Managing trade balance

Thought for the day

"Those who in quarrels interpose, must often wipe a bloody nose."

—John Gay (American, 1685-1732)

Word for the day

Fizgig (n)

A type of firework that makes a loud hissing sound.

Malice towards none

Is Arun Jaitely batting for dilution of "Prevention of Corruption Act", or just suggesting some corrective amendments?

 

First random thought this morning

The world is anticipating serious trade disruption, that may potentially lead to a recession. It that does happen, emerging markets will be badly affected.  In spite of whatever, NITI Aayog and other experts feel, India may not be insulated from a global contagion.

Domestic situation not looking great either. Fiscal management requires day to day monitoring. CAD is expanding. INR and yields conditions worsening.

Amidst all this, no one knows who is FM of the country. The Finance Ministry website says, its AJ whereas people believe its PGl!

Managing trade balance

India imported over US$444bn worth of goods in 2017, i.e., a per capita import of appx Rs24,000. This is about 22% of annual per capita income.

Exports from India during the same year totaled US$298bn. i.e. per capita exports of Rs16,000. This is about 14% of annual per capita income

In past more than one decade, the share of India in overall global trade has been mostly stagnant below 2.5%, a rather unacceptable number for the third largest global economy in PPP terms. Since 2011, exports have remained close to US$300bn, briefly falling to ~US$265bn during 2015 and 2016.

India imports ~58% of its requirements from Asian trade partners. EU at ~18% and North America at ~8% are other major trade partners of India.

Traditionally, energy and precious metals & diamonds constituted a dominant part of India's import basket. But in recent years, electronics (phones, TV, solar panels, & computer parts etc.) have become significant part of India's import basket.

As per a Bloomberg report (see here) "The relentless rise in purchases of smartphones, TVs and other goods have made electronics India’s second-biggest import item after oil, and is pushing the nation’s trade deficit wider.

There are five challenges before the government, in my view—

(a)   To increase the domestic production of energy and electronic products to substitute import.

(b)   To make Indian exports more competitive.

(c)    To increase share of India in global trade to a respectable level (as per the government targets 5%).

(d)   To diversify trade to non-traditional areas.

(e)    To maintain trade balance with most trade partners.

I would like to share my random thoughts of these five challenges in next few posts.

What are you scared off?

First random thought this morning

A portion of the railway foot over bridge in Mumbai collapsed in Mumbai. Last year also a bridge had fallen in Mumbai.

It is totally unfortunate to note that the concept of preventive maintenance to the civil structures is still not very popular in India. At the core of this apathy is perhaps our total disregard for the value of human life and right to people to live with dignity.

Thought for the day

"Fools may our scorn, not envy, raise. For envy is a kind of praise."

—John Gay (American, 1685-1732)

Word for the day

Kakaesque (adj)

Marked by a senseless, disorienting, often menacing complexity:

Malice towards none

Delhi government wants to teach happiness to school children!!

What are you scared off?

A chance conversation with a reputable fund manager and a small group of businessmen was quite perplexing. They discussed the political scenario at length. In the view of the said fund manager, PM Modi getting reelected to the office in 2019 is a key risk to the Indian financial markets, especially equities. The businessmen mostly nodded in agreement.

When I asked, "is there any substantive evidence to establish that full majority governments have performed better than the minority governments or coalitions with numerous parties having divergent agenda?", no satisfactory answer came through.

I realized that this thought is in fact be bothering many market participants. In recent months some prominent global fund managers, brokerages, and business advisory firms have also highlighted PM Modi not getting reelected would be a key risk to Indian equities.

To my knowledge, no one has so far specified any substantive reasons for this fear and concerns. I am afraid to say this, but unfortunately, this view is mostly driven by deep prejudices, ignorance and arbitrariness.

For example consider this—

Resolution of Satyam Computer has so far been one of the best examples of efficient government intervention in resolving the cases of corporate fraud and misgovernance. The intervention was swift, effective and acceptable to most stakeholders.

