Demographic dividend or EMI

Thought for the day

"If you want to be happy, be."

-          Leo Tolstoy (Russian, 1828-1910)

Word for the day

Gainsay (v)

To deny, dispute, or contradict.

(Source: Dictionary.com)

Malice towards none

Will the government stop at Maggi?

Or should it?

Demographic dividend or EMI

Millions of reams have been used to write and publish about the demographic characteristics of India. Many stories, themes and strategies have been built around the young demographic profile of 1.25bn Indians.

Almost all these stories and strategies recognize the young Indian as a great opportunity - "Demographic dividend" for the Indian economy. Of course few of them have words of caution also. Failure to channelize this vast reservoir of energy into productive streams may not only dissipate the demographic dividend but also prove to be counterproductive in terms of widespread civil unrest and violent disruptions.

I have however not come across any presentation that classifies this demographic profile as the solemn accountability and responsibility of India to the world.

The global community has always valued the resource rich nations and expected them to behave in a responsible manner to preserve the global order.

The capital rich western world has been expected to help the poor and starved of the world. The world looked forward to them to fund technological advancement, preservation of cultural heritage, assisting global growth and development. Even after taking full cognizance of the allegations of imperialism and suppression, I believe that financially rich communities have worked for the betterment of human life by funding technological innovation, life science research & development, productivity enhancement, and development assistance to the economically lagging world.

Similarly, nations rich in natural resources like minerals etc. have been expected to prospect and exploit these resources in optimum manner to assist the sustenance and growth of the global economy.

My point is that now since India possesses the largest pool of prospective workers for the world, should it not be responsibility of Indian government to prospect, grow, and develop this resource for the larger benefit of the global community.

This is even more pertinent in the context of the current global financial crisis. In places like Europe and Japan the root cause of the crisis could be traced to the aging demographic profile. China is also like to join the club in a decade or so. Under the circumstances it is the responsibility of India to provide educated, skilled and trained workforce to the global economy.

A number of research papers and surveys have shown that (a) Child and mother nutrition level in India is sub-standard consequently child mortality rates are poor; (b) higher and professional education standards are extremely poor consequently a large number of Indian graduates are unemployable even in routine jobs; (c) There is acute shortage of competent scientists to scale up research and development (R&T) activities to make Indian businesses competitive at global stage.

"Skill India" and "Make in India" are noble ideas for human resource development. But we need to make sure that these do not end up prospecting and developing only blue collar low skilled workers. In that case India will not only fail in its responsibility to global community but also slither back into the lower orbit of economic development like in 1950-80.

Bears still hibernating

Since Sensex recorded its all time high closing level of 29593 on 3rd March 2015, it has corrected little under 10%. However, Midcap and Small cap indices are down about 5% during this period.

Midcap and smallcap indices has peaked almost one month later on 13 April 2015. Even if we count from their respective tops, these indices have still outperformed the benchmark.

This suggests we may not have yet entered a bear market as greed continues to top the fear of investors.

In the bear phase, historically we have witnessed material outperformance of benchmark over broader indices.

Extreme caution in mid and small cap stocks especially those having higher momentum and beta is in order. In coming weeks, this segment of the market may witness virtual crash and illiquidity.

 

 

In search of opportunities

Thought for the day

"It is only by not paying one's bills that one can hope to live in the memory of the commercial classes."

-          Oscar Wilde (Irish, 1854-1900)

Word for the day

Middling (adj)

Mediocre; ordinary; commonplace; pedestrian.

(Source: Dictionary.com)

Malice towards none

Corruption of mind, ideas and preferences is equally detrimental to the progress of a society as the corruption in money and material matters.

First random thought this morning

Till Tuesday morning the financial experts were almost unanimous on the likely rate cut by RBI. Governor Rajan did not surprise the markets.

However, a couple of days after the policy announcement the street is vertically divided on the future course of action. Forecasts now vary from 75bps cut to no cut.

The governor has certainly brought back the element of surprise in the policy making. This un-does whatever Governor Rajan has sought to do since he took over the mantle at RBI.

