Do it yourself

Friday, September 27, 2013

Take your chances if you must

After a very hectic couple of months, the financial markets globally have been mostly calm in past few days.

Globally, the sensationalism seen ahead of US Federal Reserve’s FOMC meeting earlier this month has certainly subsided. The US government shut down threat is getting only guarded response from market participants.

The Fed statement post FOMC meet, caution urged by legendary investors like Warren Buffet, Mark Faber etc. and ECB’s dissatisfaction over speed of EU economic recovery has also calmed the over enthusiastic bulls who were unusually upbeat on the US economic growth in particular. UK housing prices also briefly provided fuel to bull’s flight, but the regulatory concerns over the trend has highlighted that it would perhaps be a mistake to see housing prices as reflection of economic strength. The alternative global financial center Singapore has also echoed the same sentiments.

In domestic markets, the recent RBI policy statement facilitated a tryst with reality. In our view, the following five points are amply clear:

(a) Inflation continues to be a worry. Consumer inflation should at least be an equal consideration in policy formulation. There is little to suggest that composite inflation will ease substantially in near term.

(b) The evidence suggests that interest rates alone cannot spur the economic growth. A lot needs to be done at fiscal and economic policy front. This will inevitably involve many unpleasant decisions that may cause pain in short term. The visibility of this occurring in near term is obviously low due to impending elections. In the meanwhile, the monetary instruments like higher rates and tighter liquidity would continue to remain in operation.

A Reuters’ poll post Friday rate hike has indicated that “expectations for monetary policy have shifted towards further tightening”.

(c) Higher inflation, higher rates, tighter liquidity should essentially lead to slower economic growth for next few quarters at the least. Most independent forecasters are now forecasting FY14 GDP growth between 4.5-5% and a muted recovery in FY15.

(d) Consensus earnings growth expectations are implying double digit earnings growth for FY14 and FY15. However, given the demand environment this does not look sustainable. We may therefore see earnings downgrades for FY14 and FY15 post 2QFY14 results to be announced over next six weeks.

(e) Despite earnings growing over 55% from FY08 level, Sensex is almost there where it ended the year 2007. This is a clear indication of de-rating of Indian markets, along with other BRIC peers. A serious re-rating does not seems to be in offing.

However, what is plausible is the correction in “Re-rate quality and De-rate stress” trade due to political optimism that seems to be building.

This is a trading opportunity, provided you could identify the “quality” within the “stressed universe”; a tough task, for sure. But take your chances.

Thought for the day

“The superior man understands what is right; the inferior man understands what will sell.”

Confucius (551-479BC)

Word of the day

Ploce (n)

The repetition of a word or phrase to gain special emphasis or to indicate an extension of meaning.

(Source: Dictionary.com)

Shri Nārada Uvāca

Why no arrest so far in NSEL case?

Thursday, September 26, 2013

Modi PM – Concluding part

Based on our interaction with numerous people across the country, we are of the view that Narendra Modi is emerging as a “phenomenon”, much like Mrs. Indira Gandhi. He had been a popular leader amongst urban middle class for long. However, in recent times his popularity is extending beyond the traditional base as he gains popularity amongst rural and semi urban population.

The following are some key conclusions we draw from our interactions:

What Modi means to his supporters

At this point in time most of Modi’s support from outside the traditional BJP support base is emanating from strong anti establishment sentiments, especially amongst youth.

Not surprisingly, the traditional Indian psychology of divine intervention at the time of crisis is playing in his favor. We discovered that he is being seen as divine intervention that will get India rid of the current social, political, and economic crisis.

What it means for Indian politics

In the immediate term, Mr. Modi’s leadership provides a strong, decisive, and marketable face to the BJP’s campaign that was missing in post Vajpayee period. This has certainly lifted the sagging spirits of BJP cadre and made the floating voters thoughtful.

However, the implication of this development could be much more significant on a longer term basis. This move could potentially culminate in creation of a sustainable alternative to the Congress Party – a process that started in 1975. In our view, the probability of this happening over next decade, should Modi become PM, would be close to certainty.

This essentially means that de facto federalization of Indian political structure would take place at an accelerated pace. This would boost Indian economy much more than all the economic reforms implemented and conceived so far.

Moreover, the erosion of traditional support base for Congress could be sustainable unlike 1977 when the Congress was still the dominating force in many states. This tie, as the opinion poll suggest, post polls the dominance of Congress might get confined to just Maharashtra, Karnataka and few smaller states.

What it means for Indian economy

In our view, considering the present state of socio-economic development of various parts of the country, it would be 10-15years too early to test the Laissez-faire model at the pan-India level. Modi’s Gujarat model therefore may need significant adjustments at the national level. Perhaps an amalgam of Gujarat’s Laissez-faire and Chhattisgarh’s socialist models could provide a more workable model at this point in time.