Do you remember who steered the Satyam resolution from government side?

Prem Chand Gupta, a minister from Lalu Yadav's RJD quota in UPA-1.

In the memories of the current generation name of APJ Abdul Kalam is etched in indelible ink. He inspired the young and old alike. It would not be an exaggeration, if I say that APJ is in the same league as Mahatma Gandhi, insofar as commanding the reverence of common people is concerned.

Do you remember who was one of the key instruments in APJ's election as the President of India?

Mulayam Singh Yadav, who broke ranks with the united opposition (People's front) in supporting NDA's nominee APJ Abdul Kalam.

On my recent visit to UP, I enquired from people about the law and order situation in the state. Almost everyone agreed that law and order situation in UP was much better during the Mayawati's tenure as CM.

Sharad Yadav, Omar Abdullah, Mamta Banerjee, Nitish Kumar, Ram Vilas Pawan, et. al. handled key ministries during AB Vajpayee led NDA's regime and there are no exceptional complaints of inefficiencies and corruption!

 I. K. Gujral who ran a government with handful of MPs, is still respected as honest and good PM. Whereas there are few who remember Rajiv Gandhi (who had brute majority of 414 MPs) as a great PM!

What I am trying to say is that with her 1.3bn children Mother India is far stronger than a few politicians.

Enterprise of the millions of Indians forms core of the Indian economy. Few good politicians can perhaps enhance their capabilities and output a little. Many bad politicians can perhaps slow them down a bit. But no party, individual or group of individuals could stop them.

The worries over who is and who is not prime minister in my view are mostly unwarranted.

If market does correct materially only due to this reason, I would take it as a massive opportunity to avail maximum possible leverage and buy Indian equities.

Celebration for vanity sake

Thought for the day

"On the choice of friends, Our good or evil name depends."

—John Gay (American, 1685-1732)

Word for the day

Buttery (adj)

Like, containing, or spread with butter

Malice towards none

Why both Ex Finance Ministers are trying so hard?

First random thought this morning

Another overloaded bus has fallen in deep gorge in Uttrakhand, claiming about 50 precious lives. Anyone who has travelled to hills of Uttrakhand and Himachal Pradesh by road is well aware that most of the public busses, autos, and taxis run overloaded there. Speeding and driving under influence of alcohol is also not uncommon.

The point is "why the enforcement agencies who allow this life threatening practices to continue for a small gratification and elected representatives (including ministers) who ignore such practices to please the strong transporter lobby should not face serious criminal charges for each such mishap.

Celebration for vanity sake

One of the "important" things that kept middle class of India busy in past few days is the engagement party of Akash Ambani, elder son of the richest Indian Mukesh Ambani. The rich and famous of India also appeared vertically divided last week. On the right being the people who got an invite to attend the gala event; and the left being the people who the Ambanis chose to ignore!

I fully appreciate that it's totally a personal matter of the family and no one has any business bothering about this.

Nonetheless, as an investor, who seriously believes that social narrative is as important for sustainable growth of the economy, as the economic and financial narrative, I must say that such events do bother me a lot.

In my numerous travels across the length and breadth of country, I have witnessed a number of family functions like wedding, birthday, anniversaries, etc. Most of the functions in middle, lower middle and even poor families are deeply inspired by Bollywood movies and publicized events of the rich and famous.

Under tremendous social and peer pressure, people are compelled to emulate the movie sequences and the indulgence of rich, regardless of their affordability quotient.

As I have highlighted many time before that a large portion of the rural debt is actually related to the spending on functions at birth, marriage, and funeral 

It would be interesting to study, how much this non-essential and mostly frivolous spending contributing to the growth in personal credit, especially consumer funding NBFCs and micro finance institutions.

People are spending on motor bikes, smart phones, SUVs, tractors, wedding & birthday celebrations, compromising on food, health, education & training, and shelter needs.

