if we accept the rather bullish estimates of government agencies.

If we examine the extant bull market in Indian equities in this context of lower growth, and diminished growth potential, we get a feeling that the current market bear more similarities to 1998-1999 dotcom bubble rather than the 2004-2008 credit led infra building episode.

As could be seen from the following chart, the long term growth (5yr rolling GDP CAGR %) has shown little improvement in 1997-2000, but Nifty had still returned its second best yearly return of 67% during 1999.

Similarly, the long term growth has been largely flat during the current bull market since August 2013 (FY14-FY18).

The picture get more clear, if we compare the bull markets of 1998-1999, 2003-2008 and 2013-2018, juxtaposed with the long term economic growth.

1999 bull markets coincided with declining growth trend, and hence did not sustain much. Subsequent losses were huge and mostly irrecoverable.

2003-2008 bull market occurred when the growth was witnessing massive jump. The market lasted longer, and despite global contagion, losses were recovered in no time.

In the current bull market, so far we have not seen any material change in long term growth trend.

The point is how long and how far this market could continue to stand on fragile "green shoots" of economic recovery?

Greed still dominating the market sentiments

Thought for the day

"If the Confederacy fails, there should be written on its tombstone: Died of a Theory."

—Jefferson Davis (American, 2909-1889)

Word for the day

Disneyfy (v)

To create or alter in a simplified, sentimentalized, or contrived form or manner.

Malice towards none

Nothing comes out of nothing, and nothing ever could.

 

First random thought this morning

A visit to a summer cricket coaching camp in south west Delhi was encouraging and shocking.

Encouraging because 60odd children aged between 12-17, all attired in proper white cricketing gears were slogging in 42°C temperature. Some parents were also waiting on the sidelines. Most of these aspiring cricketers were from lower middle families. Their parents could hardly afford the cost of proper gears and coaching fee.

Speaking to some of these children, it was discovered that playing IPL and make tons of money, is latest dream career for many children these days. The shocking part was that none of these appeared to have a Plan B in place.

 

Greed still dominating the market sentiments

Historically, one of the most successful, though intuitive indicator of the greed dominating the fear in market is outperformance of small cap stocks over large cap stocks. The outperformance peak often marks the peak of a market cycle. Subsequent correction in the outperformance of broader markets coincides with the bottoming process.

A strong cycle bottom is formed when the fear begins to dominate and benchmark indices begin to outperform the broader markets materially.

In past, an outperformance level of 25-35%, in a given period has marked the cycle peak for the market. The correction thereafter have been sharp, painful and very broad based. In one year post peaking, the broader market corrected much more sharply as compared the benchmark indices.

In last instance (2006-2009), the outperformance peaked in January 2008 and broader markets corrected sharply thereafter.

During July 2006 and January 2008, BSE Sensex gained 106%, while BSE Small Cap (187%) and BSE Midcap (150%) sharply outperformed the Sensex. IN Next one year till the market cycle bottomed in March 2009, Sensex had lost 18% (from July 2006 level), while Small Cap (41%) and Midcap (36%) lost much more than the Sensex.

On that parameter, the current market cycle might have peaked in January 2018. In the Cycle that began from august 2013, Sensex gained 98%, while Small cap 267% and Midcap 233% sharply outperformed. That outperformance has corrected somewhat in past 5 months. However, it may still be far away from the likely market bottom, that could be reached by March 2019.

There is an argument that the market cycle that began in August 2013 had already ended in February 2016. And the current market cycle is a new one.

I personally do not agree with this viewpoint, as none of my parameters for market bottoming were satisfied in February 2016.

Nonetheless, even if we consider the cycle that started in August 2013, to have completed in February 2016, still the broader market outperformance is material. The market cycle therefore may not be anywhere close to the likely bottom.

 

Is it dotcom all over again?

Thought for the day

"Never be haughty to the humble or humble to the haughty."

—Jefferson Davis (American, 2909-1889)

Word for the day

Superluminal (adj)

Appearing to travel faster than the speed of light.

Malice towards none

Does yog guru cum industrialist Baba Ramdev want to become UP Chief Minister?

 

First random thought this morning

In the present political scenario, Indian voters face really tough choice. Between the incumbent prime minister Modi, who is being seen as not being able to meet peoples' elevated aspirations (which he himself has raised in past 5yrs); Rahul Gandhi who is still untested in any administrative role; and a host of regional leaders who lack national appeal.

If the recent voting trends are any indication, we are heading for a 1996 like situation, where some BJP supporters may press NOTA; Congress may only be able to increase its vote share marginally from 2014 and regional parties which got decimated in 2014, emerge stronger.

If this assessment proves correct, expect 5 out of 7 Delhi seats for AAP!!!

Is it dotcom all over again?

The greed trade that dominated the Indian equity market for past couple of years has suddenly weakened in past few weeks. There are signs of fear emerging as the dominating factor in the market. Though they may not have capitulated as yet, but a sense of unease is palpable amongst investors.

