Still no hurry

Thought for the day

“Experience has shown, and a true philosophy will always show, that a vast, perhaps the larger portion of the truth arises from the seemingly irrelevant.”

-          Edgar Allan Poe (American, 1809-1849)

Word for the day

Caprine (adj)

Of or pertaining to goats.

(Source: Dictionary.com)

Teaser for the day

Why institutions like Army, and EC should be beyond criticism?

Why a traffic constable who weathers extreme heat, cold, and pollution in performance of his duties, often without any facilities, is lesser patriot than an army officer?

Still no hurry

The long drawn electoral battle will finally come to a close this week and we will hopefully get a new government by the end of this month. For many it may be a matter of comfort and closure. But to me it would mark beginning of a long, somewhat painful, process of bringing the ailing Indian economy on the path of faster growth and sustainable development.

The popular opinion (or I should say wish!) is that the Narendra Modi leads a stable development oriented government. For records, I too wish the same.

However, I will not be dismayed or frustrated if the next government is not led by Mr. Modi since I strongly believe that the core strength of Indian economy is private enterprise and prudent populace governed largely by righteous ethics. Politicians at best are supporting actors in a movie. Some of them get to kidnap and molest the heroine; while the others get a chance to save her. The roles keep switching with the director and the script.

Last weekend, I got a chance to meet some enthusiastic BJP workers in Delhi. Many of them were fully ready with list of reward they would be seeking from Mr. Modi’s government. The wishes ranged from school admissions to appointments at key public posts. None, yes no one, wanted anything good for the country.

I am sure most businessmen, students, housewives, farmers – all of them will have a wish list. And almost all of these wishes will be selfish and parochial.

Mr. Modi, assuming he occupies 7RCR by the end of this month, is certainly going to have tough time managing these stratospheric expectations.

On the side lines, Mr. Modi shedding his electoral façade, hinted that his government may actually honor the UPA’s decision to allow foreign direct investment (FDI) in supermarkets (multi-brand retail).

This should bring relief to foreign retailers, many of whom feared the worst after the BJP unambiguously stated in its manifesto that it was opposed to the decision of the Congress-led United Progressive Alliance allowing foreign investment in supermarkets.

Ignoring Mr. Modi’s pragmatic discourse and indications of a progressive policy regime, some enthusiast within BJP asserted that if voted to power, it will clamp down on beef exports. These people need to be reminded that India is poised to become the No.1 beef exporting nation globally. It is no small consumer either. I feel sooner they get out of election mode, better it would be for everyone.

I am not celebrating Friday’s 3% up move in Indian equities. The move was intrinsically weak and unconvincing. Volumes were much below even 3months average. India VIX jumped over 9%. The market breadth was only marginally positive at 3 stocks gaining for every 2 losers.

As I said on Friday, I have a good positive feeling about the market over next couple of years. So, I am in no hurry to make some quick bucks. I will watch the drama from fringes entertaining myself watching studio experts trying to decipher election results.

No hurry and no worry!

Thought for the day

“People deal too much with the negative, with what is wrong. Why not try and see positive things, to just touch those things and make them bloom?”

-          Nhat Hanh (Vietnamese, 1926 - )

Word for the day

Wanderlust (n)

A strong, innate desire to rove or travel about.

(Source: Dictionary.com)

Teaser for the day

Is Gujarat less secular than Maharashtra? Or MP less secular than Bihar?

If yes, is that a breakdown of constitutional machinery that calls for President’s rule?

If not, what is this commotion about?

No hurry and no worry!

While I do not expect 18 May 2009 like dramatic move in the market, the next week is likely to be eventful. The good part is that most investors appear fully prepared for higher volatility, disappointment and exuberance. Abysmally low volumes in past many days indicate that most traders have pruned their trading positions and moved to fringes.

A disappointing election result may therefore not lead to a panic attack in the market; whereas a result seen positive for the economy may drive the fence sitters into market. If forced, I will bet on an up move rather than a down move in the market in coming three weeks. Though left alone, I would also prefer to sit out and see the volatility through.

Bottoming process on, but no bull market in sight

The bottoming of stock markets is usually confused with the lowest point of indices in a cycle. In my view, it is a complicated and often long drawn out process through which the factors supporting a positive environment for “risk investments”, e.g., equities, fall in place. The following pieces, in particular, should fall in place before we could call the market bottom.

•        Psychological bottom should occur, i.e., greed should conquer the fear.

•        Macro environment should be supportive of corporate initiatives for growth.

•        Valuations should be fairly cheap to entice investors into taking higher risk.

•        Earnings upgrade momentum should be positive.

•        Technical bottom should be achieved.

•        The alternatives to equity (debt, bank deposits, gold, real estate) should sound less attractive on risk-reward basis.

