Do it yourself

Monday, December 16, 2013

2014 - War continues

Thought for the day

“The Chinese seemed to be mourning Mao in a heartfelt fashion. But I wondered how many of their tears were genuine. People had practiced acting to such a degree that they confused it with their true feelings.”

-Jung Chang (British, 1952 - )

Word of the day

Repast (n)

Something taken as food; a meal.

(Source: Dictionary.com)

Shri Nārada Uvāca

Will Rajan preempt any pre-poll fiscal indulgence by hiking 50bps upfront?

2014 - War continues

If you can look into the seeds of time,
And say which grain will grow, and which will not,
Speak.

Shakespeare, Banquo -Scene III, Act I, Macbeth

The post Lehman period has seen an intense war between the forces of “Greed” and “Fear” in the global financial and political fields. So far most of the battles have been won by Fear. Potent fears of yet another collapse, mostly kept investors under check. The torrents of liquidity emitted by central banks in US, EU and Japan did occasionally come to aid of Greedy, but were found generally inadequate. In 2013 however, for the first time since 2008, Greed appeared to be having a winning edge.

The forces of Fear, as we write this today, appear to have exhausted most of their ammunition, e.g., EU disintegration, Grexit, PIGS default, hyper-inflation resulting from the Mints printing money incessantly, Iran reneging, Currency war erupting and endangering emerging economies, hard landing of Chinese economy, etc.

Whereas the forces of Greed have got fresh batch of ammunition – stable job market in US, housing boom in UK and US, stable financial markets in EU, stronger USD, Chinese growth crawling up, moderate or no inflation, US financials back in business, lower commodity prices, US energy revolution, and mostly stable & peaceful conditions in hot beds like Pakistan, Afghanistan, Iraq, Iran, Libya, Yemen, Sri Lanka (except smaller pockets like Syria).

The only immediate hope for the forces of Fear is a disorderly withdrawal of monetary injection by US Federal Reserve. Failing this 2014 may also belong to the Greedy ones.

It will not be before 2015 when further reinforcement for the Fearful arrives – the inflationary impact of QE may begin to appear on the horizon, US Fed begins to talk about tightening rates, EU and BoJ achieve their inflation targets and talk about moderating liquidity, US completely withdraws from Asia and a war for supremacy and control ensues between Asian forces, Emerging economies are challenged by inflation, trade imbalances created by US energy boom and stronger USD, etc.

Many battles of this ongoing global war have been fought in India too. Indian politicians have mostly sided with the Fearful, providing them with enough ammunition and food to survive. The Greedy ones have been supported by the global forces (FIIs), who have provided enough supplies to keep the hope afloat. Most Indian investors have watched this intense battle from the sidelines so far. The miniscule participation, if at all, had been from the side of Fearful.

However, since September 2013, when a new General (Narendra Modi) took charge of the forces of Greed in India, the domestic Indian participants have been rather ambivalent. Some of them have actively joined the Global network of Greedy, but most are still undecided.

In next few days, we will make an SWOT analysis of the forces of Greed and Fear as they are positioned in Indian markets, and suggest what would be an appropriate strategy for the Indian investors.

Friday, December 13, 2013

Get back to the business, as usual

Thought for the day

“What a good thing Adam had. When he said a good thing he knew nobody had said it before.”

-Mark Twain(American, 1835-1910)

Word of the day

Cusp (n)

A point or pointed end.

A point that marks the beginning of a change.

(Source: Dictionary.com)

Shri Nārada Uvāca

Is Raghuram Rajan already frustrated with politics?

Get back to the business, as usual

Nifty has given up all the gains made in the wake of recent state assembly election results. The ‘gap’ (6260-6415) created at the opening on Monday, the 9^th December, has been completely filled yesterday. Incidentally, the opening level of Monday (6415) is also the highest ever level for Nifty. Technically, Nifty should correct a little more to fill up the ‘exit poll’ gap (6160-6262) of 5^th December also.

