No change in strategy

Thought for the day

“Computers are useless. They can only give you answers.”

-          Pablo Picasso (Spanish, 1881-1973)

Word for the day

Adret (n)

A side of a mountain receiving direct sunlight.

(Source: Dictionary.com)

Teaser for the day

Entire print and electronic media is highlighting caste of new Bihar CM.

Why is it necessary?

No change in strategy

Since Friday afternoon a number of readers have asked me does the unexpected election results warrant any change in investment strategy. In particular, people are asking should we be chasing the financials and infra developers and thereby increasing beta of the portfolio.

To this my reply is that I do not see any reason to change my core investment strategy due to government transition at the center for the simple reason that (a) I follow a strategy which is designed to be mostly policy independent and enjoys an optimum beta relative to macro economic growth.

Insofar as the tactical trading opportunity presented by the (a) global optimism towards global emerging markets and (b) buoyancy in investors’ sentiments due to change in regime, is concerned, I would like to reproduce the strategy summarized at the beginning of current financial year

“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.”

With these assumptions in mind I have been suggesting a “leveraged but beta neutral” trading strategy with a 12-15months time frame. I do not see any need for change on this front also.

In the said strategy piece published on 1 April 2014 I had suggested that “Buy global businesses (IT, pharma, auto ancillaries) as INR completes its correction over next 2-3months, 

I feel, I will get this opportunity in next 5-6 weeks. Till then I am looking to book some profit in my trading portfolio, especially stocks which have seen 40-50% rally in past 7weeks.

Something gotta give

Thought for the day

“My motto is: more good times.”

-          Jack Nicholson (American, 1937 - )

Word for the day

Venal (adj)

Willing to sell one's influence, especially in return for a bribe; open to bribery; mercenary.

(Source: Dictionary.com)

Teaser for the day

Narendra Modi’s journey from IGI Airport to BJP office in Delhi on Saturday highlights that India now has a daring, accessible, and risk taker prime minister.

Something gotta give

Expectation is a strange animal. More you beat it, stronger it rises. Consistent underachievement is perhaps the only way to kill it.

The astounding victory of Narendra Modi has beaten all expectations. Consequently, it has raised staggering expectations in all sections of the society.

Mandate 2014 is unmistakably for a person who projected himself as epitome of pragmatism, development, inclusivity, nationalism and good governance. He therefore does not enjoy the luxury of hiding behind the shields like limitation of coalition, party ideology and conventional political paradigms. People have afforded him complete freedom to deliver on the promised change and expect an express delivery from him.

In my view, two tasks need to top his list of priorities –

(a)   Bridging the multitude of deficits prevalent in the country, especially trust deficit, governance deficit, compliance deficit, skill deficit, social and physical infrastructure deficit, and capital deficit.

(b)   Bringing India into a state of equilibrium by removing social, and regional, economic imbalances.

From anecdotal evidence of Narendra Modi’s administrative and strategic prowess, I believe that he has the ability to drive the change. However, it would be preposterous to assume that he can do it on his own. He would need the support and cooperation of all in his colossal endeavor.

The anecdotal evidence further suggests that a vast majority of 1.26bn Indians is expecting Narendra Modi to deliver for them, at least on economic front. The problem is that no one is willing to give.

I ponder whether -

·         Industries and businesses who have thrived historical on government largesse and not necessarily on the enterprising abilities of promoters would be willing to give back to society by way higher taxes, higher voluntary CSR spending, technology upgrade for better resource utilization, etc.;

·         Regions like Gujarat and Maharashtra, which are economically more developed despite not being endowed richly with natural resources, would like to acknowledge that a part of their development is due to imperial designs of British regime and share their wealth with exploited regions like Jharkhand and Odisha.

·         Caste and communities which command ownership of the major part of economic resources and occupy most of the social space, would like to voluntarily vacate some space for the historically oppressed and downtrodden.

·         Populace who has grown to be non-compliant by habit, not necessarily by intention, would like to change habits like spitting on roads, violating traffic rules, encroaching on pavements in front of their house/shops, exploiting domestic helps and child labor etc.

Lets get back to business now

Thought for the day

“One and the same thing can at the same time be good, bad, and indifferent, e.g., music is good to the melancholy, bad to those who mourn, and neither good nor bad to the deaf.”

-          Baruch Spinoza (Dutch, 1632-1677)

Word for the day

Vane (n)

A person who is readily changeable or fickle.

(Source: Dictionary.com)

Teaser for the day

L. K. Advani lost to Manmohan Singh in 2009 and to Narendra Modi in 2013.

Why nobody has the guts to convey this to him and all those batting for him.

Lets get back to business now

By now it is widely anticipated that Indian will have a stable government in next few days and the economy in general will improve by the end of current fiscal FY15. The financial markets are vividly reflecting the buoyant sentiments of investors.

Much of the confidence is also emanating from the fact that in general global economy, particularly developed economies are looking fairly stable and showing distinct signs of an imminent recovery. Both the IMF and World Bank, have forecasted the world economy to fare better in next few quarters.