•        Moderate to low volatility.

There are some signs of market bottoming process progressing well. However, in my view, we are still some distance from a sustainable bull market.

The investors are not fearful but they are not willing to take risk either. The macroeconomic environment is stable but not encouraging enough to induce risk taking. Bank deposits are earning over 9%pa. Earnings upgrades have started to trickle in but are still sporadic and confined to top end of the market. Technically market is nowhere close to a bottom. Volatility has shot up.

It would take at least 4-6 quarters of sustainable effort on part of the new government to put the missing pieces in place for a new bull market to take shape.

I am happy to use this interim period for structuring and building my portfolio for the next bull market. For now “no hurry and no worry”.

Look before you cross the road

Thought for the day

“I have noticed even people who claim everything is predestined, and that we can do nothing to change it, look before they cross the road.”

—Stephen Hawking (English, 1942 - )

Word for the day

Flit (v)

To move lightly and swiftly; fly, dart, or skim along.

(Source: Dictionary.com)

Teaser for the day

Imagine how PM Modi will respond to the attempts of disrupting parliament proceedings!

MMS always sat quietly with a sad looking face and gestures of helplessness.

Look before you cross the road

In past three years, an overwhelming large number of financial market participants, entrepreneurs, business analysts and commentators have expressed their dissatisfaction with the incumbent UPA regime.

The government has been criticized, rather severely, especially for - its inaction in terms of economic policy and reforms; fiscal imprudence in pursuing profligate social policies and programs; incoherent foreign policy; failure of monetary policy in controlling consumer prices; impeding critical infrastructure projects; incongruent taxation policies; and corruption in high public offices.

Most of these critiques have called for a change in government. Co-incidentally almost all of them have favored Narendra Modi to lead the change. All other alternatives have either been ignored or termed potentially disastrous.

The opinions are divided amongst the people from the fields of social service, politics, art & literature, and media. The support for Narendra Modi in this arena is rather underwhelming. Most of those opposed to Narendra Modi’s leadership believe that Modi’s socio-economic model is exclusive, favors crony capitalism, ignores sustainability concerns and therefore is irrelevant in pan Indian context. Stronger personality of Modi has also been a matter of concern with many critiques.

In my view, this election is not just about economic development. Though substantive economic issues like unemployment and high consumer prices are a matter of prime concern for the populace at large, but the popular debate is focused more on social issues and personalities.

In my view, the first group is rather unfair to the UPA government. An independent historical account of UPA regime will discover that the government did a lot to help the industry and markets. For example, it provided industry with cheap natural resources; protected domestic industry from global competition; let the state owned banks fund sub-standard projects and businesses; provided huge amount of liquidity in the hands of consumers to create demand; and avoided any fiscal tightening for first 9years of its rule.

Still domestic businesses did not do well and markets suffered; because industry (except a handful of businesses) has failed to change with the time and technology. No reasonable government can help them. They are clamoring for Modi in the belief that he will continue to promote crony capitalism and crony socialism but little more aggressively, extensively, and vigorously.

The second group is rather unfair to Modi. They are naïve in their belief that any one person, political party, sect or group of people can divide India and her people. And if someone seriously believes that Modi can rule India by discriminating on the basis of religion for long they need to take some lessons in political science.

Inflation will hurt more, 20yrs later

Thought for the day

“There are some ideas so wrong that only a very intelligent person could believe in them.”

—George Orwell (British, 1903-1950)

Word for the day

Coterie (n)

A group of people who associate closely.

(Source: Dictionary.com)

Teaser for the day

What if NDA gets 255 and all non-NDA parties get together and plead with Sonia Gandhi to become PM?

Inflation will hurt more, 20yrs later

In past few years both the major drivers of economic growth, viz., investment and consumption, have suffered in India.

High consumer inflation has materially eroded the purchasing power and savings of household consumers. Consequently, demand growth for both discretionary items as well as staples has declined to lowest levels in a decade. Persistently negative real rates for savers (interest on term deposit less consumer inflation) have made life of retired miserable.

It may be argued that this is an immaterial segment of the population given the young demography of India. But this argument, to my mind, is seriously flawed. During my recent visit to some smaller town in north and central India I discovered that the cost of living at these places has risen substantially in past one decade primarily due to (a) inflation and (b) change in consumption patterns. Spend on education, mobility, communication, health and discretionary consumption has risen substantially leading to structural erosion in savings and rise in household debt.

Rising household expenditure & debt and falling savings is an ominous trend to my mind. Middle age people (a substantial number) who will retire in next two decades will find it extremely difficult to survive without adequate savings. I see a structural rise in dependency ratio in couple of decades. Therefore tremendous pressure on political establishment for higher subsidies will likely continue.

