The good part of it

Thought for the day

“I am so clever that sometimes I don't understand a single word of what I am saying.”

—Oscar Wilde (Irish, 1854-1900)

Word for the day

Slake (v)

To allay (thirst, desire, wrath, etc.) by satisfying.

(Source: Dictionary.com)

Teaser for the day

Sensex is 23K, Narendra Modi is married, Priyanka is politically active, and AK is Gandhian. Has India changed enough or do we want more?

The good part of it

I strongly endorse the traditional belief that “whatever happens, happens for our good only”.

An analysis of the social, political, and economic events of past five years in light of this belief provides reasons for optimism; raises hope; stimulates positive thinking; and slakes much of the pessimism over current state of the nation.

The canvass of the country in past five years has been marked by public revelation of multiple instances of irregularities in allocation of natural resources to private entities (coalgate, 2G etc.); vociferous agitation for strong deterrent against corruption in public offices (Jan Lokpal); public outrage against crime against women (infamous Delhi and Mumbai rape cases); worsening of macroeconomic fundamentals (GDP growth falling to below 5% level, high consumer inflation, weakening currency, fiscal and trade deficit, etc.) and decimation of Congress party in state elections.

In the interim all these developments have caused anguish, dismay, frustration, pessimism and catalyzed a negative feedback loop in socio-economic sphere. However, the mid-term impact of these developments appears materially positive.

For example, consider the following:

(a)   All major parties in the country have committed a transparent, sustainable, judicious and equitable policy for allocation and use of natural resources.

(b)   All major parties have committed to more decentralization and federalization of the political structure of the country.

(c)   Almost all parties have committed to optimum use of water resources of the country. Interlinking of rivers is a common theme running through most manifestos.

(d)   Most parties have pledged strong support for women safety.

(e)   Issues like development of physical and social infrastructure, youth, education, healthcare and employment through industrialization top agenda of almost all political parties.

(f)     Except for few exceptions like FDI in retail, most contentious issues have been avoided. (CPM is exception here, but it is so otherwise too.)

(g)   There is marked improvement in the candidate profile of all major parties. Though complete cleansing of criminal elements is appears some distance away, a strong beginning has definitely been made.

(h)   The public scrutiny of political parties has strengthens and deepened. Never before in history of independent India have major political parties been forced to retract their decisions immediately due to public outcry.

(i)      BJP appears to be emerging a pan India competition to Congress, paving the way for emergence of largely two party/two front political structure in the country in next couple of decades.

You may brush aside these trends as mere rhetoric, but I’m sanguine.

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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Two short stories

Thought for the day

“The distinction between the past, present and future is only a stubbornly persistent illusion.”

— Albert Einstein (German, 1879-1955)

Word for the day

Ad infinitum (adv)

To infinity; endlessly; without limit.

(Source: Dictionary.com)

Teaser for the day

Mamta Banerjee is certainly more Aam, Anarchist, Honest, Transparent, Experienced, & Gritty than Arvind Kejriwal.

Does TMC has a better claim over the territory which AAP is aggressively trying to encroach upon?

 

Two short stories

Power of ‘the 49’

A dear friend, one of few smart equity analysts I know, also happens to be an ardent fan of RBI governor Raghuram Rajan. While I do not share much of his adulation for the governor, I was left completely speechless when he argued last week “notwithstanding your deep skepticism over long term efficacy of “Americanized policy ways” of the governor, Rajan will continue to enjoy support of ‘the 49%’ for his charming personality”.

Shopping for kitchen yesterday I suddenly realized why the charming governor could actually be dear to ‘the 49%’. I am sure he is regularly assisting his wife in shopping groceries, fish vegetable and fruits. Because, only a person who actually visits the market regularly and keeps a tab on the grocery bills would know that the downtick in consumer inflation is merely a statistical phenomenon and could be totally misleading. Notwithstanding the claims of the finance minister regarding success in bringing down the consumer prices, the bill for daily kitchen expenses is rising every week. Besides, the petty inflation for middle class may actually be running into high double digits – if you evaluate movie tickets, popcorns, haircut, parking charges, doctor fee, salary for domestic help and drivers, phone bill, utility bills, tuition fee etc.

