Do it yourself

Wednesday, July 29, 2015

Some said, some unsaid

"First our pleasures die - and then our hopes, and then our fears - and when these are dead, the debt is due dust claims dust - and we die too."

- Percy Bysshe Shelley (English, 1792-1822))

Word for the day

Persiflage (n)

Light, bantering talk or writing.

(Source: Dictionary.com)

Malice towards none

"I AM KALAM!"

Some said, some unsaid

It is commonly believed amongst borrowers that the RBI’s rather disproportionate emphasis on inflation has proved to be counterproductive.

Though many professional investors and global financial and rating agencies have been quite appreciative of the governor's strong focus on price stability, the borrowers find little evidence to the effect that the monetary policy has achieved any meaningful success in reversing the trend in inflation in past two years. The argument that without such strict measures the price situation could have been worse is only hypothetical.

The global commodity crash, RBI's maneuvering in currency market to keep INR relatively stronger and material erosion of producers' pricing power due to diminished demand (both investment and consumption) has resulted in producers' price inflation being in negative territory in 2015. But that is no cause of celebration and rightly no one is celebrating.

There is some credible evidence to suggest that the tight liquidity conditions might have exacerbated the supply side constraints; which in turn are responsible for persistency in inflationary trend in consumption articles. In fact RBI has recurrently admitted that the supply constraints are more structural in nature.

I would not like to join this debate at this point in time. Though in my firm view, RBI has certainly not managed the growth-inflation trade off in desirable fashion.

The half hearted efforts to control prices that were overwhelmingly burdened with the guilt of constricting growth at a time when the whole world is struggling with serious economic slowdown have yielded little. Structurally the price situation might be as grim as it ever was. The growth has faltered and looks more threatened than before.

I am totally in favor of free and fair monetary policy regime. RBI shall have full autonomy in determining and conducting the monetary policy.

However, the autonomy should not come without accountability. RBI, through its governor, should be made accountable to the public for the course of policy it chose to follow. Like in case of many autonomous central bankers he should periodically testify to the people, through the parliament, about the appropriateness and adequacy of its policy measures in light of the extant circumstances and the future outlook based on such circumstances.

The Finance Minister, Planning body (NITI Ayog) chief, and RBI governor are commonly seen talking to each other through press conferences and TV channels.

Poor investors and common public are left in the lurch to decipher what is said, what is said without being said, what is meant by that is said, and what is left unsaid.

I am interested in knowing what catastrophe will occur if policy rates are cut by 100bps, along with 200bps cut in SLR and sale of US$10bn in open market.

Tuesday, July 28, 2015

Thank Mr. Tharoor and move on

Thought for the day

"All of us who are worth anything, spend our manhood in unlearning the follies, or expiating the mistakes of our youth."

- Percy Bysshe Shelley (English, 1792-1822))

Word for the day

Fumarole (n)

A hole in or near a volcano, from which vaporizes.

(Source: Dictionary.com)

Malice towards none

Rather frenzied response to any suggestions against commutation of Yakub Menon's hanging in 1993 serial blast case should worry the government.

It may be indicating a blemish in the primary fabric of Indianness in the garb of patriotism.

Thank Mr. Tharoor and move on

Shashi Tharoor won accolades from Indian Netizens, including the prime minister, for his passionate and impressive arguments for reparation payable by the British crown to the people of India. (see the video here)

Encouraged by the overwhelming acceptance of his argument, many must be wondering whether he should be made the Minister for Reparation of India and sent to Afghanistan, Iran, Mongolia, Turkmenistan, Tajikistan, Greece, Portugal etc. for seeking reparation for the plunder of India by Turks, Mongols, Huns, Greeks, Afghans, Portuguese, and Mughals invaders over past 2000yrs.

There are some dissenting voices who find the Tharoor's argument rhetorical and entertaining rather than substantive (e.g. Akar Patel -see here).

I being a philistine and unenlightened soul unlike Mr. Tharoor or Mr. Patel, however do not see any merit in discussing this tokenism of pride, retribution and justice.

I believe that the tendency to embellish our trite socio-economic with this sense of pride in our ancient past might in effect be harming us. The need of the time, in my view, is to move past 20th century and embrace the 21st century that may truly belong to India and Indians.

Let's accept that who British and others plundered were mostly disparate group of feudal lords who did not believe in the idea of India as a nation; many of them were equally cruel to their subjects and hence more than equal partners in invaders' crimes and plundering.

Since independence our attitude and policies towards foreign businesses and investment have been suffering from the false sense of pride in our ancient past and phobia of East India Company, Mahmud of Ghazni, and Muhammad of Ghor, et. al.