This is raising three damaging trends in the socio-economic milieu of the country:

(a)   Even the people who are better off in absolute monetary terms frustrated and cynical than ever.

(b)   There is an increasing tendency to depend on the State for meeting basic needs.

(c)    The consequent financial stress is gnawing into traditional Indian ethos, where defaulting on debt is considered one of the greatest sin. These days it is not uncommon to see people not only willfully defaulting on loans but also encouraging others to do so.

Insofar as Ambanis are concerned, I am no one to offer any advice. But I personally would have been delighted if they had set an example for common Indians, who eagerly look forward to them for inspiration. A simple marriage in a temple, with 25 guests, would have been remembered much longer (and proudly) than the one they may be planning. Otherwise, very few remember the Lakshmi Mittal's daughter's Rs2.5bn marriage or the obscene extravaganza of Subrat Roy's son wedding.

Also see Give them a dignified life and death.

Little hope for a religious renaissance

Thought for the day

"Bureaucracy, the rule of no one, has become the modern form of despotism."

—Mary McCarthy (American, 1912-1989)

Word for the day

Scupper (n)

Any opening in the side of a building, as in a parapet, for draining off rain water.

Malice towards none

By accepting his family, BJP and RSS have pardoned late Sanjay Gandhi, their chief persecutor during emergency days!

Or they haven't?

First random thought this morning

The biggest socio-economic priorities in India at this point in time should be:

(a)   Providing a tap carrying potable water to every household.

(b)   Taking school education out of government control and leaving it to students and teachers.

(c)    Government getting totally out of industrial and banking businesses and focusing all energies and resources on agriculture, just as it did for industry and banking in 1950s and 1960s

(d)   Making ROI of public offices (elected or appointed) negative.

Little hope for a religious renaissance

Continuing from yesterday.

Another headline that that I found disconcerting was UP Chief Minister ridiculing the Congress President for his much publicized temple run (see here).

In the related news item CM Yogi Adityanath said, "The Congress president remembers temples only during the elections. Four generations of Rahul's family have never worn a 'janeu' (sacred thread worn by Hindus), but at the time of elections, he shows his janeu." "The four generations of Rahul Gandhi have never moved a step towards a temple. One should visit a temple with a feeling of devotion and not for politics or to show off," the chief minister added. It's actually been a common theme in most BJP speeches since Gujarat elections.

My anecdotal experience gained from numerous travels across breadth and width of the country suggests that the traditional Indian religions have been degenerating since past many decades. It is absolutely critical since religion still forms the very core of the Indian socio-economic structure.

Superstitions, fears, desires, frivolous rituals and ostentatious celebrations now dominate the sense of religiousness, rather than selfless prayers for general social well being, efforts to immerse into the Nature, creating a path towards attainment of spiritual goals, & self-elevation as a human being.

Our politicians, particularly the right wing parties, have done almost nothing to stem the rot that is plaguing our religions and cultural traditions. Instead, they have encouraged the distortions to further their vested interests. This could be one of the primary reasons for lot of malice prevalent (and growing) in Indian society.

I am afraid, religion is forcing its way deep into Indian politics; empowering the politically ambitious priests and preachers. The shallowness of religious belief of politicians has become the benchmark for the society. For example, could CM Yogi explain why going to temple during the time of need is bad. Isn't it what millions of common Indian do as matter of routine? And why politicians' (including PM and BJP President) visit to temples need to be telecast live on TV?

In my experience, the unprecedented rush to temples, to a large extent, highlights the rising economic distress in the society and not any strengthening of faith in traditions and culture. It should therefore be a matter of deep concern for the State.

In the current socio-political milieu, there is little hope for a religious renaissance, that would take us back to our glorious past where temples and mutts motivated youth to learn, seek and elevate themselves. Let's admit many of us go to temple to find an ATM, where we could withdraw money by presenting a unsecured promissory note!

