Great expectations

Some food for thought

"Well, my deliberate opinion is - it's a jolly strange world. "

—Arnold Bennett (English Novelist, 1867-1931)

Word for the day

Decoration (n)

A badge, medal, etc., conferred and worn as a mark of honor.

 

First thought this morning

For past five days, mainstream media in India is busy dissecting the popular mandate for constitution of 17th Lok Sabha. A large part of the analysis is naturally devoted to analyzing the region wise, caste wise and religion wise vote share of the winning party, to find out what did actually work for it. Besides, three issues have garnered bulk of the highlight.

(a)   Number of members with criminal records is perhaps the highest in this Lok Sabha.

(b)   This Lok Sabha has highest number of women representatives.

(c)    The winners from Bhopal and Rampur constituencies are widely known for extreme religious views that may not necessarily be congruent with the principle of secularism as enshrined in the Constitution of India.

Most commentators have severely criticized political parties for selecting candidates for criminal antecedents. Many commentators have even ridiculed the voters for electing the winners from Bhopal and Rampur.

In my view, this criticism is meaningless and redundant. In a parliamentary democracy, the elected Parliament is quintessentially a reflection of Society. The constitutions of the parliement mirrors the contemporary constitution of the Society it represents.

The present Lok Sabha is an amalgam of criminals, reformers, bigots, liberals nationalists globalists, illiterate, highly qualified, young & old, suave urbanites and rustic tribals, et al. It is how it ought to be.

If some people want the Parliament to look any different, they should make serious efforts to change the constitution of the Society first!

Chart of the day

 

Great expectations

The Monetary Policy Committee of RBI will meet on June3 to June 6 for second bi-monthly review of monetary policy for FY2020. The market expectations, as reflected by the sharp fall in benchmark 10year yield, appears set to a 25-50bps cut in the policy repo rate. Taking a clue from the statements made after last policy meeting, some are even expecting RBI to break away from tradition of changing rates in multiples of 25bps and make an odd cut of 35bps.

The rate expectations are supported by downgrade in GDP growth expectations for FY19, persistent low inflation, poor sales number for auto sales, lowest manufacturing PMI data and core sector growth prints in almost one year, and BJP's promise to accelerate investment materially. It is pertinent to note that high real rates have been hurting economic growth for some time now. RBI and government must be under tremendous pressure to rationalize the policy stance to support the growth.

The expectations from RBI and/or new government include:

(a)   Material rate cut and faster transmission to support investment (both public and private) and lower borrowing cost for the government to help fiscal management.

(b)   Easing of monetary supply by inducting sustainable liquidity, to enhance credit availability, especially to farmers and MSME sector; and prevent the NBFC crisis from worsening. CRR cut of 100bps, larger OMO for bonds as wells as USD buying are some of the market expectations.

(c)    Revised framework for recapitalization and consolidation of public sector banks. RBI is expected to announce adoption of the recommendations of Jalan Committee made last year and release excess reserves for public sector bank recapitalization.

(d)   Sharp increase in public investment without compromising on fiscal discipline. RBI is expected to facilitate the implementation of the BJP's promise of raising infrastructure investment to 10% of GDP in next five years from the present 4% by structurally lowering the borrowing cost.

(e)    Measures to attract larger foreign inflows that shall also help in strengthening forex reserves to provide for a strong cushion against fall in exports due to expected global slowdown and potential FPI selling. Higher FPI limits for government bonds, larger USD swap window, NRI bonds rollover, etc are some of the steps market is expecting.

(f)    Pragmatic resolution of power sector NPAs.

(g)    Gradual strengthening of the regulatory framework for control of NBFCs and HFCs, without disrupting the status quo much.

(h)   Evolving an alternative mechanism for long term project financing, without crowding the banking system for

More on this tomorrow.

Let's quickly go back to business as usual

Some food for thought

"I am not aware that any community has a right to force another to be civilized."

—John Stuart Mill (English Philosopher, 1806-1873)

Word for the day

Stellate (adj)

Like the form of a conventionalized figure of a star; star-shaped.

 

First thought this morning

Whatever I could make of this entire controversy is as follows:

(a)   I completely believe the assurance of the Election Commission that EVM machines used in the election process are temper proof. I have carefully studied the opinions of various cyber experts and people closely attached with the entire election process. Based on this I can safely vouch for the independence, effectiveness and veracity of the entire election process.

(b)   The commotion of opposition parties sounds like the frustration of sore losers. The worst part is that the results are still not out and these parties have started raising questions on the election process itself.

(c)    I strongly believe that by raising doubts over the genuineness of the election process, the opposition parties are not only creating an excuse to justify their failure. They are also not just spoiling the image of our robust election process. They are in fact disparaging our well established and widely respected democratic traditions and weakening the trust of people in the Constitution, constitutional institutions, judiciary, and security forces which provided protection to the election the process. They are doing it without an iota of evidence and purely to further their vested interests. This is indubitably an act of sedition that must not go unpunished.

The new regime will do a great disservice to the nation, if it decides to ignore it for the fear of being accused of carrying out political vendetta.

Chart of the day

 

Let's quickly go back to business as usual

Yesterday I received the following table through a WhatsApp forward.

It highlights that 75% to 80% of the equity return in past 6 years is consequent of PE ratio expansion and only 20% to 25% is due to earnings growth. In this period Earnings have in fact grown at measly 3.7% CAGR.

Once the market participants are through with their affair with the politics and elections, they would need to sit, put their heads together and contemplate the following:

(1)        How much is the scope for further PE expansion of Indian equities?

(2)   How much earnings will have to grow in next 3years to normalize the rapid PE expansion of past 6years?

(3)   Is there enough visibility of earnings growth for next couple of years at least?

(4)   Though the premium of midcap to the benchmark indices has moderated considerably in past one year or so, but does absolute valuations are attractive enough to provide decent returns over next 3-4years?

(5)   Would it be reasonable to assume that due to higher domestic inflows into equities, we might not see any dramatic price correction, nonetheless a prolonged time correction cannot be ruled out.

Answer to these inquisitions would guide how much return one should be expecting from Indian equities in next couple of years.

Given the turmoil in corporate debt market and moderate gilt yields, on risk weighted basis the overweight equities strategy will still make more than sense than a balanced asset allocation in my view. However, the return expectations may need material moderation, in my view.

I also find the following noteworthy from a recent research report published by Nomura Securities.