Markets still in twilight zone

Thought for the day

“In order to carry a positive action we must develop here a positive vision.”

-Dalai Lama (Tibetan, 1935-)

Word for the day

Venerable (adj)

Commanding respect because of great age or impressive dignity; worthy of veneration or reverence, as because of high office or noble character:

(Source: Dictionary.com)

Teaser for the day

What if B. S. Yeddyurappa and Pawan Bansal win top leaders of AAP lose the elections?

Would that mean victory of evil over good or just that the current movement against corruption is misdirected?

Markets still in twilight zone

I firmly believe that Indian equities completed a four and half year (July 2007 to December 2011) bear market in mid 2011.

The bear market was mostly led by slowing trend growth due to declining investment and consumption demand, steady deterioration in macro indicators like inflation, fiscal and current account deficit, exchange rate, rise in cost of capital and labor and derating of PE ratio of Indian equities.

The period was marked by negative real earnings and wage growth. The bear market witnessed couple of profound swings during June 2007 to January 2008 and September 2008 to May 2009 but mostly ended on a flat note in terms of the benchmark indices (Nifty 4500 level).

In the bear phase – the leaders of 2003-2007 bull market, i.e., credit and investment, were completely decimated with an overwhelmingly large number of stocks losing 75-90% of their peak market value. Defensive consumers, pharma and IT stocks gained in market value bringing the benchmark indices out from a deep abyss.

Global events like collapse of US investment bank Lehman brothers leading to freezing of global money and credit markets, fiscal crisis in Europe raising widespread concerns over feasibility of common currency area and substantial slowdown in consumption levels across the globe contributed to the bearish trend.

Since beginning of 2012 corporate earnings have bottomed out and showing a rising trend albeit at a slower rate. Macroeconomic indicators have begun the correction process and are forecast to show material improvement over next couple of years. Market volatility has bottomed at lower level and showing early signs of rising. The supporting global environment also appears relatively stable.

The benchmark indices have undoubtedly raced to their all time high levels. However it would be a mistake, in my firm opinion, to consider it as a bull market. There is little evidence to suggest that the current pace of gains in equity prices is enduring or we could see sustained up move from here over next 12-15 months.

The market internals suggest that (a) volumes are too low for a sustained bull market, (b) volatility is too low for a large push up; (c) market breadth continues to be disappointing indicating shallowness of up move; (d) expected risk adjusted return on equity alternatives like fixed income, gold etc. is still higher as compared to equities; (e) capital market appears ill prepared for capital raising plans; (f) the impact of inevitable reversal of global rate cycle is yet to be assessed.

The increased foreign participation could be entirely due to rebalancing of overweight debt portfolios ahead of rate cycle reversal expected in 2015. It may not be reflection of the attractiveness or otherwise of Indian equities.

The market therefore, in my view, continues to be in a neutral trajectory. The course will continued to be marked by frequent sectoral rotations giving trading opportunities and slower momentum in terms of volatility and volumes. The strategy here should be two pronged – (a) trade and (b) prepare for the next bull market to begin.

Setting the context for post election market perspective

Thought for the day

“Endorsing an idea doesn't mean you endorse any interpretation of it, or everything done in its name, under any circumstance.” -Unknown

Word for the day

Arraign (v)
To accuse or charge in general; criticize adversely; censure.
(Source: Dictionary.com)

Teaser for the day

My Mother India is the supreme deity. She is held on the highest pedestal of unquestionable extreme reverence & devotion by 1.3bn Indians and admired by many foreigners. She is above all respect, insult, criticism, attacks, insinuations, and malaise.

The one demeaned, smeared or insulted easily by mere pictorial depictions, refusal to sing her praise etc. is not my Mother. Is she yours’?

Setting the context for post election market perspective

2014 general elections in India are being seen as a watershed in the political history of India. There is near consensus, a rarity, amongst political analysts and commentators on this issue. The decisive change in the constitution of electorate in favor of under 25yrs voters; emergence of a larger than life personality (first in post Indira era) as key contender for the top post; and overwhelming disregard for established political ideologies in bargain for political power are the key contours defining the watershed.

With little ideological support to back, all political parties are scrambling to find issues. It has never occurred in my memory that less than one month for elections to begin, there is no clarity on “the key election issue”. As of now it is “undefined Gujarat model of governance” vs. “bickering over moral and legal accountability for 2002 riots” with Narendra Modi at center of debate.