In search of opportunities

OECD recently cut its global growth forecast for 2015 from 3.7% to 3.1%. To put this in perspective, the global economy grew at 3.9% CAGR in the decade through 2011. In 2014 global economy grew 3.3%.

OECD said that unlike past instances where the economic recoveries were aided by investment in manufacturing capacities and technology, this time it is not happening. Besides, lack of demand is holding back employment, wages and consumption.

US and China have been two big engines of global growth in past decades. Both these engines running out of steam. The OECD sees the U.S. economy expanding 2% this year, down from 2.4% in 2014. China is expected to grow 6.8% this year, down from 7.4%.

At first this trend might look ominous for Indian economy and markets. But a second look exposes underlying opportunities. For example, consider the following:

(a)        The immediate fear of financial investors worldwide is the reversal of rate cycle in US. Slower growth and persistent deflationary pressures may delay the eventual "lift", providing a much needed window of relief to Indian economy. This may be particularly critical if the monsoon indeed turns out be bad and financial stress in the economy rises.

(b)        Lack of investment demand in developed countries and China may augment availability of capital for starved Indian projects.

(c)        Persistent deflationary pressures may keep commodity prices lower, to the benefit of importing economies like India.

(d)        Lack of demand may render a lot of global manufacturing capacities and capital equipment redundant. Given the rock bottom freight rates, Indian miners, construction contractors, and manufacturers may sources these capacities and equipment at much cheaper rates.

            This may be a threat to the "Make in India" plan and domestic capital equipment manufacturing industry, but still a big opportunity for the overall economy.

(e)        Slower growth resulting in lower income, lower subsidies and higher fiscal deficit may strengthen the demand for cheaper services, medicine, clothes, vacations etc. Thus benefitting economies like India, Bangladesh, Sri Lanka etc. Though some engineering exports may suffer.

            Though some slowdown in demand is naturally expected, I would not be unduly worried about severe impact on Indian IT and pharma companies.

In view of this, I am more confident about my underweight on commodities and cyclical capital goods manufacturers. I would be inclined to look at large contractors who are in a position to compete with global construction companies, import/lease equipment's and capacities from overseas markets and sustain their hare in incremental business.

I am evaluating whether any change is needed in overweight consumers in light of likely deficient monsoon and Nestle controversy.

Believe what you know

Thought for the day

"There is a luxury in self-reproach. When we blame ourselves we feel no one else has a right to blame us."

-          Oscar Wilde (Irish, 1854-1900)

Word for the day

Oxter (n)

The armpit

(Source: Dictionary.com)

Malice towards none

What is the ratio of people who have lost money in Unitech shares vs. the people who have made money in Unitech shares in past 20yrs?

If it is more than 100:1, does regulator need to take any step?

First random thought this morning

The prospects of third consecutive crop damage this kharif season (after poor monsoon last year and Rabi crop damage by hailstorms and excessive winter rains) does not augur well for the economy in general.

The challenge before the government is that the PSU banks' balance sheets are already crippled by massive corporate delinquencies. Exploiting these undercapitalized and stressed lenders for farm sector may not be feasible.

It would be interesting to watch how it reflects on political establishment!

Believe what you know

In one of his famous speeches PM Modi had said, "I am a poor person and I bother about small things". I really loved this. I believe this is the attitude needed to take India forward.

Given the six decades legacy of adhocism and Jugaad the task could be completed with least disruption only if we aim to build brick by brick.

The programs and idea for socio-economic growth and job creation proposed by the incumbent government are commendable. However, most of these ideas are massive and intimidating. They have substantial prerequisites and require commitment of large amount of resources for execution.

For example, development of smart cities would need large tracts of land, digital connectivity, trained and skilled administrative machinery, besides material capital investment. Similarly, highway projects, industrial corridors, waterways etc. all need huge capital, technology and other resources which may not be available within the country at present.

Even the pet project of PM Modi - Clean India - would need a revolutionary change in mindset of the people to be successful. This is beside significant capital layout and resource allocation. Building public toilets without adequate water supply and disposal mechanism may only lead to dissipation of resources.

