Do it yourself

Friday, October 18, 2013

Prefer low beta to domestic growth

Thought for the day

“Apparently there is nothing that cannot happen today”

- Mark Twain (American, 1835-1910)

Word of the day

Pinion (n)

A gear with small number of teeth.

(Source: Dictionary.com)

Shri Nārada Uvāca

Naming Ex Coal Secretary Parekh in Coalgate is to save PM’s skins or first step in process of implicating him?

The caged parrot perhaps is taking its revenge in Godfather like manner.

Remember "Revenge is a dish that tastes best when it is cold".

Prefer low beta to domestic growth

The result season has started on the expected lines. So far, the exporters, Infosys, TCS, HCL Tech, RIL and Bajaj Auto, etc. have exceeded the expectations on account of weaker currency as well as better external demand environment. Financials HDFC Bank and, AXIS Bank have indicated weaker domestic demand environment, rising stress on asset quality and margin pressure. Deposit growth may further suffer if PSUs are forced to shell out special dividends (as some reports are suggesting) out of their Rs2.8lakh crore cash chest.

The latest RBI data on credit and deposit growth and industrial growth number for 2QFY14 have not been encouraging and point to continuous poor investment demand conditions. The factors like withdrawal of RFQ for Chhattisgarh UMPP, abandoning of projects by POSCO and ArcelorMittal and poor execution of NHAI projects continue to cloud the sentiment and outlook for investment growth.

The details emerging out of the latest episode in Coal Block Allocation controversy, suggest that the Cabinet Committee on Investment (CCI) may after all not be as effective as the Finance Minister is trying to suggest at various press briefings and investors meets.

With L&T announcing the 2QFY14 results today, the real picture about the domestic investment environment will begin to unfold.

The government, economists, analysts and market participants are all seems to be betting too much on rise in consumption due to better than average monsoon rains. In our view this has created scope for disappointment.

A quick fact finding survey conducted by us suggests that Eastern part of the country where the consumption propensity is relatively higher due to demographic (more youth population) and economic (more poor) reasons have not benefitted from the monsoon. These regions have suffered from erratic rains and flash floods. Late rains have affected vegetable crops across north and east India. Moreover, floods in UP, MP and Bihar have affected logistics severely leading to crop losses.

Rural indebtedness is apparently high due to last year’s drought and higher input prices. The interest rates in informal money market have prevailed at highest level in a decade, impacting profitability of smaller and marginal farmers. Bumper crop and thus lower prices may actually lead to losses for many of these farmers. The tight fiscal situation does not augur well for any pre-election loan waiver etc.

Moreover, social sector spending including MNREGA have fallen significantly this year.

Historically, elections have led to higher consumption demand. However, due to likely lower number of candidates due to latest Supreme Court ruling on people with criminal record contesting elections, and more vigilant Election Commission strictly watching the election expense, we might see the overall election spending to come down too.

We are increasingly growing more confident about our high quality, higher global exposure, and low beta to domestic economic growth model portfolio.

Thursday, October 17, 2013

What are we celebrating?

Thought for the day

“There are people who want to make men's lives more difficult for no other reason than the chance it provides them afterwards to offer their prescription for alleviating life;”

- Friedrich Nietzsche (German, 1844-1900)

Word of the day

Hector (n)

A bully

(Source: Dictionary.com)

Shri Nārada Uvāca

Praise Narendra Modi and get CBI on your tail.

What are we celebrating?

“Clearly, the ineptitude, brazen populism and lack of appropriate policies from the government is the largest part of the problem. You really get a feeling that no one is in control, and the markets are responding to that.”

---- 28 August 2013, Surjit Bhallla, Oxus Investments

"The new RBI governor has market credibility. For now, he's saying all the right things."

- 15 October 2013 Geoffrey Kendrick, Currency and rates strategy, Morgan Stanley

‘From pariah to world’s favorite”, if the media headlines are any guide, analysts have already declared the victory for INR. The mood has changed rather quickly in past 6weeks. INR has jumped ~10% from 68.75/USD to 61.50/USD, and Nifty has jumped ~17% from 5200 to 6100.