A close below 6150 would however negate the entire up move, pushing Nifty back in neutral territory (5850-6300 with occasional violation on either side). In our view this is more likely scenario for January-April 2014 period.

The end of the last working Parliament session for 15^th Lok Sabha next week, will abort all hopes of policy reforms that need legislative approval. With no major policy initiative expected till July 2014 (when first session of 16^th Lok Sabha will be held) the market would mostly take guidance from global monetary and liquidity conditions (QE, FII flows, USD, Bond yields) and to some extent from RBI’s policy response to the political vacuum.

There are no positive political events are likely to occur till next elections. On the other hand, the rising decibel of rhetoric could actually prompt investors to slowdown or completely wait on sidelines.

In next few weeks we shall see the QE debate erupting all over again. However, in our view, there is not much economic evidence to warrant an imminent tapering. We fully agree with what Rich Yamarone, Chief Economist, Bloomberg and author of Bloomberg Orange Book, recently noted:

“Economically speaking, existing conditions are cloudy with a chance of a storm. According to the latest entries in the Bloomberg Orange Book, we should expect to see more of the same – that is, sub-par economic activity with a propensity toward a downturn.

The economic data are poor given that the economy is 54 months into the expansion – the post-WWII average length of expansion is 60.5 months. The looming fiscal and monetary issues certainly aren't likely to be stimulative. In fact, both are set to be more restrictive. Meanwhile, households remain plagued by inadequate real incomes and lacking employment prospects. Businesses are saddled with heavy government regulation and uncertain economic prospects – both domestically and globally.”

The currency and bond markets in India are not sharing any of the recent optimism expressed by large global brokerages. Recent iterations of RBI governor also highlight that (a) inflation continues to be a serious challenge and (b) though economic growth seems to be bottoming out, more evidence would be needed to confirm any reversal in trend.

Though 1^st January is merely an indiscreet point in ad infinitum, conventionally it is celebrated as a chance to begin ab initio. Accordingly, we are expected to spell out our views for the 365 days period beginning 1^st January every year. We shall abide by the convention and outline our views about the likely market directions in 2014 and an appropriate investment strategy.

Thursday, December 12, 2013

Wednesday, December 11, 2013

Positioning for May 2014

Thought for the day

“Never accept ultimatums, conventional wisdom, or absolutes.”

-Christopher Reeve (American, 1952-2004)

Word of the day

Calorifacient (adj)
(of foods) producing heat.

(Source: Dictionary.com)

Shri Nārada Uvāca

After bank license, now Tata’s do not want airport!

Will we see Tata House shifting from Mumbai to Dublin in next one decade?

Positioning for May 2014

As suggested yesterday, expecting any substantial improvement in macro fundamentals of the economy in 2014 could lead to disappointment.

In our view, the best thing that could potentially occur in 2014 due to change in government is improvement in execution of existing plans, programs and projects. We however do not agree with the consensus that the improvement in execution would completely depend on the outcome of the elections.

In our view, irrespective of the constitution (UPA, NDA or third front) or nature (minority or majority) of the government the tremendous public pressure, heightened fiscal pressure and elevated inflation would ensure faster execution. Consequently, we would not be too disappointed if BJP fails to form a government led by Narendra Modi (not our base case).

Given that the 2014 elections are likely to be fought very aggressively, and acrimoniously we do not see political consensus evolving on key social, economic and financial sector reforms till the tempers cool down (may be couple of years down the line).

In our view, therefore, the limited implications of general elections in terms of industry performance would be better visibility of order flow for capital goods from 2015, improvement in working capital cycle. Improvement in capacity utilization level would depend on the correction in inventory level, pick up in consumption demand and higher government plan expenditure.

We also note that global economic cycle is stabilizing and may show further improvement in 2014. This could have positive implications for Indian industry in terms of better external demand environment, especially when INR is likely to remain weak. Growing participation of global corporations in Indian industrial landscape by way of expanding operations (HUL, Cadbury, Nestle, Vodafone etc.) or increasing stakes in existing operations is a key trend to follow.