In my view, the right way forward is to take baby steps rather than intimidating the audience with grandeur of the vision and planning outlay.

Mission of a young monk Jagdishanand in Uttrakhand hills could be a role model for the government in this respect.

This monk started his own Child Hygiene project in 2014 with capital of Rs3000. He bought 100 nail clippers and placed them in 20 primary schools across 20 villages in Pauri district.

One nail clipper is tied with the class room window through a small metal chain. The monk visits each school every fortnight and motivates children to clip their nails. He also teaches them how to properly wash hands.

He has received 300 more nail clippers and two more volunteers recently. He plans to cover 100 schools with them.

Through his mission he is not only creating awareness about hygiene amongst children but also revolutionizing the mindset of a whole generation. With Rs3000 he has already ensured hygienic living of at least 300 future families.

I am sure there are thousands of such missionaries who are working silently and selflessly for the Country and her people. PM Modi having been a full-time volunteer of RSS, knows it much better than most of us.

The point is whether he "believes" in what he "knows"!

If he does, India is in secure hands and we need not worry about the bumps on the way. Even if he is suspicious about his own knowledge of the problems and plausible solutions, there is one Jagdishanand in each street of the country to take care.

(Go to top)

To cut or not to cut is not the question

Thought for the day

"The only thing to do with good advice is to pass it on. It is never of any use to oneself."

-          Oscar Wilde (Irish, 1854-1900)

Word for the day

Agog (adj)

Highly excited by eagerness, curiosity, anticipation, etc.

(Source: Dictionary.com)

Malice towards none

Reports suggest that the government is considering Exit Exam for MBBS doctors.

What problem does this exam seek to solve?

Can't Munna Bhai pass this exam also by proxy?

Do we have Munna Bhais only in Medical profession?

 

To cut or not to cut is not the question

 

The GDP date for 4QFY15 has further queered the pitch for Gov. Rajan.

The government authorities are claiming that the data shows that the economic recovery is taking off and rate cut at this point in time will provide the necessary escape velocity. The finance minister himself has publically coaxed Gov. Rajan to cut rates to help the struggling industry and infrastructure developers.

The independent economists however are discounting the recent GDP data as accounting miracle that is not fully corroborated by the evidence available from other sources like corporate financial results, consumption data, industrial production numbers, credit data and other lead indicators. The general view is that economy is still taxing slowly towards the runway and take off is at least couple of quarters away.

The analysts community is mostly expecting a 25bps cut followed by a long pause. Flipping through various reports, I could find little reasoning behind this expectation. Most of it is "just like that".

In my view, the rate decision of Gov Rajan this morning will be driven more by "INR" than "Industry".

Given the elevated level of stress on corporate balance sheets, as evident from the FY15 annual accounts, low demand environment, and poor credit growth despite comfortable liquidity conditions threeo things are more than clear - (a) few bankers want to take risk of giving fresh money to a stressed corporate or even a new project; (b) few corporate balance sheet will justify further lending even if rate fall by 50bps; and (c) some aggressive bankers may be chasing households with high priced relatively small ticket consumer loans, compromising prudent norms and laying foundation for a credit bubble 4-5yrs down the lane.

Under these circumstances a 25bps repo cut would be mostly redundant.

Gov. Rajan would not like to make a bigger cut, as it would risk further strengthening of already strong INR; force more liquidity infusion for buying USD; and thereby weakening the fight against price rise.

From market perspective I will not be too enthusiastic about a rate cut this morning. A sharp rise in financials may provide some short selling opportunities.

A cursory scrutiny of the FY15 annual accounts of profit making private sector undertakings shows a distinct trend of tax refunds and interest on tax refunds. State Bank of India alone reported Rs10bn interest income on IT refunds.

The official claims of no Tax Terrorism need to be closely examined by analysts in light of this trend. An informal interaction with many large tax payers and PSU managers suggests that the practice of forcing tax payers to pay higher advance tax to achieve tax collection targets is still prevalent. This "terrorist" way of deficit financing belies the government claims of "peace" with tax payers. Given that the rate of interest payable on IT refunds is higher than the present 365d treasury bill yields, it also does not make much financial sense.