That is perhaps why the governor has not only refrained from easing rates, but also refused to hint any imminent easing; disregarding the high decibel clamor from Industry captains who might be oblivious to the power of 49% and may not be regular in grocery shopping.

China – friend or foe

Historically the Sino-Indian relations have been defined by strong trade and cultural ties. There is no evidence of any substantive conflict between the two ancient civilizations prior to 1950. In fact many studies have suggested that prior to middle 19^th century Indian and Chinese economies thoroughly dominated the global economy for many centuries.

Despite such great shared history and economics the mention of two most populous nations together only evokes a sense of rivalry in India.

From my friends in US, Hong Kong and Singapore I understand that a common Chinese citizen carries no sense of rivalry for India or Indians. For most Chinese businessmen India is one of the biggest “opportunities” at hand. For Chinese politicians the territorial dispute with India is more of a “carry over” agenda item for their routine meetings.

To the contrary, a common Indian citizen hates China from the core of his heart, Indian businessmen are ambivalent towards China – they are scared of competition and enamored by the opportunity, and politicians leave no opportunity to highlight the Himalayan threat.

Recently (a) an Australian journalist sought to redefine the role of China in Indo-China war in 1962; (b) Rahul Gandhi is often seen “vowing” to bring back all jobs back lost to China in past couple of decades and (c) Narendra Modi has dared China to control its territorial ambitions.

I wonder is there a way to reset Indo-China relation to pre-20^th century era!

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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Market betting on continuity, not reforms

Thought for the day

“All modern American literature comes from one book by Mark Twain called Huckleberry Finn.”

— Ernest Hemingway (American, 1899-1961)

Word for the day

Bedash (v)

To dash or spatter (something) all over;
To demolish or ruin; obliterate.

(Source: Dictionary.com)

Teaser for the day

When the US started quantitative easing, I said right away it will not end before we have QE-99. Usually, when government introduces a programme, they don't end it, and my sense is though they have implemented some tapering, the moment US stock markets drop 10 per cent-20 per cent, they will actually increase active bond purchases. (Marc Faber) 

Market betting on continuity, not reforms

“Tere Vaade par jiye hum toh ye jaan jhooth jana;
Ke khusi se mar naa jaaate gar aitbar hota.” (Mirza Ghalib)

(Make no mistake that I believe in your promises. If I did the thrill would have killed me.)

BJP finally released its much awaited manifesto on Monday.

The best thing about the 50 plus page document is that it strongly supports the continuity and does not promise any radical shift in policy paradigm. Amidst an overdose of generics laced with usual rhetoric and confidence of a winner, the document focuses strongly on sustainability, indigenization, true federalism, decentralization, and e-governance.

The comforting part is that traditional BJP issues like 370, Ram Mandir, Cow slaughter, and common civil code etc. have been dissipated to last half page and seem to have been incorporated to address the old school internal BJP constituency only. Avoidance of other contemporary controversial issues like Section 377 (IPC) and decriminalization of politics, Jan Lokpal, Autonomy to CBI etc. is also conspicuous. In this sense the Congressization of BJP appears almost complete.

The worst part (or is it good?) is that the manifesto does not propose any major economic reform. It just talks about administrative simplification of processes and better use of IT on delivery of various public services. In my view, markets should take cognizance of this.

This brings us to very hotly debated issue amongst my readers – whether the recent upsurge in equity market is in response to the “continuity” and strengthening of recent corrective monetary and fiscal measures; or is it a hope driven rally – hope of radical shift in policy paradigm under the new regime.

I have been openly siding with the school which believes that market is not at all ready for any radical reforms. It is seeking continuity of extant policy regime with a “friendly” implementation apparatus.

The reasons are obvious. Any radical shift in policy paradigm will essentially involve move away from “crony capitalism” and/or “crony socialism”. This would certainly (a) hurt the economic viability of many businesses surviving and thriving on administrative patronage; (b) challenge the sustainability of many businesses that exist only because of the systemic inefficiencies; (c) increase overall cost of doing business and therefore impacting the profitability adversely; and (d) lead to higher and deeper competition from global players.