Therefore, Modi becoming PM might help the business sentiments initially, but expecting any dramatic shift in economic policies and reforms in next 18months would be little farfetched.

Read previous posts in the Mandate 2014 series by clicking on the link:

Anxiously Indifferent

Karnataka & Delhi

Goa, Punjab and Haryana

Gujarat

Rajasthan

Bihar

West Bengal

Andhra Pradesh

Corruption Matters, Alas! Not the way it should

Reforms ain’t mean the same for Delhi and Sangli

Thought for the day

“And forget not that the earth delights to feel your bare feet and the winds long to play with your hair.”

Khalil Gibran (Lebanese, 1883-1931 )

Word of the day

Scabrous (Adj)

Full of difficulties.

(Source: Dictionary.com)

Shri Nārada Uvāca

Should stocks exchanges have banned derivative contracts on the underlying stock of Financial Technology and moved the stock to Trade for Trade segment immediately after the NSEL controversy broke out?

Wednesday, September 25, 2013

Modi PM – Part V

As suggested yesterday, the Nehruvian model of industry led growth has mostly failed in evolving a strong structural base for the Indian economy in past more than 6 decades. Consequently, we still continue to be an economy largely dependent on labor & resource arbitrage and trading. We have failed in making significant progress in the areas such as technological advancement, productivity gains, innovation and localization.

In our view, we have focused too much on our weaknesses and tried hard to overcome by importing technology, energy, intellectual property, capital and consumption patterns. We have thus failed in exploiting our strengths and allowed outflow of precious resources both natural and human.

We can hope the things to change in any substantial manner only if material corrections are made to the current economic model. Narendra Modi has indeed raised hopes. A mission scale program to reverse the flow of trade to pre British era is what we need to ensure inclusive, equitable, sustainable and faster economic growth

The following 20 point program could help to achieve the objective by 2020.

1. Overhaul education system to make it job oriented. Inculcate enterprising skills in students from primary level.

2. Skill youth.

3. Promote co-operation movement in industry.

4. Enhance agro productivity to highest level. Promote collective and commercial farming.

5. Enforce energy efficiency.

6. Make at least 5 global education clusters by creating special zones.

7. Make at least 5 world class international tourism centers.

8. Stop river waters from flowing into sea.

9. Give equity in natural resources to local population.

10. Transform RTE into “Right to equal and uniform education”.

11. Minimize the size of central and state governments.

12. Devolve powers to Panchayti Raj Institutions.

13. Reform police force.

14. Declare sports an industry.

15. Invest in conservation of Indian culture and traditions.

16. Enforce fiscal discipline legally and constitutionally.

17. Make public offices unremunerative by stripping most discretion.

18. Implement electoral reforms, especially state funding of elections.

19. Introduce inheritance tax.

20 Introduce GST, abolish octroi and entry tax, abolish toll on less than 6 lane roads and highways.

Previous posts in the Mandate 2014 series:

Anxiously Indifferent

Karnataka & Delhi

Goa, Punjab and Haryana

Gujarat

Rajasthan

Bihar

West Bengal

Andhra Pradesh

Corruption Matters, Alas! Not the way it should

Reforms ain’t mean the same for Delhi and Sangli

Thought for the day

“We have two American flags always: one for the rich and one for the poor. When the rich fly it means that things are under control; when the poor fly it means danger, revolution, anarchy.”

Henry Miller (American, 1891-1980)

Word of the day

Esse (n)

Being; Existence.

(Source: Dictionary.com)

Shri Nārada Uvāca

What is worse – “economical truth” or “extravagant truth”?

Tuesday, September 24, 2013

Modi PM – Part IV

In our view, it is important to understand what a regime change at the center would mean for the Indian economy, especially if the change leads to Mr. Narendra Modi becoming prime minister. As suggested earlier, not many people we spoke to were clear about the economic policies, programs and agenda of BJP in general and Mr. Narendra Modi in particular.

In our view, presently India is struggling with the limitations of the Nehruvian model of economic development that we have followed since independence. Even BJP, when it came to power, decided to leave the alternative model “integrated humanism” proposed by its ideologue Mr. Deendayal Upadhyaya and followed a variant of Nehruvian model terming it “Gandhian Socialism”.

The current variant of the Nehruvian model is largely a distortion of the classical Keynesian model that advocates a larger role for the private enterprise with active state intervention during extremities of business cycle and argues against higher savings in both private and public sector. The Keynesian model has its genesis in the great depression and mostly found useful during larger economic crisis.

However, Modi seems to be an advocate of Laissez-faire or free market which entails minimal state intervention even during crisis. He has implemented the model in Gujarat with limited success. But it is pertinent to note that unlike many other states, Gujarat has a history of 200years of industrialization and 60mn people who are globally recognized for their enterprising skills.

