Do it yourself

Tuesday, June 3, 2014

Return of good times!

Thought for the day

“Caesar's wife must be above suspicion.”

- Julius Caesar (Roman, 100-44BC)

Word for the day

Braggart (n)

A person who does a lot of bragging.

(Source: Dictionary.com)

Teaser for the day

What should be the role of Modi government – (a) Driver or (b) Engine or (c) Wheels?

Or do we need a robotic engine that can fly Indian economy without a driver?

Return of good times!

Latest round of economic data from major global economies indicates towards three notable trends – (a) Large commodity producers like Canada, Brazil, Australia and Russia are materially lagging behind the commodity consumers indicating persistent deflationary pressures on commodity prices; (b) Yields have fallen sharply both in safe haven like US and German treasuries as well as weaker economies like in peripheral Europe; and (c) despite moderation in US Fed bond buying program and reluctance of ECB, BoE, BoJ and PoBC in adding fresh monetary stimulus liquidity conditions remain easy fueling risk appetite of global investors.

India appears to be benefiting from all three cited trends.

Subdued commodity prices, coupled with subdued demand and import restrictions on gold import, have completely alleviated the payment default risk, which were weighing heavy as foremost concern on the investors’ mind till at least September 2013.

Lower yields on safe haven assets have once again triggered carry trade that helped bubble building in EM assets in late 1990s and during 2004-2008. Massive inflows YTD have not only eased pressure on INR, but also made Indian debt look relatively attractive.

As the fears of liquidity squeeze have not come true despite “taper” and global financial markets are back to their euphoric best, appetite for Indian equities are at a high, despite not so encouraging growth and inflation numbers.

Incidentally, these trends are occurring when a new government is taking shape in New Delhi. Given the staggering hopes raised by Mr. Narendra Modi during his campaign, the business confidence appears at a new high. Consumers also look positive in their expectations. It is therefore natural to see the stock market rally in association with the new administration.

Though we are yet to see any concrete evidence of increased consumer spending, new investment proposals, or any indication of higher government spending, there are strong expectations that 3QFY15 data will likely show a definite uptick in consumption as well as investment demand.

Remember 1QFY15 is virtually over without any positive data improvement. The government is in the process of formulating the reviewing extant policy framework and will likely announce corrective steps only by the middle of July as part of routine budget exercise. Actual implementation may begin only by the end of 2QFY15 which may also suffer due to inadequate monsoon as predicted.

The 4QFY14 results for larger companies have been encouraging, showing a sign of demand and margins bottoming out. Most of the improvement however might be coming from massive cost rationalization programs undertaken by various companies and not necessarily due to return of pricing power. Inventories appear to have been run down materially. SME segment though has not shown any sign of improvement. Finance cost and revenue pressure are conspicuous in this arena.

I am looking at cement sector for some aggressive bets as an early cycle investment.

Monday, June 2, 2014

Early cycle industrial, consumers and exporters

Thought for the day

“All differences in this world are of degree, and not of kind, because oneness is the secret of everything.”

- Swami Vivekananda (Indian,1863-1902)

Word for the day

Xyst (n)

A garden walk planted with trees.

(Source: Dictionary.com)

Teaser for the day

Is UP Chief Minister is guilty of constitutional impropriety by –

(a) allowing discrimination on the basis of voting patterns; and

(b) failing to establish rule of law.

If yes, should he be sacked immediately?

Early cycle industrial, consumers and exporters

The GDP growth for FY14 came below 5%, mostly in line with expectations. This marks a phase of worst slow down in almost three decades.

I am not worried about the slower growth in a year or two. The worrisome part is that long term trajectory of growth (defined by 5yr CAGR of GDP) that motivates fresh large investments and thereby creates sustainable employment opportunities has now slid below 6% mark and not likely to rise above it at least FY18.

Insofar as the current year is concerned, I expect first two quarters not to show much improvement, as the efforts of new government will start showing results only from August onwards. Moreover, expected poor monsoon may actually delay the recovery by another quarter. I expect FY15 growth to be 50bps higher primarily on pick up in mining and construction activities in second half.

The private consumption demand has shown some encouraging revival in 4QFY14. I would like to wait till 1QFY15 data release to assess how much of this was due to election related expenditure. Government consumption may pick up only from August onwards, after final budget is passed.