We therefore would like position for May 2014 through:

(a) Industrial companies with substantial operating leverage and lower financial leverage. The companies with market and technology leadership, strong brand equity and access to global markets would be preferred. Examples would be Siemens, Cummins, and L&T etc. Product companies rather than services companies are more preferable as they gain from inventory correction, pricing power among other things.

(b) Consumer companies both in staple and discretionary space which may benefit from weaker INR, lower commodity prices, rising demand post bumper Rabi harvest and rising consumption demand in external markets. Examples would be HUL, ITC, Maruti, Bajaj Auto, Tata Motors, Tata Global Beverages, and Dabur, etc.

(c) Local units of global corporations that may see larger participation through more investment, hike in stake or transfer of manufacturing operations for regional exports. Examples would Bayer, Bosch, Siemens, Cummins, United Spirits etc.

We would continue to avoid PSUs, commodity stocks and leveraged infrastructure companies.

Tuesday, December 10, 2013

What to expect from the new government post 2014 election

Thought for the day

“Old age and treachery will always beat youth and exuberance.”

-David Mamet(American, 1947- )

Word of the day

Hardihood (n)
Boldness or daring; courage.

(Source: Dictionary.com)

Shri Nārada Uvāca

Should Congress take solace from the fact that its 3/5 for BJP and not 4-0 as many pools projected!

Will Congress become a “Party of smaller states” – HP, UK, Mizoram, Haryana, Arunachal, Manipur and Meghalaya – post 2014-15 elections.

Assam, AP, and Karnataka are the only larger states where Congress is in power on its own. It shares power in J&K, Maharashtra, Jharkhand and Kerala.

What to expect from the new government post 2014 election

The general mood in Indian financial markets had been rather optimistic since announcement of Mr Narendra Modi as PMship candidate of principle opposition party BJP. The results of recently concluded state assembly elections have provided further impetus to the optimism. The response of equity market yesterday reflected the optimism of financial investors.

In our view, the optimism is well guarded, mostly optical and should not be mistaken for any imminent improvement in the macroeconomic or corporate fundamentals.

It is pertinent to note that:

(a) The volumes and market breadth in equity markets are not at all commensurate with the gains in benchmark indices. The participation rate (average number of investors/traders trading and average number of scrips traded on daily basis) has not seen any notable improvement.

(b) Bond yields have actually risen since September.

(c) RBI efforts (swap window for banks and OMCs, curb on gold import) and fall in domestic demand have restored stability in INR. However, the consensus believes that from hereon INR should see orderly depreciation over next many years as India attempts to correct many of its structural imbalances. Recent political developments therefore have little or no implications for the currency.

(d) Despite expected bumper Rabi crop, food inflation is not expected to ease below 8% in 2014. The core inflation at ~4% may continue to remain benign as the global growth fails to pick up substantially.

(e) As the global liquidity expectations tighten and bond yields rise, the lending rates in India may continue to remain elevated for at least 12-15months.

(f) In absence of any substantial improvement in tax collections, the fiscal balance will continue to remain tight, especially if Food Security expenses cover for the savings in fuel subsidies.

(g) The business confidence will likely see substantial improvement. However, investment cycle would improve substantially only if the process of balance sheet correction is accelerated. This is certainly not good omen for most banks. The exuberance seen in banking stocks may therefore be unfounded.

The best thing that could potentially occur in 2014 is improvement in execution of existing plans, programs and projects. The implication in terms of industry performance would be better visibility of order flow for capital goods from 2015, improvement in working capital cycle. Improvement in capacity utilization level would depend on the correction in inventory level, pick up in consumption demand and higher government plan expenditure.

Tomorrow we shall discuss how it may translate in terms of equity price performance.

Monday, December 9, 2013

Congress losses semi final; captain retired hurt

Thought for the day

“Most of us spend too much time on the last twenty-four hours and too little on the last six thousand years.”

-Will Durant (American, 1885-1981)

Word of the day

Largesse (n)
Generous bestowal of gifts.