In this backdrop the new government will assume office by end of this month. The popular discussion after polling got over on 12^th May is focused on three broad issues - (a) How many seats NDA will get on its own? (b) Who will get which ministry in the likely NDA government? and (c) What are the immediate economic challenges the new government will have to face?

While the debate on first two issues will get mostly settled in next 2-3 days, the economic issue will remain alive for next few years.

Today morning, as the TV channels are just about to open a marathon result show, I find it pertinent to reiterate my opinion on these issues.

Insofar as the number of seats for NDA is concerned, there is little point in guessing that at this point in time; nevertheless I would like to reiterate that (a) I sincerely believe that Narendra Modi will lead a stable government for at the least next five year. It is however important to note that I will not at all be frustrated if for some reason Mr. Modi fails to make it to 7 RCR. (See here)

On constitution of the government and portfolio allocations in my view the key portfolios should be given to serious politicians and statesmen, who have the ability to think beyond current conditions and into the realm of impossibilities. I believe that induction of non-politicians in key executive posts, including appointment of Manmohan Singh as PM and Kapil Sibal as union minister for HRD, IT and communication has done a tremendous harm to the country. (For more on this see here and here)

The economic challenges before the new government are going to be very pressing and critical. Given the humongous expectations of the electorate, it would be imperative for the government to address at least some of these challenges in the maiden budget itself.

Some of these challenges include price rise, industrial revival, power generation, drinking water and issues arising out of a deficient monsoon.

As the election season winds up this weekend and investors become inclined to listen to issue beyond politics, we shall be discussing the economic issues and the what new government should be doing to address them.

To begin with it is pertinent to note that as per the advance estimates the Indian economy registered GDP growth of 4.86%, marginally higher than the 4.5% of FY13. The country has been witness to a sharp drop in its economic growth from an average 8.2% during FY04 - FY12 to sub 5% in FY13 and FY14.

Whatever it takes

Thought for the day

“The art of leadership... consists in consolidating the attention of the people against a single adversary and taking care that nothing will split up that attention.”

-          Adolf Hitler (German, 1889-1945)

Word for the day

Ad hominem (adj)

Appealing to one's prejudices, emotions, or special interests rather than to one's intellect or reason.

Attacking an opponent's character rather than answering his argument.

(Source: Dictionary.com)

Teaser for the day

In search for a strong leadership, should Congress consider a reverse merger into Trinamool Congress (TMC) of Mamta Banerjee?

Whatever it takes

In summer of 2012 when economists and analysts were busy preparing their obituaries for common currency European Union and peripheral European countries were declared pariahs in the financial market, ECB chairman Mario Draghi took the mantle on himself and declared that he would do “whatever it takes to preserve Euro”. Skeptics did not believe him then.

Two years later, everybody acknowledges that Draghi’s Outright Monetary Transaction (OMT) program has been an overwhelming success. It has successful in not only preserving but strengthening Euro. All peripheral European countries are welcome back in financial markets paying borrowing costs which almost matches the good times. Most troubled countries like Portugal, Ireland, Spain, and Iceland have successfully reigned the fiscal profligacy that led them to the crisis in the first place. The much maligned Greece also does not look too bad at this point in time.

All may still not be well but Europe at least looks a stable place today. Most importantly, all this has been achieved without actually using the OMT mechanism. Just Draghi’s firm and assuring words have done the job.

I expect the new Prime Minister of India (hopefully Modi, but anyone else would also do for me) to do the same. Assure the nation that his government would do “whatever it takes” to put economy firmly back on a sustainable growth path.

·         Businesses need to be assured that the government would do “whatever it takes” to address all their valid concerns promptly in a sympathetic manner.

·         Youth need to be assured that the government would do “whatever it takes” to adequately equip them to attain a respectable standard of life.

·         Farmers need to be assured that the government would do “whatever it takes” to introduce necessary reforms (land, marketing, pricing, rehabilitation, productivity, financing, irrigation and crop technology) to improve their earnings on sustainable basis.

·         Women need to be assured that the government would do “whatever it takes” ensure their safety, pride and equality.

·         Investors need to be assured that the government would do “whatever it takes” to protect their interest by creating strongest possible deterrence to fraud, malpractices, oppression, and mismanagement by scrupulous promoters, fund managers, and borrowers.

·         Common citizens need to be assured that the government would do “whatever it takes” to protect his right to a decent living by containing inflation, providing primary civic amenities closer to his home and defending his right to safe life, food, education, health, clean drinking water, sanitation and shelter etc.

·         Bureaucrats need to be assured that the government would do “whatever it takes” not only to protect them for all their actions taken in good faith but to own all such decisions in case of a dispute or allegation of impropriety.

“Lord, make me chaste, but not just yet”

Thought for the day

“Most people do not really want freedom, because freedom involves responsibility, and most people are frightened of responsibility.”

-          Sigmund Freud (Austrian, 1856-1939)

Word for the day

Schmaltz (n)

Exaggerated sentimentalism, as in music or soap operas.

(Source: Dictionary.com)

Teaser for the day

Many senior Congress leaders are rumored to be on their way to long holidays for rejuvenating themselves.