At this point in time I do not see any need to modify my investment strategy. I feel we should stick to early cycle industrial plays, along with consumers and exporters.

On debt side however post RBI comments later this week I would like to consider whether the time to consider playing duration in fixed is approaching faster than earlier anticipated. My sense, a below 4.75% print on 1QFY15 GDP may precipitate rate cuts to September 2014 from March 2015. Excessive volatility in Fx market due to heavy inflows in short time may also prompt some easing even earlier.

Friday, May 30, 2014

Small is beautiful

Thought for the day

“Experience does not err. Only your judgments err by expecting from her what is not in her power.”

Leonardo da Vinci (Italian, 1452-1519)

Word for the day

Meliorism (n)

The doctrine that the world tends to become better or may be made better by human effort.

(Source: Dictionary.com)

Teaser for the day

The more Congress leaders chafe, the more ground they stand to lose.

Small is beautiful

The first budget presentation by the new government is just six weeks away. Innumerable suggestions are pouring every day for consideration. Trade and industry associations, investors, households, economists, analysts etc. all have presented their wish list to the government seeking favors. I have seen only a few that would directly benefit the lower middle classes and poor – the people have who have actually elected this government.

“Reforms” is the key buzz word in financial markets. Everyone is expecting the government to unleash a substantive economic and financial sector reforms. The unfortunate part however is that everyone seems to be masquerading their selfish motives as desired reforms.

During my discover India trip last summer I made an attempt to assess the views of the common people about economic reforms – relevance, need, direction, perceived benefits etc.

I discussed with numerous people to find out (a) what has happened in past decade or so that has made difference to their lives (for good or worse); and (b) what would they want the government to do immediately to improve their lives.

Without leading them to any specific direction, we kept the discussions primarily centered around their day to day life and future of their children.

The key highlights of the feedback we received from people were quite reassuring, though not surprisingly.

Key highlights:

1. We found that the social sector schemes have impacted the people lives more than the economic reforms, especially in rural areas. Despite frequent news of irregularities, people overwhelmingly suggested that schemes like mid day meal, girl child education, NRHM and MNREGA have positively impacted more lives in almost all the states.

2. PMGSY (the flagship rural roads scheme) was widely suggested as the game changer in numerous villages.

3. Mobile connectivity was expectedly cited as the best technological evolution that impacted the rural lives.

4. In Delhi most of the people we spoke to cited metro rail as the boon that has improved their life significantly.

5. In rural areas of many states obtaining drinking water consumes 6-8 man hours. Electricity is still inadequate. I estimate focusing on these two could enhance productivity and income potential in rural and semi-urban areas substantially.

6. Talking to women folks, I felt that strictly implemented prohibition legislation would bring more prosperity to average household in states like Punjab, Haryana, Uttrakhand, Andhra Pradesh, Kerala and North Eastern states,

7. Most urban residents felt that education and health reforms are more critical than economic reforms.

Thursday, May 29, 2014

FDI from Japan: huge money at low cost

Thought for the day

“If I have seen further than others, it is by standing upon the shoulders of giants. ”

- Isaac Newton (English, 1642-1727)

Word for the day

Boondoggle (v)

To do work of little or no practical value merely to keep or look busy.

To deceive or attempt to deceive

(Source: Dictionary.com)

Teaser for the day

The country has seen the skills and expertise of Harvard, Oxford and Trinity educated people for six decades.

Let’s try 12^th pass for a couple of years!

FDI from Japan: huge money at low cost

Justice Radha Binod Pal’s dissenting note at the International War Tribunal remains fresh in the memories of the Japanese people.

At the time when there were absolutely no political interactions between the two countries, a plaque honoring Pal at the Yasukuni Shrine kept the image of India alive among the people of Japan and a feeling of friendship among the Japanese people towards India was already brewing. The end of Cold War paved the way for the two countries to re-establish their centuries old civilizational ties which were disrupted during the lost decades.

(Shamshad Ahmad Khan)

Indo-Japanese relation date back many centuries. It perhaps started with introduction of Buddhism to Japan via the Korean Peninsula. The Meiji era (1868-1912) saw bilateral relations developing around cotton trade. Post war relationships have strengthened materially.