Though occasionally parties try to obfuscate the public discourse with more pertinent issues like unemployment, inflation, and economic development; but these issues have so far mostly remained at the fringe in the election strategy. The issue of corruption that dominated the December assembly elections has been effectively sidelined by understandably united and concerted efforts of all parties to put “clouded” leaders back in fray.

It is in this context that we need to form post election market perspective for an appropriate investment strategy.

My thesis in this regard could be summarized as follows:

(a)   Expect no radical change in the economic policies and program post elections, irrespective of the constitution (BJP led NDA, Congress led UPA or any other alliance) and form of the government (majority or minority).

(b)   In past six months execution at policy level has improved dramatically. The incumbent Congress led UPA government has perhaps achieved more in past one year than it did in preceding nine years. I believe this trend is irreversible and will only accelerate post election, irrespective of the outcome of elections. Burdened by humongous expectations, a Narendra Modi led government will be obligated to perform much better in the short term.

(c)   A Narendra Modi led government is likely to face stronger resistance from left leaning sustainability activists. We might therefore even higher judicial intervention in policy matters relating to environment, compensation for displacement & rehabilitation, and allocation of natural resources. The issue of probity may dominate the allocation of resources and process if licensing, unfavorably and sometimes unreasonably impacting businesses and people popularly perceived closer to the new administration. A third front government would be actually best placed in these terms.

(d)   A continuation of effort seen in past 6months will be the best case scenario for markets in short term. A more “populist & Keynesian” (looser monetary & fiscal policy to stimulate economy) or fiscally tighter (higher taxes, lower government spending) could both be painful for markets in the short term.

…to continue tomorrow

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

Follow @VIJAYGABA

 

What the crystal ball says?

Thought for the day

“O wise man! Give your wealth only to the worthy and never to others. The water of the sea received by the clouds is always sweet.”

-          -Chanakya (Indian, 350-275BC)

Word for the day

Solipsism (n)

Extreme preoccupation with and indulgence of one's feelings, desires, etc.; egoistic self-absorption.

(Source: Dictionary.com)

Teaser for the day

Paid media! AK is absolutely right.

Ashutosh, Manish Sisodia, Shazia Ilmi, Ashish Khaitan…

AAP has rewarded all journalists who unduly propagated AK & associates with election tickets.

What the crystal ball says?

In 2HFY14 Indian equity markets have been generally buoyant. Benchmark indices have gained ~24% from lows of September 2013. I find four notable elements in this rally.

First, during this period foreign investors have been more bullish on Indian equities, whereas domestic investors have generally preferred fixed income.

Second, four notable events triggered this rally – (a) appointment of Mr. Raghuram Rajan as RBI governor and some aggressive measure successfully taken by him to stem the slide in INR; (b) announcement of Narendra Modi as PMship candidate of BJP for forthcoming election (and subsequent opinion polls showing he having an edge over opponents) which stemmed the slide in business confidence to some extent; (c) improvement in macro indicators especially fiscal deficit, current account deficit and inflation due to a variety of measure taken by the government; and (d) encouraging 3QFY14 aggregate corporate performance, primarily led by large companies having global operations.

Third, the rally was initially led by the global businesses like IT, pharma, and duly supported by domestic consumption stories. However, lately the action has moved to the hopes of economic recovery and hence credit and investment themes are leading the bull charge while defensives IT, pharma and consumers have taken a back seat. Stocks from infrastructure, realty, energy and capital goods are more in demand these days. Moreover, the early part of the rally was confined to a handful of large cap stocks while the latest surge is little broad based; though the volumes have continued to remain dismal and overall market breadth mostly negative. Market volatility has also remained confined to lower range.

Four, the rally has occurred despite (a) US Federal Reserve moderating the pace of bond buying program (tapering); (b) global energy prices ruling at elevated level; (c) Chinese economy moderating triggering fears of reversal of nascent global economic recovery; (d) RBI refusing to signal any easing plans in near term; (e) early indications of El Nino returning this year; and (f) no signs of financial stress in the system dissipating.

Keeping these elements in context, I would like to answer the following queries frequently raised by our readers.

(a)   Is it time to change asset allocation in favor of equities?

(b)   Are we at the threshold of a new bull market? Or this is just another bear market rally extended a little far, just like October 2007 – January 2008?