The earnings' show so far

Thought for the day

"To see and listen to the wicked is already the beginning of wickedness."

-          Confucius (Chinese, 551-479BC)

Word for the day

Cacophonous (adj)

Having a harsh or discordant sound.

(Source: Dictionary.com)

Malice towards none

Can Rahul Gandhi sustain his new found aggression till 2019?

Most of the issues he raising are likely to fizzle out in next one year itself.

 

The earnings' show so far

Asian Paints' 4Q results provide further evidence of slowdown in consumer demand. The company could sustain profitability due to lower raw material prices, which has again been the trend across the consumer segment.

A primary analysis of the results and consequent corporate commentaries brings out the following broad trends:

(a)   The consumption demand has slowed down considerably, and likely to remain subdued for another quarter, primarily due to poor show in rural income. However, most managements have guided for gradual pickup from 2HFY16.

(b)   Both the consumer durable and FMCG companies have managed the cost well and improved margins on normalized basis. None of the management so far has guided any material deterioration in the demand and price conditions going forward.

(c)   Exporters (IT and Pharma) have suffered due to poor demand conditions in some key markets like Europe, and Latin America. The cross currency headwinds have hit most companies. However, unlike 2008-09, most companies have managed their currency exposures well and no material forex losses have been reported.

(d)   Industrial segment has expectedly suffered due to poor investment demand. However, most large companies have been able to meet the subdued expectations. The stress in visible in mid and small cap, especially highly indebted companies.

(e)   Reality sector companies have reported mixed results so far. The well managed south based companies have reported decent numbers and have guided decent growth going forward.

(f)    Financial companies and banks have reported huge rise in delinquencies in restructured assets. The credit growth has been on the lower side. However, the cost efficiencies have improved across the board. Operation numbers are as per expectations or better.

SC clears doubts on obligation to buy power from green sources

In a precedent-setting judgement pronounced last week, the Supreme Court of India has laid down that owning a captive power plant does not absolve a company of its obligation to purchase part of its power consumption from green sources, such as wind and solar.

The judgement implies that the various companies who have not been buying green power by taking shelter under a legal ambivalence, now face enforcement of their obligations.

The case pertains to an appeal of Vendanta group’s Hindustan Zinc Ltd against a 2012 verdict of the Rajasthan High Court, which said that the State electricity regulatory commission was right in imposing the ‘renewable purchase obligation’ on the company, even though the company runs its own captive power plants, of about 475 MW capacity.

 “The renewable purchase obligation imposed upon captive power plants and open consumers through the impugned regulation cannot in any manner be said to be restrictive or violative of the fundamental rights conferred on the appellants…..we do not find any reason to interfere with the impugned judgement (of the Rajasthan High Court),” the apex Court’s order said.

Impact of the order

The Supreme Court’s order brings clarity to the point as to whether or not companies that have captive power plants are covered by the law that mandates green power purchase.

Some other companies had impleaded themselves in the case, filing counter affidavit with the Supreme Court — Ultratech Cements, Mangalam Cements, Binani Cements, Trinetra Cements, Shree Cement, Rajasthan Textile Mills Association, DCM Shriram Consolidated Ltd, JK Tyre Industries and Lucid Coloids Ltd.

“All other interlocutory applications for impleadment/ intervention/ stay/ directions are disposed off,” the order says.

As such, the order will have far reaching implications on India Inc. Vishal Pandya, Founder of REConnect, a consultancy that operates in the area of renewable energy certificates trading, observes that several High Courts have stayed the imposition of RPO on captive power producers.

“With the Supreme Court, these stays will become redundant,” Pandya said.

“The order will provide support to the State electricity regulators to impose RPO regulations more forcefully and enforce them effectively,” he said. (Business Line)

Oil prices rise on Middle East fighting; OPEC output in focus

Oil prices edged up on Monday following fighting in Iraq and Yemen, but Iranian comments that OPEC was unlikely to cut output as well as signs of strengthening U.S. production capped gains.