If we want to execute our vision of re-establishing India at top of the world in 25yrs we cannot afford to reinvent the wheel. We will have to rely on the technologies already developed and capital already accumulated. It is highly improbable that we could grow emulating China's cultural revolution by closing our doors to the world for a decade or more.

Nehru gave assurance to foreign investors in 1949 that there will be no discrimination between foreign and Indian capital and foreigners. The emphasis was however changed in early 1970’s with the implementation of FERA which marked the first major departure from the stated policy of welcoming foreign capital. In 1990’s FERA was repealed and replaced with much softer FEMA. However, there have been frequent flip flops on the of issue foreign investment in India despite deep recognition of the need and desirability of such capital.

Frequent controversies surrounding foreign investment through Mauritius route and recent cases like Vodafone highlight the lack of conceptual clarity and consistent framework for foreign capital.

It would be wrong to suggest that the complete removal of capital controls is desirable at this stage. However, inconsistency and incongruence in the framework governing the foreign capital is completely avoidable.

We need to remember investors will come when they like and not when we want them desperately.

Monday, July 27, 2015

Greed still dominates the sentiment

Thought for the day

"Government is an evil; it is only the thoughtlessness and vices of men that make it a necessary evil. When all men are good and wise, government will of itself decay."

- Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Contradistinction(n)

Distinction by opposition or contrast.

(Source: Dictionary.com)

Malice towards none

Why Togadia, Owaisi, et. al. are important to Indian society and media?

Greed still dominates the sentiment

YTD Sensex has underperformed midcap and small cap indices. IN particular midcaps have smartly outperformed the benchmark in past couple of months.

In past couple of weeks the market momentum has remained low with both volumes and volatility staying below averages. Despite this the midcap outperformance clearly signals the strong investor interest in the market.

Therefore, despite political developments (or lack of that) and numerous policy flip flops by the government, markets are not likely to fall materially from current levels in the near term.

In strict technical sense, 8470 on Nifty remains a key level to watch. A close below this could take Nifty to 8342 levels. The volumes and volatility date suggests that this F&O expiry may be a clam event.

Friday, July 24, 2015

Interest rates: let the market decide

Thought for the day

"The mechanic that would perfect his work must first sharpen his tools."

- Confucius (Chinese, 551-479BCE)

Word for the day

Risibility (n)

The ability or disposition tolaugh; humorous awareness of the ridiculous andabsurd.

(Source: Dictionary.com)

Malice towards none

Some politician says I will make my God bigger and better than the competition's!

And yet someone else was talking about India as one Nation!!!

Interest rates: let the market decide

I received many interesting comments on my yesterday's post (see here).

Many disagree with my proposition that a marginal rate cut at this juncture will mostly be perfunctory and may not have any material impact on the economic activity. Their argument is mostly based on the premise that rate cut could only stimulate the economic growth by spurring demand, both consumption as well as investment.

I obviously do not agree with them. I believe that Indian economy is already growing at its full potential. To grow at higher rate than the present it would need to change the orbit. This would require escape velocity that cannot be generated by lower interest rates or easier liquidity alone. In fact, this experiment has been tried rather unsuccessfully during 2003-2007 creating a bubble that may take 10yrs to deflate.

Mispricing a critical factor of production (i.e., capital) can only lead to disastrous results. In past six decades of economic planning experience we have experimented with mispricing of labor, materials, land, and capital. The consequences are lower productivity in virtually all economic spheres; systemic as well as commercial inefficiencies; imbalanced and inequitable growth; socio-economic inequalities, and wasteful consumption.

In recent time the system has been moving towards more efficient pricing of natural resources, transportation and cooking fuel, public sector and rural wages, land etc. Not allowing the price of capital to follow the trend by artificially suppressing interest rates may not be appropriate.

It is clear from the trend of past one decade and government's vision that in next couple of decades the growth in India will be highly capital intensive. Even in the traditional labor dominated fields like agriculture and retail trade, capital will a larger role. The demand for capital will obviously be more than the supply; hence the price of capital should remain elevated.

Global supply of capital could help moving the equilibrium to a lower point. But for that our politicians and their allies would need to take a "decision" much faster than their Cuban counterparts.

One reader who is a brilliant student of economics has pointed correctly that the market participants would need to understand that in Indian conditions high growth could co-exist with higher interest rates if inflation remains at moderate levels. Higher price of capital will benefit millions of savers while shrinking margins of few hundred thousand borrowers. It will go a long way in promoting efficient utilization of capital, eliminating the inefficient users and businesses; besides reducing income inequalities.