(Source: Dictionary.com)

Shri Nārada Uvāca

Morarji Desai (1977); V. P. Singh (1989); NTR (1982); Praful Mahanta (1985) Arvind Kejariwal (2013)?

A quick telephonic survey of 28 young finance professionals - 16 were not aware if V. P. Singh is dead or alive; 13 thought Morarji Desai was a RSS colleague of Atal Bihari Vajpayee and no one remembers who were three main leaders who founded AGP!

Congress losses semi final; captain retired hurt

The results of recently concluded four state assembly election, though not unexpected, would have surprised most. The key highlights of the results are (a) The people have mostly continued with the trend seen in past 3-4years by giving a decisive mandate at the state level; (b) complete and total decimation of Congress Party; (c) strong performance of the newly formed Aam Aadmi Party (AAP) and (d) stupendous victories of Shivraj Singh Chauhan and Vasundhara Raje in Madhya Pradesh and Rajasthan respectively.

The elections which were widely seen as semi final of the general elections due in 4months, have provided some very interesting trends. For example consider the following:

(a) In Delhi, Congress lost its traditional Muslim, SC and lower caste vote in Delhi to AAP. BJP failed to win central government employees who also went with AAP. But in MP and Rajasthan BJP gained votes from both BSP and Congress.

These trends could be crucial during 2014 general election in UP and Bihar. A change in voting pattern of Muslim, OBC and SC voters in favor of BJP in these states could be a major swing factor.

(b) Encouraged by Delhi results, AAP could take their chances in other metropolis, e.g., Mumbai, Bangalore, NOIDA where conditions are fertile for their kind of politics to take root.

(d) The detractors of Narendra Modi within BJP have got another chance; though they may not want to express their dissention before 2014 election. In case, BJP falls well short of 200 seats in 2014 election, Shivraj will definitely emerge as consensus leader around which a larger coalition could be stitched.

Implications

The results of just concluded state assembly elections, in our view, will certainly have far reaching implications for various parties in particular and general political environment in general. For example consider the following:

(a) The chasm between old feudal lordship within Congress Party and young turks has been widening since past few years. Loss in 2013 elections will embolden the old guards. With Mrs. Sonia Gandhi not in best of her health, and Rahul being repeatedly rejected by the people of India, we might see some Kamraj, Morarji Desai, Jagjiwan Ram, Biju Patnaik, Mamata Banerjee, Jagan Reddy Mohammed Alimuddin and Bhajan Lal sort of rebellion against the family. Nonetheless there could certainly be more episodes of Kamalapati Tripathi, Sharad Pawar and Sitaram Kesari sort of misadventures.

Rahul Gandhi in “acknowledgement of defeat” press interaction highlighted that the feudal elements in Congress Party have not heeded to his suggestion of changing the way party has traditionally worked. He said that he would pursue his agenda more aggressively going forward.

(b) Priayanka Gandhi has not been tested yet, but in our view, faced with such a situation she may not be as successful as Mrs. Indira Gandhi was in overcoming the threat from Syndicate in late 1960’s.

(c) Absence of any recognized national level leader outside Gandhi family will encourage more secession on lines of Sharad Pawar, Mamata Banerjee, Jagan Reddy, et al. This could be especially true in case of states where Congress enjoys reasonably higher vote share but is doing poorly in terms of electoral wins, e.g., UP, Madhya Pradesh and Gujarat.

(d) With Narendra Modi at the helm, the secularism vs. communalism debate will become almost irrelevant breaking the very fulcrum of opportunist alliances that have kept Congress and some regional parties like RJD in contention since mid 1990’s. The disenchantment of Muslim voters with Congress Party in recent elections indicates to this trend.

In a communally neutral political environment the regional parties would be more amenable to BJP which does not compete with many of these at state level and has demonstrated better track record in center – state relations.

(e) With Congress likely out of power for 5years, much reduced strength in Rajya Sabha and only a few states under its rule (forecasts suggest it losing Andhra Pradesh too, leaving it with just one big state under its rule, i.e., Maharashtra) the already meager cadre may further splinter away, making a comeback even more unlikely.