Front-month Brent futures were up 12 cents at $66.93 a barrel by 0556 GMT. U.S. crude rose 26 cents to $59.95.

Prices were supported by concerns that conflict in Iraq and Yemen could disrupt supplies after Islamic State militants said they had taken control of the Iraqi city of Ramadi in a big blow to the government.

In Yemen, a Saudi-led coalition resumed air strikes against Houthi militia in Aden, a port-city on the shores of key Middle East oil routes.

Despite these Middle East conflicts, analysts said oil markets remained oversupplied, and that the glut could worsen if U.S.-production picked up and output by producer-club OPEC remained strong.

"Oil prices appear to have outpaced the improvement in underlying fundamentals," Barclays said on Monday.

Iran's Deputy Oil Minister Rokneddin Javadi told Reuters on Monday that OPEC was unlikely to cut output at its next meeting in June, and that Iran hoped its crude exports would return to pre-sanctions levels of 2.5 million barrels per day (bpd) within three months once a deal to lift an oil embargo is finalised.

A deal over Iran's disputed nuclear programme between Tehran and world powers could see sanctions on Iran lifted if a more permanent pact is finalised in June. Because of the sanctions, Iranian oil exports have fallen to about 1 million bpd since 2012, mainly to Asia.

In the United States, Goldman Sachs said that despite an expected dip in output in the second half of this year, production would increase by 205,000 bpd in 2016. (Reuters)

...Gold too climbs to fresh three-month high

Gold jumped for a fifth straight session on Monday, climbing to fresh three-month highs, as soft U.S. data bolstered hopes the Federal Reserve would not hike interest rates soon.

The metal has been supported in recent days by sluggish U.S. economic data, which has hurt the dollar and altered expectations regarding the Fed's monetary policy.

The dollar languished around a three-month low against the euro on Monday, after weak data on U.S. industrial production and consumer sentiment.

The weak data bolstered views the economy was not recovering strongly enough for the U.S. central bank to raise rates from record lows. This has supported non-interest-paying bullion, which would have seen demand decline with higher rates. (Reuters)

58% of Indian employers facing talent crunch

Notwithstanding the recovery in job market, 58 per cent of India employers are finding it difficult to fill positions and there is a significant talent shortage in accounting and finance sector, a survey showed.

Globally, 38 per cent of employers face talent shortage. In India, however, the number stood at 58 per cent, ManpowerGroup's 10th annual Talent Shortage Survey said today.

Even though talent crunch persists for Indian companies, they are better off than last year. In 2014, 64 per cent of employers said they faced difficulty in finding the right people.

"The demand index for IT and accounting professionals have been on a continuous rise. Focus on technology up-gradation and better financial access will drive the sectors growth in the coming months," said A G Rao Managing Director of ManpowerGroup India.

Employers in India are finding it most difficult to fill jobs in accounting and finance, IT staff, secretaries, receptionists, administrative assistants and office support.

The other jobs that are most in demand in India this year include, teachers, engineers, communications staff, sales manager, engineers, communications staff, sales manager, executives, legal staff and researchers.

As per the survey, around 13 per cent of Indian employers said talent shortages are having a negative impact on their ability to meet client needs.

However, few employers are putting in place strategies to address the talent crunch problem, the survey added. (ET)

For first time in 20 years, Indian mobile phone sales drop

Mobile sales dropped 14.5% in Q1 (January to March) 2015, on a quarter-to-quarter basis, compared to Q4 (October to December) 2014; from 62 million handsets in Q4 2014 to 53 million handsets in Q1 2015.

The decline in smartphone sales from quarter-to-quarter was 7.14%. Cheaper “feature” phones performed worse, with an 18.3% sales decline over the same period.

 

 

FM seeks rate cut from RBI

 
Trivia

Each crisis that materially disrupts social, physical, or economic life of people institutes some changes of far reaching implications.

For example, a cardiac arrest forces material changes in the life style of the person. The national emergency imposed by Mrs. Gandhi changed the socio-political fabric of the Indian society forever. The currency crisis of late 1990s changed the economic structure of countries like Thailand and South Korea.

