Where India stanmds in Sino-US trade war

Some food for thought

"He said it was artificial respiration, but now I find I am to have his child."

—Anthony Burgess (English Novelist, 1917-1993)

Word for the day

Evenfall (n)

Twilight; dusk; the beginning of evening

 

First thought this morning

Indian Air Force avenged the Pulwama attack adequately. Penetrating deep into the Pakistan territory (not just PoK), our fighter planes destroyed JeM camps. The performance was meticulous, worthy of a force which is comparable to the best in world. All citizens must be feel proud and safe.

The early reactions to the strikes from various sections are noteworthy, as these reactions indicate to some important trends.

(a)   Pakistan Army admitted the transgression, but denied any damage. They claimed that transgressing Indian Air Force planes were forced to shed "payload" in vacant land and run back. The adventurous attempt therefore has been successfully repelled.

This official reaction came much before any claim was made by any Indian official.

Obviously, Pakistan establishment is worried about its credibility and also preparedness of war, both economically and strategically. They are hence eager to preempt any adverse public opinion that might force them to retaliate without any preparedness.

Secondly, regardless of all the rhetoric, Pakistan is certainly not willing to escalate the matter further. Most voices in Pakistan media called for peace and dialogues.

(b)   Almost every opposition leaders in India commended IAF for the successful operation, much before any official statement was made.

It appears that almost all of them were suffering from the guilt of challenging the authenticity of surgical strikes of September 2016. They used this opportunity to remove the label of "anti national" pasted on them by BJP and allied organization. To this extent, it is clear that BJP has been largely successful in setting the narrative and agenda.

(c)    By making this overt operation, the Indian establishment has also made sure that the situation does not get escalated any further. The government has effectively calmed all the feathers that got ruffled post Pulawama attacks.

Chart of the day

 

Where India stanmds in Sino-US trade war

For past many months, the trade related disputes between two of the largest global economic powers have kept markets busy.

USA has announces several measures to reduce its trade deficit with China, including imposition of import duties on imports from China. The impact of the measures is visible in slowing Chinese growth and declining global trade. The exports of US to China have also suffered. The collateral is that the trade surplus of EU, Japan and Australia etc with China has further increased.

The financial markets have reacted wildly to each sign of truce and antagonism between the two super powers. Currently markets are running up, rather hard, fueled by the signs of thaw.

Notwithstanding the market volatility, as a small Indian investor, who is entirely focused on domestic assets, I find the following issues pertinent for examination.

(1)   Would India benefit from escalation of trade war between US & China, or complete normalization of trade relation between US and China; or continuation of current state of indecision and tentativeness?

(2)   If not resolved soon, would the trade conflict between China and US, remained confined to trade or escalate further into a geo-political crisis?

(3)   If the trade war escalates, and both the parties harden their positions, will we have a cold war kind of situation again, polarizing the world again?

All our neighbors (Pakistan, Nepal, Bangladesh, Sri Lanka, Maldives, Mauritius, Myanmar) have shown their inclination to side with China. Under these circumstances, what would be in the best interest of India? Should India side with US, because of lot of legacy issues siding with China may not be an option, or stay non-aligned?

(4)   In next few months, Europe might also see a new equation emerging. Notwithstanding, UK dithering on Brexit, a realignment of forces in Europe looks more likely. Under these circumstances, could we see support for China in Europe, especially from beleaguered economies like Italy and Greece?

(5)   Would a full US China deal reinvigorate the struggling global growth, and bring back inflation and higher rates?

Given that I am no expert on global financial markets, international relations, global economics and most other subjects, I would be contended to rely upon the views of the "experts".

Intuitively, I feel the US China dispute is not about trade, which is only incidental. The real issue is whether China will be allowed an entry in elite global club or not.

Therefore, regardless of the outcome of Summit on Friday, the condition may not normalize, until US begins to consult China before invading a country like Iraq, the way it does consult with UK and France. At best the deal on Friday would be temporary relief till a new flash point gets triggered.

I would be examining these issues in some detail over next few months to assess the impact on my investment strategy.

In the meantime, I shall be delighted to receive comments, views and opinions of readers on these issues.

Do we mind a war?

Some food for thought

"Who are you to condemn another's sin? He who condemns sin becomes part of it, espouses it."

—Georges Bernanos (French Author, 1888-1948)

Word for the day

Tabula rasa (n)

A mind not yet affected by experiences, impressions, etc.