This is a typical case of hangover after a spell of ecstasy and overindulgence, and a key sign of the beginning of the market cycle bottoming.

It is pertinent to note that the bottoming of stock markets is usually confused with the lowest point of indices in a cycle. In my view, it is a complicated and often long drawn out process through which the factors supporting a positive environment for “risk investments”, e.g., equities, fall in place, and a foundation for the next cycle is laid.

The following pieces, in particular, should fall in place before we could call the market bottom.

• Psychological bottom should occur, i.e., greed should conquer the fear.
• Macro environment should be supportive of corporate initiatives for growth.
• Valuations should be fairly cheap to entice investors into taking higher risk.
• Earnings upgrade momentum should be positive.
• Technical bottom should be achieved.
• The alternatives to equity (debt, bank deposits, gold, real estate) should sound less attractive on risk-reward basis.
• Moderate to low volatility.

However, before I try to make any analysis of the bottoming process and form a strategy for the new cycle, it is important to assimilate the anatomy of the extant market cycle.

In past four years (FY14 to FY18), Nifty EPS has grown at measly ~2.8% CAGR, whereas Nifty has risen by ~12.2% CAGR. In this period, real GDP growth rate has fallen.

It is therefore important to examine if the extant market cycle that started in summer of 2013, is more like 1998-2000 dotcom cycle.

The dotcom cycle was purely a global phenomenon, in which Indian markets also participated, returning a phenomenal ~88% CAGR during November 1998 and February 2000. The retail participation in that cycle was overwhelming. But in hindsight we all know that it was mostly a "bogus" and "manipulated" market as rise in equity prices was not supported by earnings improvement or macro growth pick up. The gains were ephemeral and evaporated totally in less than a year.

In next few days I shall share my views on the same. Comments welcome.

Labor pain

Thought for the day

"To one who loves his country in all its parts, it is natural to rejoice in whatever contributes to the prosperity and honor and marks the stability and progress of any portion of its people."

—Jefferson Davis (American, 2909-1889)

Word for the day

Schlimazel (n)

An inept, bungling person who suffers from unremitting bad luck.

Malice towards none

Sharad Pawar must note that for a Janta Party encore, opposition parties would need some senior and still relevant BJP leaders to join them. Mere Sinha couple would not be adequate!

First random thought this morning

Water scarcity in Shimla must ring alarm bells in the corridors of power, both center and state. The day is not far when the locals will turn violent against the unmindful tourists and government agencies, thus destroying of whatever is left of this once heavenly place. Delhi is also witnessing riots like situation in many areas over water scarcity.

Experts and courts have been warning about deteriorating conditions of ground water across the country.

Any government or politician who makes a claim of development must account for water first.

Labor pain

Speaking with some traders in the Delhi wholesale markets, I realized that pain for migrant laborers is going to rise further in next few years.

Many of these markets are located in old Delhi congested areas. The only way to evacuate goods from these markets is through hand pulled rickshaws &, carts, and coolies carrying goods on their heads. I know for sure that this true for most old cities like Mumbai and Kolkata.

Most of these markets are likely to be either relocated or decongested in next few years, rendering this manual labor totally unemployed, just like the poor manual rickshaw pullers who lost their wages to E-rickshaws.

Construction work in large infrastructure projects is also becoming much less labor intensive now, with rising use of modern technology and automation.

If the civic authorities are to be believed, these migrant laborers are avoidable burden on the civic infrastructure. It is also a common complaint of law enforcement agencies that migrant laborers are also a major source of criminal activities in cities.

Having worked on some social projects to help these migrant laborers, I know the plight of these laborers rather well.

Many of these laborers mostly live in inhumane conditions, with little access to civic amenities like water, electricity, education, toilets, adequate health services, child care, etc. Many of them do not have a proper shelter to sleep in hot summer and chilly winters. Most of them have dependent family back home, but still work at much below the prescribed minimum wage rate, thus subsidizing the traders, MSME manufacturing units, builders etc.; and even households who use their services as rickshaw puller, vegetable & fruit vendors, domestic helps etc.

Worst, these laborers have to often face racist attacks from locals who believe that these migrants are encroaching upon locals' share of employment by undercutting the wage rate.

Despite a host of programs for rural employment, most of these laborers from UP, Bihar, Jharkhand, and Odisha have little to fall back, and cannot afford to return to their villages. Moreover, with rising automation, the opportunity to work in farms is also shrinking with time.

The question however is, in a large and diverse country like India, with frustrating and unpardonable regional inequalities, demographic imbalances and pervasive socio-economic disparities, should we not have a national labor migration policy.

Instead of providing random solutions like accident insurance, few night shelters, additional railway reservation counters during festivals and pulse polio camps, the government should consider regulating the interstate labor migration with a comprehensive legislation to safeguard everyone's interests.