If true, Modi ji can say that he has achieved Congress Mukt Bharat for few weeks at least.

“Lord, make me chaste, but not just yet”

Some media reports in past couple of weeks have suggested that BJP leadership may not be comfortable with Raghuram Rajan continuing as RBI governor. Though there no explicit confirmation or denial from BJP side, the tenor of media reports and subsequent comments by the incumbent FM, comments of the governor himself and utterances of some senior BJP leaders suggest that the smoke is not without fire.

Though not a great admirer of the suave governor myself, I believe he is apolitical, unlike some great global economists who have openly taken sides during the recently concluded elections. As such, the new government may not want to disturb a critical organ of economy in haste. In my view, the credit policy due in June first week should give ample indication how well the government and the governor are likely to get along.

In my view, there could be three potential points of disagreement between BJP and the governor, viz., (a) INR exchange rate, (b) benchmark rates and (c) restriction on gold imports.

During the election campaign BJP has likened the INR weakness to instability of Indian economy and failure of UPA government. As such it may want INR to strengthen so that it could score some political points. BJP would also like to return favor to its core business and trader constituencies by easing rates and lifting restriction on gold import.

Through stronger INR it may be able to bring down fuel prices in short term. Also, a sense of industrial revival could be created through lower rates and easier credit. A lower inflation statistic and improved employment environment could help it sail through the budget session of the Parliament.

These are however at best some first aid solutions. The economy would need much more fundamental measures to get on a sustainable 6-7% growth path. So far I have not heard anything to this end.

Insofar as linking INR exchange rate to national pride is concerned, the following excerpts from my favorite BoB McTeer’s blog are pertinent to note.

“When the Federal Reserve adopted a super easy monetary policy in response to the financial crisis and recession, many analysts, along with their predictions of hyper-inflation, predicted a collapse of the dollar. Furthermore, many advocated measures to strengthen the dollar in foreign exchange markets. It was widely believed that what we needed was not a weak dollar, but a strong dollar. Larry Kudlow and many of his guests pined for ‘King Dollar.’

My position back then was that we need a strong dollar in normal times to support a high standard of living, but, during a steep recession and anemic recovery, a strong or stronger dollar would inhibit the recovery. My line was that a strong dollar is desirable eventually, but not during a recession or weak recovery. I compared my position on a strong dollar to St. Augustine’s position on chastity. “Lord, make me chaste, but not just yet.”

The party to continue as some parties face extinction

Thought for the day

“The jury consist of twelve persons chosen to decide who has the better lawyer.”

-          Robert Frost (American, 1874-1963)

Word for the day

Matrifocal (adj)

Focused or centered on the mother.

(Source: Dictionary.com)

Teaser for the day

Sensex climbed 17% on 18-19^th May 2009 when MMS was re-elected as PM.

Sensex has climbed 18% since 12^th September 2013 when Modi was announced BJP’s PM candidate.

So what’s the big deal?

The party to continue as some parties face extinction

India successfully concluded the largest and longest running general elections in world, much to the comfort of all, except perhaps UPA allies and some traditional socialists like JDU and SP.

The Exit poll done by various agencies have confirmed our February assessment that NDA will likely get a “working majority” and Congress party may be decimated in terms of number of seats at least if not vote share.

To my mind, if we accept the exit polls as correct, there are three key take away from these elections:

(a)   Congress has been virtually eliminated from the northern, central and eastern part of the country. It has dissipated to become a marginal force in large states like UP, Bihar, Jharkhand, West Bengal, Tamil Nadu representing 40% of the Indian population. It is in serious danger of losing the tag of the only truly national party.

The point to watch would be how Congress reinvents itself to regain its lost glory. In 1998 Sonia reenergized the ailing Congress. This time, she herself is not well and Rahul Gandhi has repeatedly failed to inspire. The keen political observers would also tell you that Priyanka Gandhi, the hitherto unused trump has turned out be a bigger disappointment.

Under the circumstances, in the absence of any recognized national level leader outside Gandhi family, we may see more secession on lines of Sharad Pawar, Mamata Banerjee, Jagan Reddy, et al. This could be especially true in the case of states where Congress enjoys reasonably higher vote share but is doing consistently poorly in terms of electoral wins, e.g., UP, Madhya Pradesh and Gujarat.

(b)   BJP appears consolidating its position materially in the so called BIMARU states (Bihar, Jharkhand, MP, Chhattisgarh, Rajasthan UP, Uttrakhand) and western part of the country (Gujarat, Maharashtra and Goa). A stable performing government for five year will likely place BJP in pre 1989 Congress shoes, thereby rendering southern states less relevant in national government formation. The process of federalization of the country and decentralization of power could move a few step back.

(c)   The so called religious and caste based vote banks appear to have dissolved. This is a reflection of changing demography. The youth of the country is certainly more interested in substantive issues like employment and socio-economic development.

Consequently, the parties solely dependent on caste and religion arithmetic face the threat of extinction; whereas neo-socialist like TMC, are gaining strength. AAP also registers its presence at the national scene.

Insofar as markets are concerned, with favorable exit polls, the party will continue till 16^th at the least.