The applause has been for the new Suave RBI governor Raghuram Rajan, and correctly so. But now what? How long a central bank can “talk currency up or down”? Eventually, the economic fundamentals will have to take over, in our view.

In this context, there are three points that need to be pondered over. These points are critical as these will also decide the direction and momentum of equity markets in next couple of years.

(a) Whether Raghuram Rajan has enough rabbits in his hat that could be pulled out every month?

(b) Whether the structural issues plaguing the Indian trade balance, demand-supply equilibrium and therefore currency strength have been addressed in any sustainable manner over past couple of months?

Four measures are primarily responsible for the gains in the INR value. (a) Taking the largest participants, i.e., PSU Oil Marketing Companies (BPCL, IOC and HPCL) out of the currency market; (b) Providing huge subsidy to banks for mobilizing foreign currency deposits; (c) Suppressing gold demand through tariff (raising duty) and non-tariff (import restrictions etc.); and (d) Allowing banks to raise more debt funds in foreign currency.

In our view, these are temporary solutions and if continued for long may likely introduce more distortions in the equilibrium.

Monetary policy has so far been ineffective in providing any solution to the demand – supply inequilibrium and inflationary pressures are only rising. There are little signs of reversal of negative feedback loop of higher inflation – higher rates – lower growth – higher demand supply gap – higher inflation.

The governor will likely further strengthen this loop by raising rates on 29 October.

The CCI’s (mis!) achievement of clearing multi billion dollars worth of project has been touted so much that nobody even bothers to listen.

The reality is that the CBI’s latest FIR in coal scam will most likely result in (a) many more outward FDI proposals and (b) further delay in execution of projects stuck for want of administrative approvals. The already wide rift between politician bureaucracy chasm shall widen substantially in next few months.

With PM in direct firing line now, the winter session of the Parliament has been virtually killed. So the next meaningful legislative action is expected only in June-July 2014 when new Lok Sabha will assemble.

And insofar as the strength of INR is concerned, it is mostly an optical illusion. INR/USD averaged 39 in 2007, 48.5 in 2008, 46.5 in 2009, 44.7 in 2010, 53 in 2011, 55 in 2012 vs. the last closing of 61.85.

Tuesday, October 15, 2013

Some more random thoughts

Friendly banker who likes to have more “likes” on facebook

Raghuram Rajan in his first interview after taking over as RBI governor had proclaimed that “The Governorship of the Central Bank is not meant to win one votes or Facebook “likes”.” But in Washington last week, he did try to earn some “likes”.

His efforts so far have provided much needed stability to the currency and soothed many ruffled feathers. He has taken many “popular” measures that have earned him votes of foreign investors.

The recent proposal to liberalize the regime for foreign banks is also a step in that direction. Otherwise, the fact is that in past one year many foreign banks have indeed scaled down/exited their Indian operations. The banks which are there in India since many decades have mostly remained an urban phenomena and are not exactly known for their good practices. The foreign banks contribute nothing positive to the objective of financial inclusion. The negative contribution could be listed, though not inarguably.

The market reaction to the governor’s statement was nothing short of euphoric with some takeover candidates gaining 5-10% in day’s trade.

In our view, the banks whose survival or prosperity depends purely on foreign capital should be considered instable and put under stricter surveillance.

Would wait to hear some protesting noise from so called nationalistic and socialistic forces.

The blessings of Phailin

The destruction and losses caused by the cyclone Phailin that hit India’s east coast last Saturday is terrible and the entire nation stands with the people who have suffered from the nature’s fury.

But as they say, whatever nature does is for the good of mankind. The tragedy perhaps has done a tremendous good to the country as a whole. It has catalyzed the much needed reform in the area of disaster management. The administrative response to the tragedy was unprecedented and results stupendous.

We are certain that this incident will set the benchmark in disaster management that will only be improved with the passing of time. Hope we see no more stampedes at religious places and no avoidable loss of life in natural calamities.

Feudalism wins over democracy yet again

Rahul Gandhi suppressed his desire to break free from the clutches of feudal lords within Congress party. The gas he showed at the Press Club couple of weeks back was pressurized enough to turn into cold water by the time he reached Punjab last week.