(Note: Temple herein means a place of worship, regardless of religion)

It's definitely not development

Thought for the day

"If someone tells you he is going to make a 'realistic decision', you immediately understand that he has resolved to do something bad.

—Mary McCarthy (American, 1912-1989)

Word for the day

Edentate (adj)

Toothless

Malice towards none

Are all armed forces' officers absolutely beyond any doubt?

 

First random thought this morning

Sushma Swaraj and Venkaiah Naidu have emerged as favorite BJP leaders of many opposition parties in recent times. Even Congress leaders have expressed their liking for both of them.

This could be a strategy to create friction within BJP top ranks and make Modi-Shah little insecure and incite them to make some mistakes.

The possibility is that opposition parties are preparing for a Plan B, if BJP gets ~180-200 seats in 2019 and needs their help to form a government.

 

It's definitely not development

Three headlines that appeared in media in past 3days are particularly disconcerting. These news items aptly highlights some of the malice that have percolated deep down our socio-political consciousness'.

The first headline proudly claimed "Under PM Modi's watch, Amarnath and Chardham Yatras may see highest footfall"

The related news claims that this year more than 2lac people may visit the holy Amarnath shrine in Kashmir during the month of Sharavan (July-August). Another 2million are likely to undertake Char Dham Yatra in Gharwal hills of Uttrakhand during five month period between May-November. More than 70% of these 2mn visitors will be visiting the holy shrines of Badrinath, Kedarnath, Gangotri and Yamunotri in 2months, with most visiting Badrinath and Kedarnath only.

As someone who had been visiting these holy shrines since childhood, I know for sure that these places are in no position to handle so many people visiting in a short span of one month for Amarnath and 2months for Char Dham. The ecology of Haridwar (Base camp for Char Dham Yatra) Uttarkashi (Gangotri and Yamunotri) and Chamoli (Badrinath and Kedarnath) districts has been damaged severely in past one decade.

The politicians have blinded the local populace with the lure of higher income and employment opportunity from rising pilgrim tourism. Unmindful construction and unpardonable exploitation of natural resources is not only endangering the ecology of the region, it is also jeopardizing the sustainability of all future generation. For, this region is the source of water to more than 250million Indians.

The government, and especially PM himself, ought to be deeply concerned over the number of visitor to holy shrines. He must immediately appoint an empowered commission to regulate the flow of people and vehicles to the region, rather than boasting about the crowds and traffic jams in the hills.

I have the following suggestions to offer:

1.    Completely ban private vehicles in 100km radius of these sacred temples.

2.    Allow only disabled and senior citizens to travel by public buses to the temples.

3.    Develop the traditional pedestrian route to the temples. Encourage youth to trek upto the temples. Provide tented accommodation with bio-toilets along the way.

4.    Ration the number of pilgrims visiting these temples, and make it compulsory for all pilgrims to plant one tree each and pay for its maintenance for one year.

5.    Ban plastic totally in the hills.

...to continue

Sector rotation a trading opportunity

Thought for the day

"The innocent are so few that two of them seldom meet - when they do meet, their victims lie strewn all round."

—Elizabeth Bowen (Irish, 1899-1973)

Word for the day

Semaphore (n)

An apparatus for conveying information by means of visual signals, as a light whose position may be changed.

Malice towards none

To a common man, who grows with stories of the valor of James Bond (more recently Tiger) and strongly believes in infallibility of MI6, CIA, KGB, Mossad, RAW etc., the recent news flow regarding Nirav Modi comes as an unpleasant shock.

 

First random thought this morning

Like in Greek mythology, all Indian politicians are Demigods. They never make mistakes. All their decisions and actions are totally dedicated to the welfare of common people and they are incapable of doing anything wrong or something that is prejudicial to the public interest.

At least I have not seen anyone admitting to, or apologizing for, a wrong decision or deed that may have hurt people. Arvind Kejriwal once admitted that his resignation from CM office in 2014 was a mistake. But he was perhaps referring to the interests of his party and not common people.