 

First thought this morning

Till a few years back, "Kameti" (A kitty of businessmen) used to be one of the most popular source of financing for traders, cottage and micro industry in unorganized sector in many parts of the country. This very friendly source of funding was widely used for working capital, capacity building & expansion, and even meeting expenses of family events like marriage etc. In past few years, especially after demonetization, this source of funding has almost dried up.

The modus operandi of "Kameti" is very simple. 25-50 businessmen working in a micro markets would come together and commit a fixed monthly amount (say Rs50,000 and 40 people) to be a put in a pool. Every month there would be a meeting of all the participants. The participant(s) who need money for their business or personal purpose, would bid for the pooled money of Rs20lacs (Rs50000*40). The participant bidding the highest discount would take the entire pool less discount. The amount of discount is distributed equally amongst all the participants as "interest income". All the transactions are usually in "cash", and all the participants would generally know each other well.

The amount of discount (or interest) dynamically varied as per business cycle, and was determined in very transparent manner. In case there is no bidder in a month, the winner will be chosen by lot of draw and a pre agreed nominal discount would be applied (usually 1-2%).

In rare cases of a successful bidder failing in making successive monthly contributions, the rest of the participants would bear the loss in equal proportion. There were no willful defaults.

Like most other indigenous systems and traditions, I found this system also very effective and useful. From anecdotal evidence, I find this system to be the best example of Self Help Group - totally self regulated, based on mutual trust & empathy, transparent, flexible and dynamic. It involved no need for regulatory oversight and entailed no systemic risk.

First demonetization and now the new law on unregulated deposits, has virtually destroyed this very useful source of financing for small businessmen.

The only regulatory drawback of this system was that the "interest income" earned by the participants remained outside the tax net. But a pragmatic review of the system would have allowed tax exemption for the interest income from Kameti participation, as an incentive to MSME, provided such Kameti was approved by the local trade or market association. This interest is nothing but the compensation for the risk. If equity investors can get tax concessions for investing in "risky assets", why not these.

To those who believe that all cash is "black", I have all my sympathies with them. Nonetheless, businessmen could be motivated to gradually operate Kameti via an escrow account. All participants could contribute to this escrow account through digital transfers and the pooled money could be transferred to successful bidder's account, so on and so forth.

I am not naive enough to assume that this "escrow" account method would be equally useful and immediately acceptable to businessmen who still like to deal in cash. But the lure of tax exempted interest income will surely draw many people to this mode over a period of time, lessening the work load and risk for formal lenders, and lowering cost and inconvenience for small businessmen.

 

Do we mind a war?

Indian financial markets have totally ignored the war shenanigans and not reacted at all to—

(a)   Massive troop movement: Reportedly over 10,000 additional troops are being moved to J&K).

(b)   Pakistan preparing for war: Pakistan has reportedly declared war preparedness, vacating border villages, cancelling leave of forces etc. There are some unconfirmed reports of artillery mobilization also.

(c)    US President has cautioned the world that a "Big" action is imminent in the current Indo-Pak dispute.

(d)   Many friendly nations have extended explicit support in case a war does erupt. Israel in particular has been quite vocal.

(e)    Prime Minister is threatening an adequate response to Pulwama attacks, at least thrice a day.

(f)    Trade blockage has already started with withdrawal of MFN status, imposition of 200% duty; and "voluntary" refusal of merchants to export goods to Pakistan; boycotting of all Pakistani artists and sportspersons, etc.

This is not at all surprising. Similar escalations were seen in the aftermath of Kargil War (May-July 1999), attacks on the Parliament (December 2001) and Mumbai attacks (November 2008) and attack on Army base in URI (September 2016). On each of these periods of escalations, the market did not make any panic or unusual move.

What does this imply?

Does the collective wisdom of market not believe in any probability of even a limited war between two neighbors? If that be the case, what this all brouhaha is that we are witnessing in media, both mainstream and social?

Is it safe to assume that we do not mind a war insofar it has no significant economic cost?

Is it also safe to assume, even a small engagement at border may surprise markets hugely?

Keep it simple

Some food for thought

"Theories are patterns without value."