(c)   All new bull markets are usually led by a new leader. If we are entering a new bull market which sector(s) is/are going to lead the way?

(d)   What will change if Narendra Modi indeed moves to 7RCR in May 2014? What if he fails?

(e)   Is it possible for equity markets to rally hard from here even if interest rates do not fall materially, food inflation picks up again due to poor monsoon and global rate cycle begins to turn with Fed indicating a hike sometime in year 2015?

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

Follow @VIJAYGABA

Atone - pepper, seizure

Thought for the day

“I will give you a definition of a proud man: he is a man who has neither vanity nor wisdom one filled with hatreds cannot be vain, neither can he be wise.”

-          John Keats (English, 1795-1821)

Word for the day

Solipsism (n)

Extreme preoccupation with and indulgence of one's feelings, desires, etc.; egoistic self-absorption.

(Source: Dictionary.com)

Teaser for the day

Has Kejriwal exhausted all arrows in his quiver, a little too early?

Atone - pepper, seizure

Last week an MP used pepper spray in the Parliament, apparently to prevent introduction of a Bill to carve out Telangana state out of current Andhra Pradesh. The cited act of MP widely criticized as seizure of Indian democracy by anarchist elements, motivated many elegies; some of them so eloquent that for once I seriously felt that we are living in a banana republic.

A week later the anguish and commotion of “concerned citizens” and “conscious media” over the incidence has subsided materially. Telengana State has been almost created. Common people, who were little bothered about the seemingly bizarre incidence for a blink, have moved on. The MP in question has sought to atone himself by apologizing and quitting politics. Another MP who allegedly feel sick due to use of pepper spray has lodged a complaint with police to make us feel that we are living in a civilized world where rule of law still prevails.

I am now feeling much better and find myself in a position to reflect on the incidence independently (without overwhelming media reports and commentaries) in my own ways, that many find ridiculous and whimsical.

In my view, this incidence was perfectly normal and encouraging for the health of democracy. Unlike many popular conscious keepers of the country, I believe in a democracy the elected representatives should truly and fairly reflect the social, cultural, economic and political conditions of the country.

It is only in aristocracy that we look for an ideal man governing the country, advised by the best minds available. Not in democracy.

Today, if there is widespread anarchy, non-compliance, corruption, intolerance, degeneration, injustice, inequalities, anguish, dismay, and frustration in the society – the and Parliament, state assemblies and elected local bodies should truly and fairly reflect that. Democracy needs our representatives to mirror us and our state of affair. Let them not be something “out of our world” – honest, compliant, tolerant, just, equitable, peaceful, enthusiastic, gratified and facilitators.

To me it is very simple, unless the mirror shows the filth on my face as it is, how would I feel the need to wipe it off and wash myself clean?

Some readers have suggested, somewhat tacitly, that I am wasting too much time discussing political affairs. I should rather focus on financial markets and suggest how to make more money – faster and safer. I see their point, but feel helpless. In my view, a profitable investment strategy has to cross this strait. Nevertheless, I will keep their suggestion in mind.

I would like to initiate a larger debate on the desirable social, political and economic order for the country. I had been accumulating some thoughts on this for past couple of years. I had initially intended to present the thoughts in a closed format - in the shape of a book. However, in past few months I have realized that these thoughts are too utopians and need to be discussed and modified to suit our conditions. I have therefore decided to make it an open source like series from which people may pick whatever they like, debate it, improve it and introduce back in the stream.

I shall begin introducing these Utopian thoughts in coming days. Trust me it has nothing to do with Arvind Kejriwal’s idea of “Swaraj”.

What PM Modi could mean for Indian economy?

Thought for the day

“My work is a game, a very serious game.”

-          M. C. Escher (Dutch, 1898-1972)

Word for the day

Moiety (n)

A half, a small part.

(Source: Dictionary.com)

Teaser for the day

What is harsher punishment – hanging by the neck till death or jail term till death?

What PM Modi could mean for Indian economy?

Since February 2013 when first time Narendra Modi made his national ambitions conspicuous, I have been discussing this question with some investors, fund managers, businessmen, farmers, bureaucrats, and young students. The discussions have become more intense and argumentative since September when he was formally announced BJP’s PMship candidate.