And then we have the audacity to claim ourselves followers of Mahatma Gandhi, or critics of Mahatma Gandhi, who had enough courage to admit even his most personal failings and weaknesses publicly.

Sector rotation a trading opportunity

Considering that the subject is attracting too many arguments and becoming too time consuming, I would like to close the discussion with the following final comments.

1.    I believe that the market cycle that started on 28 August 2013 (Nifty closing 5285) has already peaked on 29 January 2018 (Nifty closing 11130). The process of bottoming of the cycle has started, and may last many months. In this process, Nifty may or may not record a level higher than 11130. The bottom however shall occur in the 8250-8500 range.

2.    The mid and small cap indices may fall 20-25% more than Nifty in the process, thus erasing most of their outperformance in past five years.

3.    We may see massive rotation of sectors and size in the bottoming process, e.g., from over owned financials & commodities towards under owned Pharma, and from mid and small caps towards large cap etc. But this rotation might not be indicative of the leadership for the next market cycle. The rotation in that sense might only be a trading or defensive strategy.

4.    I shall inter alia keep a close watch on the following data points for tracking the progress of the bottoming process:

(a)   RBI panicking – watch for couple of unscheduled announcement.

(b)   Collapse in G-Sec yields below 7%. This could be preceded by a sharp spike in yields and major unexpected spike in NPA provisioning.

(c)    Crude prices falling sharply.

(d)   Nifty trading 5% or more below 200EDMA for a week.

(e)    Nobody talks about stocks at social gatherings you attend, and you get a strong urge to sell the stock you have been holding for more than 5years.

(f)    There are few large daily moves, ideally over 2% on closing basis, in Nifty.

(g)    S&P500 in USA falls below 2500 and US 10yr yields breach 2.5%.

(h)   USDINR trades above Rs70 for a week.

(i)    BJP losses both Rajasthan and MP assembly elections.

(j)    The Nifty earnings revision ration falls below 0.7.

(k)   INVIX trades above 30 for a week or so.

(l)    Advance Decline ratio falls below 0.65 for two consecutive months.

(m)  Domestic MF net flows are less than Rs5000cr for two consecutive months.

Investment is an art

Thought for the day

"Nobody speaks the truth when there is something they must have."

—Elizabeth Bowen (Irish, 1899-1973)

Word for the day

Antigodlin (adj)

Lopsided or at an angle; out of alignment.

Malice towards none

What do the number of twitter followers for a person imply?

First random thought this morning

Politicians of various hues have been raising demand for full statehood for Delhi since many decades. All these politicians have got a fair chance to rule the city state in this interim. There have been long phases when the same party had governments in Delhi and the Center. There is nothing to suggest that any progress has been made in the direction of affording full statehood to Delhi. It could therefore be reasonably deduced from this that this demand is a pure political rhetoric and means a little to anyone.

Strangely, no one has even casually suggested an alternative plan to improve the state of affairs of NCT of Delhi.

An Investor's Diary

Many readers have questioned my line of study in analyzing the character of the current market cycle that in my view started in August 2013 when the RBI and the then Government began the process of fiscal and monetary corrections in right earnest with some effective measures.

The current market cycle started after correction of the excesses of 2008-09 market collapse between March 2009 and September 2009 and a long four years consolidation phase between September 2009 and August 2013.

The market cycle has seen a sub phase between May 2014 and February 2016, mostly dominated by the Euphoria created by the change in the political regime in May 2014, and subsequent normalization of the sentiments.

On macro front, the improvements that started from summer of 2013, mostly peaked in early 2016 and has started deteriorating in past few months.

I thought it appropriate to make a comparative analysis of the current market cycle with that of 1998-99, because both markets cycles have (a) overwhelming participation of the domestic household investors; (b) the real capacity (asset) addition has been poor in both the cycle; (c) valuations of mid and small cap companies saw massive, inexplicable and mostly unsustainable jump; and (d) poor return on alternatives (primarily debt, gold and real estate) was a major reason for money moving  into equities.