Mr. Rahul Gandhi should understand that at this point in time he can bring 700mn people in the “middle class” category by giving them just Rs1000 pm. But keeping them there is going to cost much more for much longer.

Given the serious supply-demand mismatch, the pressure on prices, especially consumer and energy is more structural in nature. To bridge this supply-demand gap India needs huge investments. But persistently negative real rates have widened the chasm between demand (investment) and supply (savings) of capital. To minimize this gap (a) interest rates have to be kept high (for domestic savings) and (b) INR exchange rates have to be kept favorable to foreign investors.

Both of these higher rates and weaker currency put further pressure on prices as higher cost of capital and imported inputs makes the cost of production higher. Higher inflation also pressurizes wages, further adding to the cost of production.

India imports more than it exports and therefore runs a trade deficit with most of the trade partners. Weaker currency therefore harms the domestic economy more than it benefits the exporters.

The new government will have to urgently and strongly focus on inflation that is widely acknowledged. But “how” could be a matter of debate. Printing money (QE) and cutting rates to bridge capital gap may unleash inflation and weaken INR thus structurally weaken the economy, at least in the short term. Fiscal tightening (higher taxes, lower subsidies and higher cost for state controlled natural resources) could cause tremendous pain to already struggling industry but may lead to more intrinsic strength for the economy.

There will be life beyond 16th May, no matter what

Thought for the day

“In every author let us distinguish the man from his works.”

—Voltaire (French, 1694-1778)

Word for the day

Wayfarer (n)

A traveler, especially on foot.

(Source: Dictionary.com)

Teaser for the day

For God sake, please do not believe “India is doomed without Modi”.

There will be life beyond 16th May, no matter what

After completion of poling on more than three fourth of the total Lok Sabha seats, the situation is as cloudy as it was couple of months back.

BJP and its PM candidate appear to have failed in winning over sizable minority votes, especially in the eastern parts of the country. Consequently, it appears that it might need support of more parties (inside or outside) to form a working government. A majority government purely on the basis of pre-poll alliance looks slightly difficult today; though not ruled out.

The Modi Euphoria in market is taking a breather, and correctly so. In my view, it was an undue credit to Mr. Modi. I feel the market rally in past few months is mostly a consequence of (a) global emerging market wave that lifted most risk assets globally including peripheral Europe bonds and not in demand commodities; and (b) some tough decisions taken by RBI and the incumbent government that make the fiscal and current account picture look pleasant. Hope of a stable government (sic. Modi led majority NDA government) has only alerted the fence sitters and checked the selling pressure from domestic investors.

Many market participants are trying to invoke the memories of crazy market move seen post election results in May 2009. I believe a similar result this time is unlikely for two reasons:

(a)   In 2009 Indian market had underperformed the global emerging markets in four months preceding the elections and most investors were underweight India due to political uncertainty. The entire underperformance was erased in just one trading session. But in 2014 Indian markets are performing in line with the global emerging markets and there is not much underperformance to recoup and global investors are mostly overweight India; and

(b)   In 2009 Indian government in coordination with global governments provided massive fiscal and monetary stimuli to support the economy adding almost 2% to GDP growth, whereas in 2014 we are witnessing a reverse trend – withdrawal of stimulus and fiscal tightening.

In my view therefore the best case post 16^th May is not as good as 2009. However, an outcome contrary to the expectation could lead to a material correction in near term as some fringe players stage a retreat and punters try to make some quick bucks.

I would reiterate that my strategy is completely independent of the poll outcome. I will be happy if we a majority government that can take some risk. However, I will not be disappointed if we get a working government that enjoys support of at least one of the key national party.

I strongly believe that our economy is at a stage where it cannot afford to stay dormant. Action has to start. And it will. The point is who we believe will be the driver. I firmly believe that it will be the Indian entrepreneurs with the help provided by better global demand environment. Many disagree. They feel it will be the new government. You decide for yourself.

Reconnecting with “the India story”

Thought for the day

“To insult someone we call him 'bestial. For deliberate cruelty and nature, 'human' might be the greater insult.”

— Isaac Asimov (American, 1920-1992

Word for the day

Bestial (adj)

Without reason or intelligence; brutal; inhuman.

(Source: Dictionary.com)

Teaser for the day

What’s this talk about first personality driven election in India.

Besides 2009, which was not a personality driven election?

Reconnecting with “the India story”

In India, post independence, major business cycles, and therefore market cycles, have been quintessentially led by important socio-political transitions. The present landscape of the country suggests that another socio-political transition is underway that could potentially lead to an economic transition in next few years.

In my view, the India story is primarily about ‘demographics’ and ‘sociopolitical transformation’. The economic growth is just a by-product.