(f) Congress Party in panic may reverse its decision of going alone in the election in the key states like UP and Bihar. This would structurally weaken the Congress as they would get much fewer seats to contest and therefore find it difficult to retain their flocks together.

(g) Modi effect is clearly visible in the state election results. Despite strong undercurrent in favor of AAP and bitter infighting in BJP, the party has been able to retain its traditional voter base. In MP and Rajasthan it has broken new grounds. In Chhattisgarh, despite a strong sympathy wave in critical tribal areas of Bastar, BJP could scrape through. Weakening of Congress Party could further aid in strengthening of this trend.

Modi will however need to change his strategy to positive campaigning from mere Congress bashing as that space is crowded and regional parties might have edge over BJP in that space. The performance of AAP will certainly encourage the regional parties to adopt an aggressive anti UPA strategy.

(h) It is also clear that Modi alone will not be sufficient to take BJP home. BJP would need a strong local leadership to gain new grounds. The key states of UP, Haryana, West Bengal, Karnataka, Andhra Pradesh, Assam and Maharashtra etc. still do not have strong and popular leadership.

(i) India shall now move even faster towards a truly federal structure of governance with strong state leaderships and a “cooperating” central administration.

Tomorrow we shall discuss the socio-economic implications of the results.

Thursday, December 5, 2013

Investment Strategy - II

Thought for the day

“In a world where every event is identical to a previous event no change would ever occur.”

Peter L. Bernstein (American, 1919-2009)

Word of the day

Pokelogan (n)
Marshy or stagnant water that has branched off from a stream or lake.

(Source: Dictionary.com)

Shri Nārada Uvāca

Is it healthy for democratic traditions to presume a “demand for debate” as “opposition”?

Investment strategy - II

As the world endeavors to slither out of the fiscal crisis, a new global economic order takes shape and India’s socio-economic transition to a truly federal governance structure that is transparent, accountable gets established over next decade or so, Indian businesses will face numerous challenges.

Historically, a large majority of Indian businesses have grown on government patronage and/or resource arbitrage opportunities and have been low on innovation, productivity and scale. The politically advantageous socialistic façade of the government, especially during 1950-1990 led to misallocation of resources, trade and capital controls, demand suppression, and protectionism that promoted low productivity. The conditions have changed in past 10-15years but not sufficiently to make a majority of Indian businesses globally competitive.

The following trends, which are quite likely to strengthen in next few years, would suggest that a large number of small, over protected, less productive, uncompetitive, under-capitalized businesses should become extinct in next decade or so.

In past two decades we have seen this happening with small steel and cement plants, textile manufacturers, petrochemical plants, numerous public sector undertakings, NBFCs, etc. There is no reason why it should not happen to (a) small and mid-sized engineering and construction companies which purely survive on administrative patronage: (b) ITeS providers who are pure commodity plays solely focused on wage arbitrage opportunities; (c) mid-sized commodity producers who cannot scale up to compete with global corporations in a more open, price & quality competitive and transparent market; (d) intermediaries who are not adequately capitalized and technologically prepared to serve or compete with large global businesses which are highly price sensitive.

1. The cost structure of Indian businesses shall move up structurally due to higher wage inflation, rise in effective tax rates, higher compliance (social, legal, environmental) cost, higher cost of capital and rise in cost of resources like land, minerals, water etc.

2. Given the non-linear rise in consumption demand, the investment demand shall rise faster, in a period when global cost of capital would have bottomed out and begin to rise. India has clearly missed the advantage which China enjoyed by investing and building huge capacities in an era of lower interest rates. This shall force us to be governed by the terms set by the capital providers, essentially opening our markets to global competition. What we saw in case of FDI in retail might just be a small trailer of the things to come.

3. The global competition and rising cost should squeeze the margin and hence force the small and mid-sized businesses out of arena.

In our view, there is little opportunity in India’s SME segment at this juncture. Only the businesses which have shown the capability to take the game in global arena look promising. Otherwise stick to the large Indian MNCs – if one is looking at a really long-term horizon (5-10years).