He acknowledged that Dr. Manmohan Singh and Sonia Gandhi are his gurus in politics. Remember, these two are the supreme examples of the exploits of the Feudal powers governing the GoP of India since independence.

The meek surrender will certainly disappoint the young turks of the Party who had supported him instantaneously in his rebellion.

Thought for the day

“If you can't get rid of the skeleton in your closet, you'd best teach it to dance.”

- George Bernard Shaw (Irish, 1856-1950)

Word of the day

Trepan (n)

A person who ensnares or entraps others.

(Source: Dictionary.com)

Shri Nārada Uvāca

Does the administrative response to Phailin meet international standards?

If yes, who gets the credit?

Monday, October 14, 2013

Few random thoughts

The equity markets globally have been unusually buoyant past couple of trading sessions.

Except for somewhat easier liquidity and stable INR noting seems to have changed in domestic economy. Chinese export data suggests that Asia in general might have further deteriorated. Recently all global agencies, e.g., IMF, World Bank, European Commission etc. have warned that emerging markets, mostly BRICS, present greater risk to the global economy now, as compared to Europe and US couple of years back.

US political impasse

US political impasse is only worsening from midterm perspective and offers no sustainable solution. Even if they agree to enhance the debt ceiling at the 11^th hour and government starts working again, there are enough indications that the US may continue to witness many recurrences of stalemate in the remaining term of Barack Obama.

Anyways, in 2011 episode of debt ceiling break below supports that led to accelerated losses in the equity markets actually took place once an agreement was reached.

US President himself and many others have warned of that financial markets will crash should the US Congressmen fail to enhance the debt ceiling and pass the budget. This highlights the tenuousness of the economic recovery that is riding on the back of the QE tiger.

The complacent financial markets remind us of the period between August 2007 to January 2008, and the thought of what followed thereafter is disconcerting.

A rise in US bond yields post debt ceiling hike will be the first indicator that the buoyancy in equity markets is about to terminate.

Optical illusion in India

The current rally in Indian equities may mostly be an optical illusion. The rally is driven by a handful of stocks, while broader markets continue to languish. The domestic investors’ participation is dwindling even at a faster rate. The number of stocks trading on daily basis is shrinking, traditionally an indication of rise in number of vanishing companies and deeply stressed companies. Volumes continue to remain low and overwhelmingly concentrated in index option, giving the market a definite “lottery” like outlook.

The inflation continues to remain sticky and manufacturing weak. RBI’s next policy action shall logically be a 25bps hike in repo rate.

Remember, the governor had made it clear on September 19^th that (a) Inflation is the primary focus and (b) both MSF and repo rate will do the walking. Now, as the inflation outlook has worsened further with late withdrawal of monsoon and crop damage by Phailin, and MSF rates have already walked down 125bps, its turn of repo rate to move up a bit.

A rise in US and domestic bond yields could moderate the raging bulls in next couple of months.

....to continue

Thought for the day

“Sin cannot be conceived in a natural state, but only in a civil state, where it is decreed by common consent what is good or bad.”

—Baruch Spinoza (Dutch, 1632-1677)

Word of the day

Promulgate (v)

To make known by open declaration; publish; proclaim formally or put into operation (a law, decree of a court, etc.).

(Source: Dictionary.com)

Shri Nārada Uvāca

We all share the pain, misery and sufferings of the people who came in the way of nature’s fury – Phailin.

God will join us soon.

Friday, October 11, 2013

InvesTrekk model portfolio

Core Portfolio (67%)

In our view, the core portfolio should be constructed with the longest possible timeframe and expectation of returns better than other asset classes, e.g., fixed income, gold, and real estate. We call it “Generational Portfolio” signifying that these are stocks are such that could be passed on to next generation comfortably.

Strategy

Accumulate by buying 10-15% quantity in each month beginning November 2013.

Hold till the investment theme remains valid.

