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

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.