—Constantine Brancusi (Romanian Sculptor, 1876-1957)

Word for the day

Suffragatte (n)

A woman who advocates suffrage for women

 

First thought this morning

I visited a prominent private school in West Delhi area yesterday morning for a story telling session. There I had a chance to meet few students admitted under the economically weaker section (EWS) quota. The interaction was quite revealing. I wonder how come the policy makers have not think about so many aspects while framing rules under the Right to Education. Or may be rules are in place but no one is bothering about the enforcement.

I would in particular like to highlight the following three issues:

(1)   Many of EWS students appeared lost and out of place amongst their wealthy peers. No one has counseled them about the situation they would be facing as "imposed" burden on the school.

(2)   The students in government schools get many benefits like weekly Iron supplements, mid day meal, books, uniform, shoes, and even cash subsidy. As per the RTE rules, the government is responsible for providing funds to private schools for arrange for uniform and books for the EWS students. But many schools complaint that since they do not receive funds from the government hence they are unable to extend the benefits.

Moreover, the amount fixed for uniform (Rs1100/yr) and books, stationary & exam fee (Rs2200/yr) is totally inadequate to meet the standards of private school.

The matter was referred to the Delhi High Court, and is still pending there. In the meantime, both the students and parents are suffering.

(3)   After 8th standard, these students are required either to migrate to government schools or pay full fee. This is most insensitive arrangement viewed from any angle. As the fee and other expenses (coaching, exam fee, extra books etc.) rise materially from 9th standard, it is unreasonable to expect the parents to afford the cost. Besides, considering the huge cultural difference in the private schools and public schools, forcing a vulnerable teenager to migrate against his/her will, could have dire consequences. Again no counseling is provided for such migration.

I think, a serious review of the entire RTE framework is long overdue.

Chart of the day

 

Keep it simple

The past 3-4months have been particularly painful for investors in Indian financial markets. Both debt and equity investments have performed poorly. The performance of few asset managers (MF/PMS/AIF tec.) has matched the benchmark indices. Most of them have severely underperformed. A spate of rating downgrades/defaults post IL&FS bankruptcy filing, and sharp correction in broader markets are being cited as the primary reasons for this underperformance and pain.

As per various media reports and gossip on social media, many of the celebrity asset managers, investors and trader who have wide following amongst investors and traders, are getting dethroned from their high pedestals. Some who were widely touted as most discerning stock pickers till couple of months back are being accused of malpractices like connivance with unscrupulous promoters, front running, insider trading etc.

Many investors who had taken mutual fund route to build a strong investment portfolio are already disenchanted with the poor performance. The anecdotal evidence suggests that many of them are bewildered as to whether they need to review their investment strategy & style.

Unfortunately, I am in position to help anyone in this matter. What all I can say is as follows:

(a)   Investing with a good asset manager is a very good idea. Most good asset managers are not celebrated as they never claim to be great stock pickers or masters in finding multi baggers. These managers keep their head down and chest deflated while doing their job.

(b)   Once you have identified couple of good managers and entrusted your money to them, allow them reasonable time to show performance. If you give him money at the top of the cycle and ask him to show report card near the bottom of the same cycle, it is an unreasonable demand.

(c)    If you fail in finding a trustworthy asset manager, and wish to invest on your own, you may want to keep your life simple. Zest to find multi baggers will only lead to disappointment and losses.

The life of equity investors in India could actually be very simple. Operationally, there are only a handful of companies that have performed consistently. About 2/3rd of these companies have performed well in stock markets also. Investors would be better off choosing a few from this small universe and sleeping tight. An annual review would be just fine. No need to watch NAV of your portfolio daily, monthly or quarterly.

For example, consider the following universe of 51 companies.

(a)   These are the only listed companies in India which have earned more than $25mn (Appx Rs180cr) in profit for each of previous five financial years, and also gave an ROCE of more than 20% for each of those 5years. Out of these 44 companies have listed on stock exchanges for 5years.

(b)   Stocks of these companies have given a return ranging from -1% to 45% CAGR for past 5years. 2/3rd of the companies have given CAGR return of more than 10%.

(c)    All IT sector companies, media and two-wheeler have been notable underperformers. Consumer discretionary firms have done significantly well.

(d)   Only two companies have given negative return.

(e)    A basket of 20 stocks, equally diversified across sectors, could have given a return of 14%CAGR even if one had both the negative return stocks in the portfolio.

If you are wondering, it may not be as easy as it sounds, but certainly not too difficult!

 

(Note: This is only for illustration purpose. Please check the authenticity of data from other sources.)