Hopes are running high

I have been repeatedly highlighting that the hopes of people from Modi are running unusually high. People in general are viewing him as divine intervention that would get them rid of all the ills currently plaguing Indian society, politics and economy. Businessmen in particular are expecting that Modi will at the least ensure the following:

(a)   Proactive, clean, responsive and business/investment friendly administration.

(b)   Proactive administration.

(c)   Higher economic growth and lower inflation.

(d)   An accountable and responsible administration and protect bureaucracy for their bona fide actions.

(Note: Surprisingly, the expectations from Rahul Gandhi are no different, but few believed that he could become prime minister.)

Unfortunately, no one could produce an iota of substantive evidence that would suggest that Modi could meet their expectations in the timeframe they are considering. Probably, we would have much greater clarity once we see the much awaited “Vision” document of BJP.

As of now, in my view, Modi does appear assertive and has shown tendency to take quick decisions in economic administration matters. A few quick decisions could boost the sagging business sentiment and help kick start the stalled investment cycle. Fortunately, many other things are already falling in place and would work in his favor.

In my view, the following positives could emerge if Narendra Modi gets to lead the next government with a clear mandate:

(a)   Business and investor confidence may recover on the hopes that policy making will be proactive, business friendly, consistent and faster.

(b)   Important economic and financial legislations like GST, DTC, Insurance and Pension Bills etc. may get cleared in FY15 itself. In my view, BJP’s opposition to GST is purely political and has nothing to do with theie economic idelology.

(c)   Important administrative reforms are implemented to uplift the morale of bureaucracy. This is expected to expedite the project execution.

Besides, the macroeconomic environment may also begin to improve on its own as core inflation and therefore rates bottom out, and consumer demand recover post good Rabi harvest.

Need to evolve a federal economic model

Indubitably, at present 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 in 1998, 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.

Modi seemingly favors Laissez-faire

However, Modi seems to be an advocate of Laissez-faire or free market which entails minimal state intervention even during crisis. He has implemented or should we say supported 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 PM what he has delivered as CM of Gujarat.

…which may not be relevant to a large part of India

In my 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, Goa’s minimal intervention and Chhattisgarh’s socialist models could provide a more workable model at this point in time.

I do however strongly feel that the Gujarat model should not become Modi’s 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.

Immediate implications

Given that the 2014 elections are being fought very aggressively, and acrimoniously, I do not see consensus evolving on key social, economic and financial reforms till the tempers cool down, may be two years down the line).

In my 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.

I do not subscribe to the enthusiastic perception that the economists sitting in London and New York advising strategy on the basis of Planning Commission or CSO data sheets, would be of much help to Mr. Modi. I feel we have had enough of bureaucrat/economist contribution to the economy. Now please let statesmen run the economy.

The big bang theory

Thought for the day

“Landlords, like all other men, love to reap where they never sowed.”

-          Karl Marx (German, 1818-1883)

Word for the day

Bestiary (n)

A collection of moralized fables about actual or mythical animals.

(Source: Dictionary.com)

Teaser for the day

“Disruptive electioneering” – © 2013 Aam Aadmi Party, India

The big bang theory

The NDA regime led by Atal Bihari Vajpayee (1998-2004) is remembered, in market parlance, for its big and bold decisions. The tenure started with the big blast (May 1998 nuclear test) and was punctuated by major initiatives like NELP (hydrocarbon exploration), SEZ (key reforms in land, labor and tax laws in select zones), NHDP (highways), PMGSY (rural roads), AAY (food security for poor), SGRY (employment for rural poor), SSA (primary education for all), airports privatization, port privatization, Electricity Act 2003, spread of mobile telephoney, 100% FDI in core sectors, etc.

These initiatives excited the global investors at a time when Indian IT professionals were making big impression on global technology canvass. A supportive regime, Y2K problem, easy credit post LTCM and Asian crisis (rates lowest since 1970s) and depressed commodity prices (inflation lowest in decades) helped big investment initiatives.

The problem was that many of these programs were initiated hurriedly without putting an adequate institutional mechanism in place, thus leaving the scope for misuse (of discretionary powers by minister and bureaucrats), litigation (ownership of natural resources), misappropriation (of natural resources by scrupulous allottees), non-compliance (environment and sustainability norms) and wide viability gaps (in absence of immediate demand) and thus planting the seeds of financial stress, economic slowdown, mistrust and corruption we are witnessing today. Subsequent UPA government have watered and nourished these seeds well.