Prime Minister Yoshiro Mori’s visit to India in 2000 was a stepping stone in the bilateral relationship of the two Asian nations. He envisioned global partnership between India and Japan and emphasized that the “relations between the two nations, which offer great possibilities for both parties, would be further strengthened, not just bilaterally but also by playing a role together regionally and internationally”.

The relationship were give indeed given a “strategic orientation” when Prime Minister Junichiro Koizumi and Manmohan Singh, in their joint statement confirmed, “The global partnership between India and Japan reflects a broad convergence of their long-term political, economic and strategic interests, aspirations, objectives and concerns. India and Japan view each other as partners that have responsibility for, and are capable of, responding to global and regional challenges in keeping with their global partnership. A strong, prosperous and dynamic India is, therefore, in the interest of Japan and vice versa”.

More recently, in his address to the Indian Parliament, Prime Minister Shinzo Abe mooted the idea of a “broader Asia” at the confluence of the two seas of the Indian and Pacific Oceans and urged that the democratic nations located at opposite edges of these seas deepen the friendship among their citizens at every possible level. Abe envisaged that “this ‘broader Asia’ will evolve into an immense network spanning the entirety of the Pacific Ocean, incorporating the United States of America and Australia.”

According to a recent survey conducted by the Japan Bank for International Co-operation, India is one of the most favoured investment destinations for strategic Japanese investment. However, the low trade volume between the two countries is the proverbial Achilles' heel in Indo-Japanese economic engagement. In fact, recent optimism aside, the bilateral trade between the two countries is substantially lower than the trade between Japan and China. In 2009, less than 5 per cent of total Japanese FDI came to India. These figures indicate the “conservative approach” of the Japanese, who though buoyed by the “Indian growth story” remain reticent when investing into India. The Japan Chamber of Commerce and Industry in its report to the DIPP titled “Suggestions for Government of India” dubs the Indian business environment as “tough”, with tax inefficiencies, land acquisition challenges, multiple administrative bottlenecks, difficult legal environment and labour issues consistently being named as the primary culprits.

I hope the new regime which professes to be close and friendly to Japanese administration as well as corporates, will work in right earnest to overcome the inadequacies in the investment environment and welcome Japanese investment in key areas like capital intensive large infrastructure projects and high technology industries. I believe the money that could flow in from Japan could be huge and cheaper.

Wednesday, May 28, 2014

Thalaivar Shinzo Abe

Thought for the day

“The way positive reinforcement is carried out is more important than the amount. ”

- B. F. Skinner (American, 1904-1990)

Word for the day

Booboisie (n)

A class of people regarded as stupid or foolish.

(Source: Dictionary.com)

Teaser for the day

Some never try to overcome their prejudices and dogmas.

They are analyzing team Modi from caste, class, religion, and region angle.

Thalaivar Shinzo Abe

With Narendra Modi taking over the reins of Indian government, talks of deeper and wider economic relations with Japan have gained strong currency. Japanese PM Shinzo Abe following Narendra Modi on Twitter (for record he follows only three people) is now part of folklore. The other common point of interest between two leaders is apparently Thalaivar Rajnikanth (Outside India, Thalaivar is most popular in Japan).

Indeed, Shinzo Abe added his personal touch to the blossoming Indo-Japan ties by identifying India as a pivotal partner in his book “Towards a Beautiful Country” which he wrote before assuming Japan’s premiership. In his book, he describes how Japan could advance its “national interests” by strengthening “ties with India.” He speculated that “it will not be a surprise if in another decade Japan-India relations overtake Japan-US and Japan-China ties.

Indisputably Japanese investors can materially help in bridging capital and technology deficit, especially in the sectors like large infrastructure projects and technology intensive manufacturing.

In September 2007 The Policy Council of The Japan Forum of International Relation, a power policy think tank in Japan, issued a policy framework including 10 recommendations to enhancing economic cooperation with India.

These recommendations seem to have influenced many deals subsequently. It is therefore pertinent to highlight the recommendations of the Forum to put things in right perspective and make an assessment of the potential contours of the economic and business opportunity.