Rebalance for any major change once in a year

(Alternatives: Nestle, Britannia, Asian Paints, Dabur, )

Tactical portfolio (33%)

The tactical portfolio should have a time perspective of next economic cycle (normally 3-5yrs) with a relatively higher return expectation.

Strategy

Accumulate by buying 10-15% quantity in each month beginning November 2013.

Hold for 3-5years or more.

Rebalance for any major change once in a year.

(Alternatives: Tata Steel, Eicher, Glenmark, M&M Finan., Ashok Ley)

Also read the following:

Looking beyond 2014

Constructing a model portfolio

Why be contrarian?

Thought for the day

“I have made a ceaseless effort not to ridicule, not to bewail, not to scorn human actions, but to understand them.”

—Baruch Spinoza (Dutch, 1632-1677)

Word of the day

Obverse (n)

The side of a coin, medal, flag, etc., that bears the principal design (opposed to reverse)

(Source: Dictionary.com)

Shri Nārada Uvāca

The rise of Women power in global banking space is a definite indicator of the structural changes in the offing.

In the coming decades we might see many business model collapsing and more Lehmans biting the dust!

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It is important to note that InvesTrekk is a purely research oriented firm and does not offer any portfolio management , brokerage, money management or investment advisory services of any kind. The model portfolios are only for illustrative purposes. Please take advise of a qualified and registered investment advisor before taking any investment decision.

InvesTrekk Research Reports provide generalized macro investment strategy to its subscribers.. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). InvesTrekk reports are not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in the reports and should understand that statements regarding future prospects may not be realized.

Thursday, October 10, 2013

Why be contrarian?

It is a common perception among countrymen that the Congress Party and therefore UPA government is controlled by the Gandhi family, mostly Mrs. Sonia Gandhi and her son Mr. Rahul Gandhi.

It is also a popular practice for the Congressmen to publically ascribe all successful endeavor of the government or the Congress Party to the Gandhi family and all the failures and delinquencies of the government and Congress Party to others.

The paradox however is that when someone conforms to the said perception and practice usually no one believes him/her.

For example, when a Congress spokesperson ascribes the loss of Congress party in last UP election to the local Party unit rather than Rahul Gandhi – not a soul in the country believes him. The spokesperson fully knows that no one will likely believe his statement, but still he/she makes it.

Similarly, the government’s media campaign claims credit for MNREGA, Food Security, Aadhar, RTI, Bharat Nirman, but Congress spokespersons ascribe all this to Mrs. Gandhi. Often when at a press briefing about cabinet decisions someone says that the Cabinet took ‘X’ decision, no one takes it at par. The popular retort is that the decisions are taken at 10 Janpath, the Cabinet just endorses it. But still the practice goes on.

The unfortunate part is that when a Congress leader does make an honest statement, like the Criminal Politician Ordinance bashing at the Press Club in Delhi, no one believes him/her either. (Also see Another Good Omen)

The point in contention is that when the person making a statement knows that no one will believes him/her; person listening to such statement knows what the statement is going to be and that he/she is not going to believe that – then why the farce is continuing?

In our view, this highlights the natural tendency of people to be conformist and futility of being contrarian.

In constructing our model portfolio (Also see Looking beyond 2014 and Constructing a model portfolio) we struggled with this complexity a lot. We examined many contrarian views and ideas and also examined the success of these views and ideas in anteriority. We discovered that there have been many isolated cases of large gains being made through contrarian ideas/view. But most contrarian investors who did not convert to conformism usually perished. Most successful legendary investors have conformed to the classical investment theory.

We therefore decided not to care about contrarian view/ideas in construction of a model portfolio that is aimed primarily for household investors and not professional fund managers.

This makes our strategy boring and predictable. But then we are not in the business of entertainment. The wealth creation is a serious business and so should be the process.

Thought for the day

“Extreme positions are not succeeded by moderate ones, but by contrary extreme positions.”

— Friedrich Nietzsche (German, 1844-1900)

Word of the day

Tittup (v)

To move, especially to walk, in an exaggerated prancing or bouncing way, as a spirited horse.