The key difference between two market cycles is that while 1998-99 cycle was totally driven by global dotcom Euphoria, and the new business model in which people were investing was totally unknown and untested; whereas the current cycle witnessed a variety of triggers. For example, (1) China crackdown on polluting industries provided a massive growth opportunity for Indian chemical, metals industries; (2) Public sector banks facing capital constraints due to large NPA build up, providing opportunity for well capitalized private banks and NBFCs; (3) Fiscal incentives like pay commission award, loan waivers, interest rate subvention for affordable housing, higher MSP etc, augmented the purchasing power of consumers.

In this sense, this cycle may not be akin to 1998-99 market cycle, or even 2004-2007 credit driven market cycle. I am not considering the earlier market cycles because at that time Indian markets were shallow with insignificant global participation.

The analysis of bull phase of market cycle is important because it helps in assessing the potential downside in the bear phase. In the extant episode. we would perhaps know the true character of the market cycle only with the benefit of hindsight. Nonetheless, I am inclined to work with 1998-99 estimates and seek protection accordingly.

Those who strongly disagree with me, may not be wrong at all. Investment after all is an art and not a science, in my view.

Has 2013-2018 mostly been a "Hope" trade? - Part 2

Thought for the day

"It is not helpful to help a friend by putting coins in his pockets when he has got holes in his pockets."

—Elizabeth Bowen (Irish, 1899-1973)

Word for the day

Blamestorming (n)

A discussion or meeting for the purpose of assigning blame.

Malice towards none

Ain't the Z+ security cover already assumes the highest conceivable level of threat to the person being covered?

 

First random thought this morning

The government has apparently decided to allow lateral entry of experienced professionals into civil services at Joint Secretary level. The idea is welcome, inasmuch as it aims at bringing wider experience and diverging thoughts into the administration.

A complementary idea would be to allow IAS officers with more than 10yr service, to work in private or social sector for 3-5year (without losing their seniority and other tenure related benefits) to gain wider and deeper experience and assimilate the needs of businesses and society from a non-administrative perspective.

An Investor's Diary

The corporate earnings picture of past 4years, indicates that the market rally in India has so far been driven more by "Hope" rather than delivery of results.

To quote a recent research report by Edelweiss "Q4FY18 was another disappointing quarter with profits for our coverage universe contracting 19% YoY (versus our forecast of +13% YoY). While corporate banks and commodities were big disappointments, even after excluding them profit growth was muted at 8% (versus Q3FY18 growth of 10% YoY) despite a low base....Nifty’s FY19 EPS consensus/Edelweiss forecast is 25%/30% growth (versus 0% in FY18)."

As per a recent CRISIL India Outlook report, though the revenue growth for NSE listed companies (ex financials and oil companies) has shown some signs of recovery in FY18, the EBIDTA growth has been the worst in more than a decade.

Despite major disappointment in past four years, the market is assuming more than 22-25% EPS growth in FY19, though rising input prices, wages and finance costs are clearly indicating the low probability of this kind of profit growth.

The capex has been collapsing ever since 2014, with the share of private sector capex consistently declining. As per CRISIL, FY18 saw capex growth of just 1%, out of which 76% was contributed by the government.

The sharp recovery in Capex projected in FY19 is mostly expected to be driven by the government. However considering the risk of government focusing on social schemes in an election year, rather than asset creation cannot be ignored.

Moreover, as the said CRISIL reports note, there are early signs of GST pushing the industries into consolidation. The large companies (mostly listed) are gaining market share in respected spheres at the expense of smaller companies.

So even if the aggressive projections of `22-25% earnings growth comes true, this will not be a true reflection of the stress in the economy that must get reflected in consumption at some point in time.

...to continue tomorrow