This is certainly not the case for most parts of the rest of the country.

It is therefore important to evaluate whether the Gujarat model could be replicated at the national level, or in other words whether Modi can deliver the same results as Prime Minister what he has delivered as Chief Minister of Gujarat.

But at the same time the Gujarat model should not become his limitation also. Modi has very successfully demonstrated his strategy skills in past one decade. It would be totally wrong to assume that he would not be able to adapt to the larger responsibility and formulate an appropriate strategy for integrated development of the country.

In our view, given the almost unmanageable socio-economic diversity of India, the model propagated by Mahatama Gandhi is still the most, and perhaps the only, relevant economic development for the country, viz., focusing on domestic strengths rather than weaknesses and building bottom up beginning with Village economy.

Previous posts in the Mandate 2014 series:

Anxiously Indifferent

Karnataka & Delhi

Goa, Punjab and Haryana

Gujarat

Rajasthan

Bihar

West Bengal

Andhra Pradesh

Corruption Matters, Alas! Not the way it should

Reforms ain’t mean the same for Delhi and Sangli

Thought for the day

“So, I'm lying on the couch and Laura walks in and I say, 'Free at last,' and she says 'You're free all right, you're free to do the dishes.' So I say, 'You're talking to the former president, baby,' and she said, 'consider this your new domestic policy agenda.”

George W. Bush (American, 1946 - )

Word of the day

Sobersided (adj)

Solemn or grave in disposition, attitude, character, etc.; serious-minded.

(Source: Dictionary.com)

Shri Nārada Uvāca

RBI Guv is renowned for his prophecy on US sub-prime crisis.

Wonder when he would open his third eye on Indian sub-prime!

Monday, September 23, 2013

Modi PM – Part III

Almost all opinion polls conducted in past one month have suggested that Narendra Modi is the most popular PMship candidate, especially in the states going to polls this winter. No national or regional leader is coming even close to him.

Incumbent prime minister and Rahul Gandhi have scored much less on the popularity scale as compared to Mr. Modi. Others like Nitish Kumar, Mulayam Singh, Sushma Swaraj, L.K. Advani etc. also seem to have marginal support.

Mr. Modi is ostensibly preferred as someone who could instantly bring India back on faster and sustainable economic growth path, besides ensuring a clean, transparent, responsive and accountable administration.

However, the interesting part is that none of the people we spoke to (certainly a tiny and unscientific sample) appeared to have any clue about his economic policies & programs, and development agenda.

Everyone repeated the much publicized media headlines that under his rule Gujarat has made tremendous economic progress.

This to our mind is little disconcerting.

Firstly, this allows Congress to set the election agenda to which BJP and most regional parties will just be responding. Remember, Mayawati committed the same mistake in UP elections last year. She just responded to the agenda dictated by Congress, rather than setting her own agenda, and lost badly.

Given, the present economic mess and governance issue, the Congress would obviously like the agenda to be social rather than economic, where Sonia Gandhi has inarguably emerged as the champion, even better than “Garibi Hatao fame Mrs. Indira Gandhi’.

Secondly, this inhibits non-aligned parties from coming closer to BJP. In absence of a clear forward looking and articulately presented economic agenda, BJP would continue to be associated with its traditional social and religious agenda which does not suit many of the potential regional allies in their local constituencies.

An overtly laid out exclusive socio-economic agenda would provide a platform of common minimum program (CMP) on which a larger NDA could be rebuilt.

BJP would need strong allies in Andhra Pradesh, Tamil Nadu, West Bengal, and Karnataka to have a realistic chance to forming a stable government. Our feedback suggest that a clearly spelt CMP could get BJP support of TDP, AIDMK, TMC and JD(S). 25 seats in UP could get them support of BSP post polls.

Last but not the least, this makes Modi and BJP vulnerable to over expectation (remember V. P. Singh,1989, Manmohan Singh, 2009, Akhilesh Yadav, 2012).

Tomorrow we discuss the template of economic agenda which people would like the BJP to present.

Thought for the day

“Speak softly and carry a big stick; you will go far.”

Theodor Roosevelt (American, 1958-1919 )

Word of the day

Serotinal (adj)

Pertaining to or occurring in late summer.

(Source: Dictionary.com)

Shri Nārada Uvāca

Guv Rajan has sought to take his contribution to the market gains back.

It’s a matter of time when Bernanke also seeks it back.

Only Modi would be willing to contribute more!

Previous posts in the Mandate 2014 series:

Modi PM – Part II

Modi PM – Part I

Mandate 2014

Anxiously Indifferent

Karnataka & Delhi

Goa, Punjab and Haryana

Gujarat

Rajasthan

Uttar Pradesh –I

Uttar Pradesh - II

Madhya Pradesh