And if it is continuity we are hoping for, politics (and Narendra Modi) will cease to be a major consideration for the markets 6months down the line. The market will increasingly look to global cues for determining its direction. In my view, these cues will most likely be positive. I therefore would continue to avoid domestic reform story and focus on global bubble theme for next 12-18months. And I promise to come back home much before cows do. (See here and here)

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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Affordable is profitable

Thought for the day

“Let us raise a standard to which the wise and honest can repair; the rest is in the hands of God.”
-George Washington (American, 1732-1799)

Word for the day

Ambivert (n)

One whose personality type is intermediate between extrovert and introvert.

(Source: Dictionary.com)

Teaser for the day

If not in politics what these people should be doing?

·         Rahul Gandhi

·         Digvijay Singh

·         Lallu Yadav

·         Sharad Pawar

Affordable is profitable

I met with couple of private equity managers last evening. The idea was to share the learning from my Discover India Trips and gain some understanding of the investment climate in the country from their experience. What I learned was quite useful, and I deem it fit to share with the readers.

Not going into too much detail and avoiding jargon, I understand that in past 5years most of the private equity has ventured into five broader sectors – education, real estate, healthcare, agro processing and e-commerce. Besides logistics and technology startups have also attracted good interest from private equity, venture funds and angel investors.

The investments in education sector have mostly not done well for a variety of reasons. In my view, the tutorial business model is not sustainable as it is based on the basic premise that the inefficiencies in the mainstream education system are perpetual. The classroom business model is not viably scalable as affordability is still largely missing and political structure will likely remain socialist. Only content development and management model appears but that too till the time this sector is opened to global competition. The best domain appears to be development and management of vernacular content. Not much activity is so far seen in that sphere. The consequence is that most investments in these sectors have not performed as per the expectations.

The real estate sector has caused maximum disappointment to private investors. Lack of demand, delay in execution, and poor transparency levels appear primary drivers of the disappointment. Affordability is a major detriment in this space also. Political involvement had been both a major driver as well as hindrance in growth of this sector. The general opinion is heavily skewed in favor of lower political involvement and better affordability going forward, especially if a strong national leadership emerges from 2014 elections.

Healthcare business is still mostly driven by export demand rather than domestic demand. Given the rising pressure on global corporations due regulatory changes; and governments to reduce cost of healthcare – this space has seen strong growth. Most investors in this space appear happy and enthusiastic about future growth.

Agro processing industry in the country unfortunately is a great example of mismanagement. Though extremely critical, this industry is growing completely on “subsidy” rather than “viability” consideration. In my view, the fate of this industry may not be much different from wind energy.

E-commerce is the most active and interesting area of investment. From my own personal experience I can vouch that many e-market places are very efficient, hugely relevant, popular and scalable. These ventures adequately address the issue of accessibility, affordability, aspirational consumption, cost efficiency and bring the benefits of free market and economies of scale to the consumers especially in tier II &III cities and towns. I shall eagerly wait for couple of them going public at a reasonable price!

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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Banarsi Ladoo – eat it or keep it

Thought for the day

“Whoever battles with monsters had better see that it does not turn him into a monster. And if you gaze long into an abyss, the abyss will gaze back into you.”
- Friedrich Nietzsche (German, 1844-1900)

Word for the day

Punnet (n)

A small container or basket for strawberries or other fruit.

(Source: Dictionary.com)

Teaser for the day

Who started the 1962 war?

How that is relevant today?

Except perhaps making Gandhi family more defensive in their electoral pursuit.

Banarsi Ladoo – eat it or keep it

My seemingly uber bullish view on Indian equities and simultaneous words extreme caution have evoked strong reaction from many readers.

The best reaction reads: “This morning you presented me the most delicious Banarsi Ladoo wrapped in my medical test report showing a blood glucose reading of over 400mg/dl. I do not know should I thank you for the Ladoo or letting me know that I cannot eat it. Thank you anyways.”

I admit that my views have been somewhat ambivalent in recent past.