The global financial crisis that started 2007-08 is also shaping many changes of far reaching impact in global markets.

While the non-conventional monetary policies used to diffuse the crises are still being tested and yet to find recognition in the economic text books, the new stringent norms for banking, cross border investments, money laundering, and leash on fiscal profligacy of many countries are some changes of far reaching implications that are already coming into effect.

One serious change that is increasingly becoming evident is the global aid for poverty alleviation due to fiscal constraints of the donor nations. The stress and non-compliance in the aid receiving jurisdictions is rising and may continue to rise in coming years. Africa that emerged as favored investment destination a decade ago must be "under review" at investment banks.

You may also want to read the following:

Euro Wreaks Havoc on Carry Trades in Rally Almost No One Foresaw

Tspiras Endgame Nears as Greek Bank Collateral Evaporates

Chinese Maternity Tourists and the Business of Being Born American

Fed's Evans says FOMC could look at rate hike in June

 

NIFTY: Constrained by a long leash

Thought for the day

"In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of."

-          Confucius (Chinese, 551-479BC)

Word for the day

Rhapsodic (adj)

Extravagantly enthusiastic; ecstatic.

(Source: Dictionary.com)

Malice towards none

Indians are drinking more and young.

The abortion rate amongst Indian teens is rising at alarming pace.

Tell me the catalysts for these trends.

I mean besides, item numbers, item girls, Maggie Noodles, and denim trousers!

NIFTY: Constrained by a long leash

Technically speaking, the Indian equity markets are positioned at interesting juncture from near term as well as short term perspective.

Near Term (1 to 36 trading sessions)

In the near term NIFTY is close to completing a reverse head shoulder pattern (H&S) (see chart on next page). It has also made a higher bottom, suggesting buying support above 8050 level.

A close above 8325 will conform the H&S breakout and will open the way for up move till short term resistance range of 8550-8630.

On the other hand a close below 8120 will negate the H&S formation and trigger a move towards short term support of 7860.

The most likely scenario in my view is that NIFTY may complete H&S pattern breaking 8325 this week and making a move towards 8550 level in next 3-18 trading sessions.

Short term (1 to 108 trading sessions)

In the short term NIFTY appears to be established in a downward slopping channel. The current bounds of this channel are 8630-7860.

Three consecutive close outside these bounds will violate the trend and open the gate for a 7% NIFTY move in the following 1 to 42 trading sessions. This scenario looks less likely as on date.

Medium term (108 to 324 trading sessions)

The medium term uptrend has been violated and must take some time get re-established.

As per current trend the medium term NIFTY range is 7860-9450. Failure to close above 8630 in next 54 trading sessions will move the range lower to 7200-8320. However, three consecutive close above 8630 in next 54 trading sessions will sustain NIFTY in the current range.

At present, the chances of breaking this range are miniscule.

Nifty: Near Term uptrend likely

Selling pressure recedes, breadth better, IV higher but moderate

Global Markets Last Week

 

Fed, data take center stage

Investors will watch for any change in the economic outlook from housing data and remarks by various Federal Reserve speakers next week, while retailers will take over on the earnings front as the first-quarter reporting season trickles to its end.

The highlight comes at the end of the week with Fed Chair Janet Yellen speaking on the economic outlook on Friday. Any hint of a downgrade to the economy could signal a delay in monetary policy tightening; central bank watchers now expect the Fed to begin raising interest rates in September.

Yellen will be preceded by Chicago Fed President Charles Evans, who will talk about policy on Monday and Wednesday in Europe. The San Francisco Fed's John Williams takes his turn on Thursday, a day after minutes of the Fed’s April meeting are due.

Yellen signaled earlier this year that the Fed will likely start raising borrowing costs later this year, even before inflation and wages have returned to normal levels.

"From Yellen, markets want to know whether or not she continues with that direction," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

"Any color that you can give to the debate on expectations for liftoff will certainly be picked up by the market." (Reuters)