1. Recognize that private sector activities are more effective than government initiatives and act accordingly.

2. Strengthen ties with a view to achieving common diplomatic objectives.

3. Participate actively in business networks connecting east Asia with India.

4. Diversify India-Japan trade and investment.

5. Share the latest intellectual resources for infrastructural development.

6. Promote meaningful policy dialogue and mutual understanding through outcome oriented trade missions.

7. Japanese corporations should adopt business models to the Indian markets.

8. Take full advantage of India’s IT expertise.

9. Increase human interaction, especially by offering ore employment opportunities to Indian skilled human resources in Japan.

10. Cooperate with India on peaceful use of nuclear energy.

Though Indo-Japan relations have certainly seen material improvement in past one decade, the potential has not been realized even nominally. Most set targets have remained underachieved…..to continue tomorrow

Tuesday, May 27, 2014

All the king’s men and all his horses

Thought for the day

“When I was young I thought that money was the most important thing in life; now that I am old I know that it is.”

- Oscar Wilde (Irish, 1854-1900)

Word for the day

Indelible (adj)

That cannot be eliminated, forgotten, changed, or the like

(Source: Dictionary.com)

Teaser for the day

How Arun Jaitley would be a better finance minister than Pranab Mukherjee.

If quotient differential is Modi, then how does it matter who is FM?

All the king’s men and all his horses

In past 10days many readers have written and called to discuss the constitution of Narendra Modi’s cabinet. My view that this discussion is completely irrelevant, and has mostly been unacceptable or, in many cases, unregistered.

I would like to reiterate with added emphasis that this episode in India’s history is quintessentially about one person named Narendra Modi – his vision of India, his character, his strengths and his weaknesses. Any effort to dilute this supposition will not only dilutive of the conviction but is also bound to distract from the core.

My conviction in faster and sustainable growth of Indian economy stems from the faith in Modi’s ability to quickly assimilate the cotemporary environment, strategize a faster response and get it executed diligently. The role of ministers in his cabinet would therefore logically be limited to execute his policy direction. You need hard working, no nonsense workers for the job. Someone with strong views or exceptional intelligence will only create undesirable incongruence.

Coming to back our core subject, CLSA in a note issued to its clients highlighted some interesting opportunities which I found pertinent to share.

The research note highlights, among other things, commercial vehicle sales in the country are at the level last seen in 2003-04 while GDP/GFCF has grown 300% since then. It may therefore not unreasonable to expect 120-150% growth in CV sales over the next 3 years.

I feel while the CV manufacturers like Eicher, Tata Motors, Ashok Leylend will undoubtedly gain from the trend reversal in CV demand, sharper gains could be expected from ancillaries like Bharat Forge, Bosch, etc. could gain even more.

A similar situation exists in cement demand also. The report suggests that “Andhra Pradesh consumption is 30% lower now than 2009. From here on it will reverse and make up for lost time. But 7-8% CAGR volumes assumption won’t take us back to 2009. The impact on Cement companies will be exaggerated.”

IT and pharma sectors which have been out of favor for past few weeks. The primary reason for the underperformance is attributed to sharp appreciation in INR vs. USD. The said CLSA report highlights that stock prices of major IT companies are presently building in an exchange rate of RS58/USD., an 8-9% local currency volume growth and 50bps shrinkage in margins.

With this matrix, IT sector underperformance certainly looks overdone and a corrective up move would be in order. The trend was visible in yesterday’s trade. In my view it can accelerate further in next two months.

Post yesterday volatility, I am even more confident about my “leveraged but no beta strategy” and feel no need for any material change in InvesTrekk model portfolio

Monday, May 26, 2014

TEAM MODI

In a historic event Narendra Modi assumed the office of PM of India along with 44 colleagues.

The likely team of Modi had been a subject of intense speculation over past 10 days.

Putting all speculations to rest, Narendra Modi presented a team which is true to his style and thinking – less government more governance.

The team is young, experienced, representative and highly political. We had argued in April in favor of politicians vs. technocrats (see here).

We are delighted to report that there is no technocrat (except Gen. V. K. Singh) in the Team Modi. And very bravely Modi has resisted the internal pressure to accommodate old guards like Advani and MM Joshi.

KEY HIGHLIGHTS

Maximum number of women ministers in cabinet (six). A strong message.

One minster for Finance and Defence – This in our view is a very well thought out strategy.

In recent past serious doubts have been raised about preparedness of our defence. Lack of adequate budgetary support has been cited as primary reason for that. An integrated view of finance and defence will help overcoming shortcomings in Defence and improve the preparedness. A key issue highlighted by Modi.