(Source: Dictionary.com)

Shri Nārada Uvāca

What does Yellen as Fed Chief mean—

(a) More QE

(b) No tapering anytime soon

(c) No change in policy stance, i.e., measured tapering during 2014

Wednesday, October 9, 2013

Constructing a model portfolio

Constructing a model Indian equity portfolio is somewhat similar to electing members for Indian parliament. Investors like electorate have limited choice.

As suggested yesterday, there are not more than 100 companies that have demonstrated capabilities to remain relevant over many business cycles due to their product, market and technology leadership, strong financial position, lower beta to macro fundamentals, and proven managerial capabilities. Only 80 odd companies have given consistent good positive return over past 10years, 5year and 3year time horizon.

We took three approaches to identifying companies for our model portfolio.

Firstly we applied a slight variation of the classical investment approach. We looked at value of various companies and short listed the companies which have been, still are and will likely remain relevant in Indian and global economic conditions. However, since there are just a few of these businesses are available in India, these companies invariably trade at premium valuation. Hence we had to abandon the “buy at low price” principle. About 100 listed companies fit the basket.

Secondly, we applied a simple “historical economic value added (EVA)” rule to all listed companies, and identified companies that have consistently given positive EVA to shareholders over past 10years at least. About 80 odd companies fulfilled the criteria selected by us. All these companies were there in the list constructed using the first approach.

Thirdly, we surveyed some veteran investors, analysts, and brokers asking for their subjective opinion about the best investible companies in India. Based on their perception we created a list which contained 58 names. 52 of these 58 names were there in the list constructed using the second criteria.

We finally selected 25 companies from this list. The key leanings in the process were that —

(a) Applying complex valuation criteria for company selection could be useful for professional investment managers whose mandate is just to outperform his/her peers over relatively short time frame. However, in the wealth creation endeavor of households, it may not hold much weight. For example, many PSU stocks do perform well in some part of a market cycle, but most of them have not eventually created wealth for investors.

(b) EVA to the shareholder may be the most useful investment criteria for household investors.

For example, a company that has given more than 20% EVA over past more than 20year or 3-4 economic cycles, is more likely to be beneficial to its stakeholders in the following economic cycles than the companies that have historically failed in rewarding its stakeholders or have erratic in their economic and financial performance. Amongst Nifty companies, ITC and JPA are two good examples to illustrate this point.

(c) Over 90% of the companies that have created euphoria or excessive excitement over a small period of time, have eventually caused tremendous losses to investors. For example, consider Suzlon and DLF.

…to continue

Thought for the day

“Choose a job you love, and you will never have to work a day in your life.”

— Confucius (Chinese,551-479BC)

Word of the day

Picaro (n)

A rogue or vagabond.

(Source: Dictionary.com)

Shri Nārada Uvāca

Could elevation of Arundhati Bhattachary catalyze a wave of fist generation women entrepreneurs in the country?

Tuesday, October 8, 2013

Looking beyond 2014

It could be a matter of debate whether the current economic down cycle will hit the rock in FY15 or the economy will continue to slither down even in FY16. One may also argue over the shape of the recovery, viz., it will be a ‘V’ or ‘U’ or ‘J’ or an “L’ shaped recovery.

However there could be little difference of opinion that the economy would continue to struggle with below par growth through 1H2014 at the least.

The election season has already been kicked off in India. If the recent round of policy statements by US Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE) and Bank of Japan (BoJ) and utterances of IMF and ADB provide any indication – the monetary stimulus driven global economic recovery is firmly stuck in first gear and not likely to pick up speed in near future. The political impasse in US over critical fiscal Bills is also not helping the cause.

Under the circumstances, for being relevant, any investment strategy has to be focused on the time horizon that looks at least beyond 2014 if not 2015.

InvesTrekk therefore has decided to modify the construct of equity strategy and accordingly its model portfolio.

Changing from present absolute return portfolio that focuses on a 12month horizon with a return target of 10% over the consensus nominal GDP growth forecast, we suggest the following strategy:

(a) The portfolio should be divided into two parts – (a) Core portfolio (67%) and (b) Tactical portfolio (33%).

