Do it yourself

In my past couple of strategy reviews, I had noted that given the present circumstances, the market outlook is pretty simple and straightforward – Moderate return expectations and focus on capital preservation. In fact, in the past three months the investment environment has become much more uncertain and complex. The geopolitical uncertainties, fiscal policy fatigue and monetary policy dilemma make short term forecasts very complex. These factors further support the idea of keeping the investment strategy simple and continue giving preference to capital preservation over higher returns. I continue to believe that the economic and market cycles are now becoming much more shallow as compared to the 80s and 90s. The recessions nowadays last for a couple of quarters, not many years. Inflation peaks at 7-8%. Despite all the brouhaha over unprecedented QE and uncontrolled inflation, US rates are expected to peak at 3%. In fact the bond market in the US may already be pricing in a reversal o...

  Markets in 1H2022 – As tough as it could be The first half of the current calendar 2022 was perhaps one of the toughest six month periods for the global markets. In fact, for global equities, the 20% fall in MSCI All Countries index 1H2022 during 1H2022 is the worst ever on record. The global government bonds are also having the worst year in 150years, as the global central bankers reversed the course of monetary policy. Indian benchmark yields have risen 14.5% during 1H2022. Energy and Food prices have risen in this period, largely due to war between Russia and Ukraine; but other commodities like industrial metals, steel, and precious metals have mostly shown a downward trend. Gold (-1.3%) is trading marginally lower while silver (-15.6%) has lost in line with industrial metals. The new age assets like cryptocurrencies have also been decimated in the global melee. The bellwether bitcoin lost over 58% of its value during 1H2022. USD has gained close to 10% during 1H2022, while JP...

 On 29 th June 2022, Reuters reported a trade deal that could have material and far reaching implications for India’s external trade in particular and the global trade in general as well. As per the agency, it has accessed documents from the Indian Custom department showing that Ultratech, the largest cement manufacturer in India, has imported 1,57,000 tonnes of coal, worth USD25.81million (appx INR2000cr), from Russia. The consignment is invoiced in Chinese currency Yuan (CNY), implying that the payment will be made in CNY, without using the global payment network like SWIFT. The agency also reported that other companies have also placed orders for Russian coal using CNY payments. ( see here ) This could be the first instance of an Indian company using CNY to make international payments. Apparently, this time the transaction could be to circumvent the international sanctions on Russia. Ultratech would be using USD to buy CNY in China or Hong Kong to pay the Russian coal produce...

 Thankfully, the impromptu protests against the scheme for recruitment of short term soldiers in the Indian armed forces have subsided in a few days and the armed forces are reporting enthusiastic response from the youth. I see this scheme as an extension of the fast growing gig economy in the country. Most industries in the country are increasingly relying on gig workers to perform their business to maintain a lean and flexible cost structure for their enterprises. Recognizing the trend, the government has accorded legal recognition to the gig workers. The Code on Social Security, 2020, (CSS2020) that shall, in due course, replace nine extant labor laws and establish a single comprehensive legislation to extend social security benefits to all employees and workers irrespective of belonging to the organised or unorganised sector. The Code on Social Security, 2020 brings, within itself the self-employed workers, home workers, wage workers, migrant workers, the workers in the uno...

  In the past couple of months there has been a visible rise in the reports expressing fears of an implosion in Japanese, Chinese and Russian economies. The reasons behind these fears are quite diverse. Of course there is nothing new in these reports. Experts have been predicting an implosion in the Japanese economy since the early 1990s’ in the Chinese economy since 2008 and the Russian economy since 1917. Personally, I do not subscribe to any of the theories that forecast implosion in the Japanese, Chinese and Russian economies in the near future. Nonetheless, I believe that the study of the growth, fiscal and indebtedness profile of Japan is important from two viewpoints, i.e., (i) impact on the global economy, should the BoJ losses control over the situation; and more importantly (ii) impact on the global economy if the US economy (consumption, growth, fiscal profile, etc.) follows the Japanese economy and gets trapped in this vicious cycle of high debt and low growth; and the ...