Besides politically it keeps CCS and CCPA confined to three people. Expect faster and more coordinated decisions.

One minister for coal and power – No explanation needed for this much desired move. Piyush Goyal is the best person as he understands the financial and logistics intricacies well and is very well connected with the industry.

Smriti Irani a young, deeply nationalist and incorruptible face, getting HRD cabinet birth at age of 38yrs. The ministry has a budget of Rs66k crores that is likely to increase substantially. A great move to connect with youth.

V. K. Singh getting Independent charge of NE affairs and support role to Sushma Swaraj in External Affairs. This is amazing and far sighted. NE involves border dispute with China, water and infiltration issues with Bangladesh and greater cooperation with ASEAN. Gen Singh with his vast experience as Army officer, will be a great support to Sushma Swaraj besides solving lots of NE problems. Remember no one is better versed with NE terrain and problems than him.

Merging Law and telecom under one minister. Given the kind of legal problems faced by critical telecom sector, this might help preempting most of the problems and solving crucial pending issues like Vodafone.

Highlighting Ganga Cleaning, River integration in ministry formation is also a commendable move.

Least representation to BJP stronghold Rajasthan, Gujarat, MP and Chhattisgarh highlights the confidence and ability of Modi to seek sacrifice from his supporters. He seems to have negotiated well with allies also.

The minister seems to be above from caste and religious considerations.

Friday, May 23, 2014

Politics to change from “power centric” to “people centric”

Thought for the day

“Human behavior flows from three main sources: desire, emotion, and knowledge. ”

- Plato (Greek, 427-347BC)

Word for the day

Abecedarian (n)

A beginner in any field of learning.

(Source: Dictionary.com)

Teaser for the day

In new India it’s ok for men to be emotional and show it also. I find this is the best thing that is happening to us.

Politics to change from “power centric” to “people centric”

Yesterday many of my readers enquired whether I being excessively and unnecessarily emotional about the political changes taking place in the country. Some of them raised concern “if it would be appropriate to change investment strategy on the basis of an emotional political speech”.

I have replied to most of the concerns. However, I find it pertinent to share my thoughts with all of you.

First of all, there is no change in the investment strategy. Asset allocation remains the same. Portfolio constitution remains the same. Timing of investment remains the same. Return expectations remain the same.

I have been saying that the only thing I expect from new regime is better and faster execution. With Modi at helm the confidence in execution capabilities has increased. That is one minor change.

A major change however comes from the visible change in the political culture. The free flowing tears of Narendra Modi, many of his party colleagues and Anandiben Patel, signifies the most distinguished paradigm shift in Indian the Indian political system.

In post Lal Bahadur Shastri era, politicians have only shown stoic arrogance or divisive fervor. Genuine humane emotions have been mostly missing from the popular discourse. This has not only deepened the trust deficit between people and administration but also disconnected politicians from the real concerns of the country.

Return of emotional politics gives me confidence that the people at the helm are now connected with people and appreciate their concerns. As a natural corollary the policy making is therefore bound to be “people centric” rather than “power centric”. Programs will be based on people’s aspirations and needs, rather than what is necessary to stay in power.

Economics of political profligacy and misdirected entitlement may likely pave way for holistic growth based on the principle of equality, justice, dignity, sustainability and viability.

The propaganda done by Arvind Kejriwal led AAP has seriously dented people’s faith in “the system” and “the constitution”. Elevation of Narendra Modi, Anandiben Patel and Jitan Arm Manjhi will go a long way in restoring faith of people in “the system” and “the constitution”.

In his speech Modi repeatedly emphasized that the system that allows the last man in socio-economic hierarchy to rise to top posts does not need to be replaced. It needs to be strengthened. Kejriwal should also realize that the system that allowed an ordinary citizen like him to become CM of a state and aspire to become PM of the country need not be changed. It only needs to be honestly followed, which unfortunately AAP did not do. Post their electoral victory in Delhi, I had given AAP led by Kejriwal five years to perish (See here). It seems it will much sooner.

People who fear about RSS need to understand two things: (a) Hindustan Lever with a customer in every street has the best economic intelligence of the country and (b) RSS with a volunteer in every street has the best socio-political intelligence of the country. These two should be respected for their intelligence inputs at least.