The investee companies therefore should be such that have demonstrated capabilities to remain relevant over many business cycles due to their product, market and technology leadership, strong financial position, lower beta to macro fundamentals, proven managerial capabilities. An analysis of the companies listed on BSE suggests that not more than 100 companies would fit the basket. We have selected 25 out of these.

The core portfolio should be constructed with the longest possible timeframe and expectation of returns better than other asset classes, e.g., fixed income, gold, and real estate. We call it “Generational Portfolio” signifying that these are stocks are such that could be passed on to next generation comfortably.

The tactical portfolio should have a time perspective of next economic cycle (normally 3-5yrs) with a higher return expectation.

(b) The adverse valuation argument for some of the core portfolio could be handled with opportunistic trading positions thus bringing the cost down.

(c) The portfolio should be constructed over next 6months period to account for the major local political event (election) and global liquidity event (tapering).

…to continue tomorrow

Thought for the day

“Whether zeal or moderation be the point we aim at, let us keep fire out of the one, and frost out of the other.”

— Joseph Addison (English, 1672-1719)

Word of the day

Malign (v)

To speak harmful untruths about; speak evil of; slander; defame:

(Source: Dictionary.com)

Shri Nārada Uvāca

Should the people choosing to participate in electoral politics be mandatorily required to begin from the lowest level, i.e., Panchayat or Municipality and move up the ladder through state assembly?

If done, no one could become MP unless he/she has at least 10yrs of experience as elected representative. Most dynasties would end here.

Monday, October 7, 2013

Finding structural stories in a cyclical economy

India, encompassing society, economy and markets, is indubitably passing through a period of crisis. However, the current phase of crisis is not the first, not the last or the worst ever. In fact, since gaining geographical independence in 1947, the country has consistently been under crisis of all sorts with some brief periods of respite patched in between.

The current down trend in Indian socio-political and economic spheres presents an opportunity, in our view, to make a holistic assessment of the six decades of progress (or otherwise, as some would like to argue) and make necessary mid course correction.

From an investor viewpoint, it is important to assess whether there is anything structural in India story or it is all cyclical. We believe that so far India has been a cyclical story in all respects and we have completely failed in evolving any structural socio-political and socio-economic model that would put Indian economy on a sustainable growth path. Besides a few random instances of excellence like space research, there is little evidence of the force that is needed to catapult us in the higher economic orbit.

Speaking specifically about financial markets, in our view, Indian market behaved like a classical cyclical business. For example, consider the following:

Since 1989 the stock market has seen strong bull phase only during 7year period between 1989-1992 and 2003-07. The shallowness of bull phases could be assessed from the fact that 2002 NIFTY closing level was lower than 1992 and NIFTY has never closed near the 2007 closing level since then. Rest 16years have been of moderate to severe bear phases.

Not more than 100 companies would have created net wealth for common shareholders over past twenty five years. To the contrary, the number of corporates responsible for destroying common shareholders’ wealth is much larger.

At micro level, many of the deep cyclical businesses, like power and construction, have been popularly marketed as structural growth stories. Consequently, the wealth destruction by mistakenly called blue chips like BHEL, DLF, JPA, Suzlon, ABAN etc. has been excruciating.

More recently, the Congress led UPA-II government (2009-2014) has been criticized for ‘policy paralysis’ leading to halt of growth momentum seen during NDA (1998-2004) and UPA-I (2004-2009) periods. The critique is perhaps based on the assumption that high growth seen during 2004-2008 was structural and hence sustainable. Whereas, the macro data highlights otherwise.

In our view, the genesis of the current crisis could be found in the piecemeal reforms and expansionary policies seen in the wake of economic sanctions post nuclear tests in 1998 and global slowdown in 2001-02. The UPA government perhaps has just perpetuated the malaise.

In coming days, we shall discuss these issues in some detail.

Thought for the day

“Sometimes you mistake sunset for dawn.”

-Unknown

Word of the day

Finagle (v):

To trick, swindle, or cheat (a person) (often followed by out of).

(Source: Dictionary.com)

Shri Nārada Uvāca

If death is an occupational hazard; who is martyr?