Wandering through the streets and dusty roads of hinterland I find that the virtuous cycle of trade, finance and industrial activities has come to a virtual halt. The general environment is filled with dismay, distress and frustration. Financial stress is too conspicuous to ignore. In past such conditions have not improved in a jiffy, especially when the reasons for malaise are mostly structural. This makes me fearful.

However, at the same time, the global settings are clearly indicating that a massive “risk on” trade is building ahead of US rate hike event that may likely take place in 2015. A near recession in many emerging markets, including the large ones like Russia and Brazil, marked slowdown of economic activities in larger economies like China, France, Germany etc. shall fuel this “risk on” as more monetary stimuli is added. This likelihood is firing up my greed.

The challenge is to balance the emotions of greed and fear. That has been exactly my endeavor in past many days. I want to religiously stick to my core investment strategy that is aimed at generating sustainable returns (marginally above the nominal GDP growth). At the same time I want to allocate a small percentage of my risk money to a tactical trading strategy to generate higher return over next 12-15months.

For those who find my trading strategy little greedy and more fearful, I would like to quote from a two month old Fitch report on Indian financials. Some may accuse me of lacing the greed with excessive fear, but those who have lost 50-60% of their wealth in 1992, 2000 & 2008 would certainly appreciate it.

“Of the total exposure of Indian banks to the industrial sector, an estimated 46% is attributed to the debt of top 100 corporates (non-financial and non-public sector). An estimated INR1.9trn-INR2.1trn of these loans is due for refinancing in the next 12-15 months. This amount is around 27%-29% of the aggregate net worth of the banking system as at end-FY13.

The refinancing requirement may present significant challenges to lenders. Around 24% of the refinancing requirement (about 4%-5% of the banking system net worth) is attributed to the companies already in distress.”

“20 corporates accounting for 26% of the refinancing amount have weaker credit metrics than that of the previous two categories. Generally, as a group, their asset coverage ratios are low and financial flexibility of the promoter is also limited. Under normal market conditions, they should be able to refinance at a high cost or with stringent covenants. However, this group may face significant challenges in refinancing during stressed market conditions.”

Trust me nothing has changed in past three months.

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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Necktie and plastic chappals

 

Thought for the day

“I've had a few arguments with people, but I never carry a grudge. You know why? While you're carrying a grudge, they're out dancing.”
-Buddy Hackett (American 1924-2003)

Word for the day

Puerile (adj)

Childishly foolish; immature or trivial

(Source: Dictionary.com)

Teaser for the day

What is wrong with “Vote Bank” politics?

 

Necktie and plastic chappals

It is heartening to see that an effort is being made to divert the election debate to substantive issues like inflation, employment, development and growth from mostly redundant issues like communalism and dynastic politics.

Though the economic issues are being raised mostly to besmirch each other and not to debate the pertinence of economic policies of various groupings to the current context, it still is better than personal slandering and mudslinging.

I firmly believe that there is little to distinguish between the core economic policies of UPA and NDA; though NDA perhaps has a better implementation track record to showcase.

“Crony capitalism” is at the core of the whole debate. Congress and BJP have accused each other of pursuing crony capitalism. Communists and neo socialists (e.g., BSP, TMC and AAP) have accused both the national parties and the supporting (traditional) socialist parties as well for promoting the cause of a few at the expense of 1.26bn Indians.

I believe that the debate is completely misdirected, for (a) it leaves the biggest scam out of the purview of debate and (b) it does not focus on “crony socialism”, which to my mind has harmed the country more than anything else.

Maintaining the negative real rates for households (household inflation minus term deposit rate) for a long period is the biggest scam perpetrated on the poor people of this country. The inflation tax, as I call it, paid by poor and middle class savers for cheaper financing of “crony socialism” and unscrupulous businessmen, has caused tremendous damage to the basic fundamentals of the Indian economy.

It has resulted in wasteful public expenditure, misallocation of capital, and unsustainable economic growth that is visible only in the statistics. Not many social and qualitative indicators corroborate the kind of growth politicians from both sides of the fence are claiming to have delivered.

For years, poor and middle class households have probably funded almost the entire subsidy bill of the government through this inflation tax. Whereas it is common knowledge that large part of subsidies has historically gone to enrich a few. For records Rajiv Gandhi put it at 95%. Current claims range between 80-90%.