Now, having learned from the mistakes of omission and commission made and follies committed during past two decades, Indian businessmen and investors are hoping (or should I say assuming!) that new leadership will carry further the “big bang” initiatives minus the follies, and thus reinvigorate the Indian economy.

I am fully with them in their hopes and assumptions.

However, the only caveat is that the new leadership will not be able to plant the seeds of prosperity unless the field is cleared of the poisonous crop of mistrust, misdeeds, and misallocations that has taken deep roots. Like Chankaya the new regime will have to first uproot these plants and appropriately inoculate the soil.

This is not going to be easy. It will cause tremendous pain to investors and entrepreneurs, and disruption of business activity and financial stress.

We have seen some glimpses of this cancelling of telecom licenses by the Supreme Court, deallocation coal blocks by the government, de-notifiaction of a number of SEZs, withdrawal of investment proposals by road developers and steel companies and rising financial stress in the economy.

We shall see more of these. IDBI, ICICI, IFCI, UTI all are witness to what happened when last time these correction were carried out.

That is not exactly good news for someone looking for immediate gains in stock market.

More on what Narendra Modi might mean for Indian economy tomorrow.

Third fronts have mostly been good for economy

Thought for the day

“The schools would fail through their silence, the Church through its forgiveness, and the home through the denial and silence of the parents. The new generation has to hear what the older generation refuses to tell it.”

-          Simon Wiesenthal (Austrian, 1908-2005)

Word for the day

Elegy (n)

A sad or mournful musical composition; especially a funeral song.

(Source: Dictionary.com)

Teaser for the day

Once out of denial – the Congress Party will be most relieved. It is the only party that can do better than expectations.

Third fronts have mostly been good for economy

A government without Congress or BJP post 2014 is less likely in my view. However, for the argument sake even we take a hypothetical situation where non-aligned regional parties like JDU/RJD, TMC/CPM, BJD, DMK/AIDMK, SP/BSP, TRS/TDP, etc. get sufficient seats to form a government along with Congress joining or supporting from outside.

The moot question is should investors be worried about this probability?

I had expressed my opinion on this many times in past. I am happy to reiterate.

In my view the investors should rather be happy with the prospects of a larger number of regional parties with different socio-economic ideologies sharing power at center.

I find that post independence the best periods for the Indian economy have perhaps been those when a “coalition” government was in power.

By “coalition” I do not mean multi party governments. In my view, coalition government means where people with different and many a time completely diverging socio-economic policies jointly participate in a government. They arrive at the common minimum agenda of agreement and focus on executing the same, hence avoiding conflicts and logjams.

The first cabinet of India post independence had R. K. Shanmukham Shetty (Finance), Shyama Prasad Mukherjee (Industries) B. R. Ambedkar (Law) and Jagjiwan Ram (Labor). These people did not subscribe to the Nehruvian socio-economic agenda, but we still got a robust socio-economic framework. The singular governments of Nehru (post BRA, RML, SPM - 1956 and 1961), Indira Gandhi (1971, 1980), Rajeev Gandhi (1984) are not particularly known for good governance or socio-economic reforms.

Morarji Desai (1977, FM H. M. Patel, Bureaucrat – FERA dilution, Gandhian socialism, Mandal Commission), V. P. Singh (1989, FM Madhu Dandavate, Socialist  – tax reforms, social justice), Chandrasekhar (1990, FM Yashwant Sinha, Bureaucrat, fiscal commitment, government exiting non-strategic businesses) PV Narsingh Rao (1991, FM Manmohan Singh, Economist – economic liberalization, Industrial delicensing, LERMS, financial sector reforms), Devegoda/I. K. Gujaral (1996, FM P. Chidambaram, Lawyer turned politician – dream budget, tax reforms), Vajpayee (1998, 1999, FM Yashwant Sinha, Jaswant SIngh – divestment of government monopolies like roads, power, coal, NELP, NHDP, SEZ, nuclear program) and Manmohan Singh (2004, FM P. CHidambaram – RTI, MNREGA) were all coalition governments supported by socialists/communists.

These governments are all remembered for some structural socio-economic reforms causing fundamental positive changes in the economy.

None of these governments is particularly remembered for non-governance, anti market policies or anti business stance.

I will therefore be not too worried if our base case of Modi led NDA government does not materializes.