 In March 2009, Tata Motors, the largest automobile manufacturing company in India, rolled out an inexpensive small car from its plant in Sanand town of Ahmedabad district of Gujarat. The car was metaphorically named Nano, which means dwarf in Greek and Little in Gujarati. The ambitious project of the Tata Group chairman Ratan Tata, is remembered for multiple reasons. First, the plant to manufacture Nano was planned to be set up in Singur town of Hooghly district of West Bengal. The then Left Front government acquired the farm land for the project and handed it over to Tata Motors. The then leader of opposition in West Bengal, Mamta Banerjee organized a massive protest that turned violent against the project, alleging that the land of farmers had been acquired inappropriately. Many activists and celebrities supported Ms. Banerjee’s protests and Tata Motors was finally forced to withdraw the project from the state of West Bengal. The then Chief Minister of Gujarat, availed the opp...

 The latest issue of Sarvekshna (March 2022 ), the periodic journal of National Statistical Office (NSO), presents some important insights into assets and indebtedness of the Indian households. Some of the data is actually contrary to the popular perception. I find this data important since it defines the limits of potential domestic inflows into the financial markets; and the challenges the household face in a persisting negative interest rate environment. The key highlights of the NSO presentation are as follows: Asset ownership pattern ·          96.6% of Rural households own some financial asset . This percentage is lower (94.7%) in case of urban households. ·          Average value of financial assets held by a rural household in India is around INR73,000. For an urban household, this value is much higher at INR2,52,000. ·          About 91% of rur...

The Federal Open Market Committee (FOMC) of the US Federal Reserve decided to hike the benchmark bank rate by 75bps to 1.5% - 1.75% on Wednesday. The Committee also reiterated that the Fed will continue to shrink its balance sheet by US$47.5bn till August 2022 and from September the unwinding will be stepped up by US$95bn/month. The FOMC noted that there is no sign of broader slowdown in the economy, while lowering its GDP growth forecast for 2022 to 1.7% from 2.8% earlier. The FOMC statement reiterated the strong commitment to achieve the 2% inflation target. The Fed Officials projected raising it to 3.4% by year-end, implying another 175 basis points of tightening this year. The projection shows a rate cut in 2024. In the post meeting press meet, Chairman Powell commented that “Either a 50 basis point or a 75 basis-point increase seems most likely at our next meeting. We will, however, make our decisions meeting by meeting.” The Chairman added that ““It does appear that the US econom...

As I suggested yesterday ( see A perfect storm ), “the best strategy under the present circumstances would be to (a) hold nerves and not panic; (b) review the portfolio for any corrective action that may be needed once the storm passes and the sea becomes calmer.” To add further to that, I may suggest that the following points may be pertinent to note while reviewing the portfolios: 1.    The higher cost of capital (interest rates) would result in lower fair valuation for equities in general. The growth companies that have debt on balance sheet or need to borrow for capex; and/or where the free cash flows are mostly back ended may see much sharper cut in their target multiples. In fact we have already seen 20% derating in Nifty PE Ratio over the past eight months. 2.    The market consensus was working around 18% CAGR for Nifty earnings over FY23-FY24. The realized earnings growth may be much lower than this. My personal assessment is that we may end ...

The benchmark Nifty is down about 15% from its October 2021 closing high of 18477. A broader gauge of the market performance Nifty500 is also down by a similar proportion. However, anecdotally I find that damage to the investors’ sentiments is much worse than what this extent of correction in these indices might be suggesting. There could be multiple reasons for the investors’ despondency. For example— ·           Most of the popular trades of 2020-21 that have attracted a whole lot of new investors/traders to the equity markets have lost materially. The Covid trade (Pharma, healthcare); New listed IT enabled businesses like ecommerce platforms and Fintech; popular disinvestment candidates; PLI beneficiaries; self-reliance and import substitution (Specialty chemicals, electronics) have sharply underperformed the markets. A large number of these stocks have corrected 25-75%. The non-institutional investors have a tendency to chase popular trad...