“Crony socialism” is a term I often use to define the Congress brand of election focused socialism, now pursued by almost all the political parties. The best way to understand the term you need to see a typical municipal school child in Mumbai or Delhi wearing a worn necktie, torn shirt, and plastic or rubber Chappal.

Politicians and administrators have sought to achieve the equality between government and private schools by prescribing a necktie as part of uniform for poor kids who cannot even afford a pair of canvas shoes!

In my view the debate should be on “how to improve the level of education in government schools” and not on “who is the supplier of the neckties”.

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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No indication of a sustained revival as yet

RBI governor maintained status quo on his policy stance.

The governor said that he does not see further tightening in the near term. 

He cautioned that "Lead indicators do not point to any sustained revival in industry and services as yet."

RBI expects FY15 growth in the range of 5-6% with downside risks.

The RBI also reduced the availability of overnight funds from its repo window for banks and increased the amount that banks may borrow from its term repo window in a bid to reduce lenders' reliance on short-term central bank funding. 

We see little economic case for lower rates in 12months, unless the global and Indian economies take a yurn for the worse and it becomes absolutely necessary to provide monetary stimulus to sustain even 5% growth trajectory.

Trading strategy and themes

Thought for the day

“Economists perform the same function as shamans and witch doctors in tribal societies, who regard the entrails of some  animal and predict the future, which generally corresponds to what the chief wants to hear. Economists are far more advanced than that, of course. We painstakingly gather data and develop complex computer models to show what our politicians want to hear.”
-John Mauldin (American, 1951- )

Word for the day

Entrails (n)

Internal parts of anything
(Source: Dictionary.com)

Teaser for the day

Both BJP and Cong promising reforms, i.e., incremental changes to existing policies. We need revolution, complete change, not reforms.

Trading strategy and themes

In my view it is clear that we are headed towards a major trading rally in Indian equities over next 12-15months. I will not be surprised if this rally actually transcends into bubble territory as the “US rate hike” clamor gains further momentum. Also there is little doubt that this bubble will also meet the same end as the previous ones, more recently 1998-2000 and 2005-2007.

Having this view in mind, I set my strategy for trading with following assumptions:

1.       The new government in India will follow the classical Keynesian method to revive economic growth. Both fiscal and monetary stimuli shall be provided to spur consumption and investment demand. Monetary policy will not be further tightened.

2.       Government will raise substantial resources through aggressive assets’ sale to recapitalize struggling public sector banks.

3.       US Fed achieves the QE tapering target driven by consistent improvement in housing and job market. US rate hike anticipations lead to stronger USD, and massive rotation from US bonds to risk assets like EM equities.

4.       No major geo-political event occurs that would create supply disruption in energy market.

Caveat: Remember, this is trading strategy focused on next 12-15months. It may differ in places from our core investment strategy.

Make hay while sun shine but get back home ahead of cows

Thought for the day

“Don't be afraid of missing opportunities. Behind every failure is an opportunity somebody wishes they had missed.”

-Lily Tomlin (American, 1939 - )

Word for the day

Dandy (n)

A man who is excessively concerned about his clothes and appearance; a fop.

(Source: Dictionary.com)

Teaser for the day

If RaGa, NaMo and AK are all challengers – who is the defender in these election?

Make hay while sun shine but get back home ahead of cows

I had stated earlier that we are witnessing a good trading opportunity in Indian equities. The opportunity is presented by a multitude of factors. The primary being (a) likely reversal of rate cycle in US that may lead to large scale rotation of money out of US bonds and into risk assets including EM equities; (b) maintenance and likely enhancement of monetary stimulus by central banks in Japan, EU and China; (c) cyclical up move in some Indian macro indicators against notable deterioration in other major emerging economies including Russia, Brazil and China; (d) likely change in political regime in the country raising hopes for accelerated economic reforms, faster execution and complete recuperation of administrative paralysis seen in past two years.

But as I said these factors do not confirm any structural change in global or Indian economy in near future. The resulting up move in Indian equities is therefore a trading opportunity much like 1999. Mistaking it for a structural shift or beginning of a secular bull market might be a mistake.