I strongly believe that the disenchantment with “The India story” seen in past few years is primarily the consequence of omitting the socio-political transformation factor from the financial and economic analysis. Unfortunately, the “re-connect” of global investors that we are witnessing in the hope of a decisive leadership emerging post election also suffers from this oversight.

I am also convinced that the transition we that we may witness post 2014 elections will lead India’s metamorphosis into a more participative and globally competitive economy with a sustainable growth trajectory. A more transparent, accountable, inclusive and objective governance structure should change the socio-economic context, leading to significant changes in the business and market landscape.

In my view, the transition will largely be visible through emergence of strong federal governance structure leading to diminishing regional imbalances and abridged rural-urban divide (urbanization).

The burgeoning local aspirations; elimination of administrative discretions and consequentially undue arbitrary political patronage to businesses; better delivery mechanism through higher transparency and e-governance; larger and broader consumer base with better affordability and changes in global socio-economic order would largely catalyze the transition.

However, it is critical to understand that the transition to a more transparent, accountable, participative, globally competitive and sustainable growth environment could be painful in the short to medium term – for businesses and investors alike. Businesses, especially which do not have viable scale in a globally competitive scenario, or businessmen who are not competent enough to grow without administrative privileges or political patronage, shall stand to face extinction.

One big opportunity lies in identifying such businesses which have good quality unencumbered assets but would not be viable in the emerging globally competitive scenario. These businesses, in my view, should not be valued on a going concern basis. Many of these businesses would have invaluable resources (surplus land, access to water, rights to exploit natural resources for raw material purposes etc.) and rights like environmental clearance, technology licenses or market access.

The biggest opportunity however lies in the businesses that have attained global scales and adequately demonstrated the ability to grow in a globally competitive environment.

Gandhian Anna would do much better than expert Bhagwati

Thought for the day

“What is the primary purpose of a political leader? To build a majority. If voters care about parking lots, then talk about parking lots.”

—Newt Gingrich (American, 1943 - )

Word for the day

Pluvial (adj)

Of or pertaining to rain; rainy.

(Source: Dictionary.com)

Teaser for the day

UP, West Bengal, Odisha, J&K, Karnataka, TN, Kerala, Bihar, Assam – BJP has antagonized the state government representing over half the Indian population.

Modi will definitely find it difficult to build consensus on key reforms involving states for at least initial one year.

Gandhian Anna would do much better than expert Bhagwati

Yesterday I expressed my opinion about the ideal construct of new government. I may reiterate that in my view the key portfolios should be given to serious politicians and statesmen, who have the ability to think beyond current conditions and into the realm of impossibilities. To further illustrate the point, I would like to cite the following example.

In past one decade the market for online retail in India has grown multifold. However, still the coverage area has not expanded beyond metropolitan areas and other top 100 cities. My interactions with some e-retailers suggest that the lack of access to market for people living in tier II and III town, and semi urban and rural areas where internet telecom connectivity has reached is the biggest opportunity for e-retailers. The logistics and lack of banking access are the major road blocks.

On the other hand India Post is a great network with reach to every household in the country. Unfortunately, it has been left to die on its own.

An IT and telecom minister (which includes postal department also) should think about marrying these two. India post can provide excellent last mile connectivity and payment gateway for entire e-retailing industry at little incremental cost; given that most of the cost for India Post is fixed anyways (salaries and pension). The incremental revenue could have helped reviving this great institution and also helped the nascent e-retailing industry.

Similarly, a 200kms drive away from any metropolitan area would tell you which business is the largest unskilled and semi-skilled employment generator in the country – yes it is mobile telecom. While textile industry traditionally believed to be largest employment generator has historically received humongous, often undeserved, support from the government, the telecom sector has remained at the receiving end! Have you heard anyone talking about subsidizing telecom industry for generating more employment?

The IT and ITeS services sector has grown multifold in past one decade. But unfortunately, still the wage arbitrage remains the primary driver for the industry. Same telecom minister in UPA, who also held the portfolio of HRD minister for sometime besides being simultaneously at the helm of Science and Technology ministry, did almost nothing to promote R&D activities in the IT sector so that Indian IT industry could move up the value chain. For record, the Facebook, Inc which was founded in February 2004 just 3months ahead of UPA-1, is today worth 1.5x more than the revenue of India’s entire IT industry.

We need a Raman Singh who could think of Food Security for all so that children could go to school, marginal farmers could leave unviable sustenance farming and take up more rewarding construction jobs; a Atal Bihari who could think of a massive road development program despite severe fiscal constraints to counter global economic sanctions and generate massive employment; give away key government monopolies like hydrocarbons, coal, power etc.

A Gandhian Anna could do much more for the Indian economy, than all foreign trained economists.

(Note: Names mentioned herein are purely for illustrative purpose and do not reflect any bias or prejudice on part of the author.)