Nonetheless, it is desirable to avail this sizeable opportunity with adequate precautions. Remember, on most earlier occasions such trading rallies have retraced without according any exit opportunity to traders hence causing tremendous losses.

It will not be out of context to quote two recent views of Seth A. Klarman of Baupost Group and Jeremy Grantham of GMO regarding fragility of the current economic and financial environment.

Seth A. Klarman, Baupost Group

“Welcome to “The Truman Show” market. In the 1998 film by that name, actor Jim Carrey is ignorant of the fact that his life is a hugely popular reality show. His every action, unbeknownst to him, is manipulated while being broadcast to millions of TV viewers worldwide. He seemingly lives in an idyllic seaside community where the manicured lawns are always green and the citizens are always happy. These people are, of course, actors. The world Truman inhabits turns out to be phony: a gigantic sound stage created for a manufactured “reality.” As Truman starts to unravel the truth, his anger erupts and chaos ensues.

Ben Bernanke and Mario Draghi, as in the movie, are the “creators” who have manufactured a similarly idyllic, if artificial, environment for today’s investors. They were the executive producers of “The Truman Show” of 2013. A global audience sat in rapt attention before this wildly popular production. Given the U.S. stock market’s continuing upsurge, Bernanke is almost certain to snag yet another People’s Choice Award for this psychological “thriller.” Even in “The Truman Show,” life was not as good as this for investors.

But there is one fly in the ointment: in Bernanke’s production, all the Trumans – the economists, fund managers, traders, market pundits – know at some level that the environment in which they operate is not what it seems on the surface. The Fed and the Treasury openly discuss the aim of their policies: to manipulate financial markets higher and to generate reported economic “growth” and a “wealth effect.” Inside the giant Plexiglas dome of modern capital markets, just about everyone is happy, the few doubters are mocked and jeered, bad news is increasingly ignored, and markets go asymptotic. The longer QE continues, the more bloated the markets is pure Truman Show; according to the Wall Street Journal (12/20/13), the Federal Reserve purchased about 90% of all the eligible mortgage bonds issued in November.

Like a few glasses of wine with dinner, the usual short-term performance pressures on most investors to keep up with the market serve to dull their senses, which makes it a bit easier to forget that they are being manipulated. But what is fake cannot be made real. As Jim Grant recently noted on CNBC, the problem is that “(t)he Fed can change how things look, it cannot change what things are.” According to John Phelan, a fellow at the Cobden Centre in the U.K., “the Federal Reserve has become an enabler of the financial havoc it was designed (a century ago) to prevent.”

Every Truman under Bernanke’s dome knows the environment is phony. But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end, and no one wants to exit the dome until they’re sure everyone else won’t stay on forever.

A marketplace of knowing Trumans seems even more unstable than the movie sound stage character slowly awakening to reality. Can the clued-in Trumans be counted on to maintain their

complicity or will they go off-script? Will Fed actions reliably be met with the desired response? Will the program remain popular? Could “The Truman Show” be running out of material? After all, even Seinfeld ended.

Someday, the Fed’s show will be off the air and new programming will take its place. And people will debate just how good it really was. When the show ends, those self-deluded Trumans will be mad as hell and probably broke as well. Hopefully there will be no sequels.

Jeremy Grantham of GMO

“Central banks have created an enormous bubble in stocks, by holding rates too low.

We do think the market is going to go higher because the Fed hasn't ended its game, and it won't stop playing until we are in old-fashioned bubble territory and it bursts, which usually happens at two standard deviations from the market's mean. That would take us to 2,350 on the S&P 500, or roughly 25% from where we are now...

...But to invest our clients' money on the basis of speculation being driven by the Fed's misguided policies doesn't seem like the best thing to do with our clients' money.

We invest our clients' money based on our seven-year prediction. And over the next seven years, we think the market will have negative returns. The next bust will be unlike any other, because the Fed and other centrals banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before. Assets are overpriced generally. They will be cheap again. That's how we will pay for this. It's going to be very painful for investors.”

With these cautionary notes, I will discuss my trading strategy on next Tuesday.