This is critical, because in the evolving paradigm the level of employment and wage growth is likely to remain low. The capital intensive industrial and rural growth will not generate enough employment opportunities to keep the burgeoning worker population fully employed. The supply of unskilled and semi skilled labor will always exceed the demand.

The interest income therefore will become a critical component of most household's income. So far it has been critical mostly for the pensioners and borrowers. Interest rates will assume a distinct political character; that is if it does not already.

Thursday, July 23, 2015

No enthusiasm for rate cut

Thought for the day

" Life is really simple, but we insist on making it complicated."

- Confucius (Chinese, 551-479BCE)

Word for the day

Criticaster (n)

An incompetent critic.

(Source: Dictionary.com)

Malice towards none

In all likelihood that Nestle will eventually win the Maggi battle.

It may however not press for compensation as a gesture of goodwill towards the government.

But I will certainly seek compensation for the deprivation my kids are suffering due to this unsavory ban.

No enthusiasm for rate cut

As the date for RBI's periodic policy review date draws closer the anticipation regarding the likely move on policy rate is rising. Like most preceding policy reviews, the opinion is divided this time also.

Many believe that strong fiscal correction measures taken by the government, trending lower commodity prices and poor core sector growth should lead the governor to cut another 25bps before hitting a pause button.

While there are others who find the erratic monsoon and rising food & vegetable prices a deterrent to any rate cut on August 4.

Not joining any camp, I continue to strongly feel that RBI is running way behind the curve and any marginal measure (25bps cut) or absence of that is unlikely to have any material impact on the economy.

Nonetheless, I feel that RBI today has little leverage in cutting rates. The failure of last auction indicated that there may not be much demand for government paper at lower yield.

Moreover, the government appears keen to upfront the borrowing program to gather adequate resources for plan expenditure. Lower yields may defeat that purpose. Narrowing of gap with other EM yields with risk of further relative appreciation in INR might impact foreign debt flows also.

In my view, the rate decision of Gov Rajan next month will be driven more by "INR" than "Industry".

Given the elevated level of stress on corporate balance sheets, as evident from the FY15 annual accounts, low demand environment, and poor credit growth despite comfortable liquidity conditions three things are more than clear -

(a) few bankers want to take risk of giving fresh money to a stressed corporate or even a new project;

(b) few corporate balance sheet will justify further lending even if rate fall by 25bps; and

(c) some aggressive bankers may be chasing households with high priced relatively small ticket consumer loans, compromising prudent norms and laying foundation for a credit bubble 4-5yrs down the lane.

Besides, in recent days the short term money markets have anyways been close to or even below the policy rates.

Under these circumstances a 25bps repo cut would be mostly redundant, in my view.

Gov. Rajan would not like to make a bigger cut, as it would risk further strengthening of already strong INR; force more liquidity infusion for buying USD; and thereby weakening the fight against price rise.

From market perspective I am not be too enthusiastic about a rate cut in next policy announcement.

Wednesday, July 22, 2015

Bad economics, poor politics

Thought for the day

"To see what is right and not to do it is want of courage, or of principle."

- Confucius (Chinese, 551-479BCE)

Word for the day

Sidereal(adj)

Determined by or from the stars.

(Source: Dictionary.com)

Malice towards none

Does a common person refer to a police constable as what AK did?

If yes, then AK is true to his positioning.

If not, you are true to yourself.

Bad economics, poor politics

The French President Francois Hollande has again mooted the idea of a United State of Europe (USE). He feels that Geek crisis has weakened the citizens' faith in European project.

To renew this faith it is necessary to strengthen the institutions of governance. “What threatens us is not an excess of Europe but its insufficiency,”, Holande wrote in the Journal du Dimanche weekly newspaper.

The president cautioned that populist movements had seized on Europeans' disenchantment with European institutions and were taking issue with Europe because "they are scared of the world, because they want divisions, walls and fences to return."

With public debt to GDP ratio of close to 100%, ever rising pension liabilities, a struggling economy, diminishing revenue, shrinking market share in global exports, rising youth unemployment, France has been occasionally sending jitters down the market's spine. Some in the market place are therefore seeing this as early signs of rising tendency of escapism, as the French government is struggling to introduce fiscal and labor reforms considered essential for the economy to avoid another Greek tragedy taking place on Paris.

It is commonly believed that the sublime idea behind a common Euro area was to put an end to centuries of conflicts between various European powers which have materially dissipated post second war. The paranoid might therefore smell an attempts to recreate a strategic power that Europe had traditionally been under the garb of an economic union.

I am however not inclined to subscribe to the theory of "Rise of Empire". Consequently, I also do not agree with those who fear an all out war involving Europe or Japan in foreseeable future. I believe that a full war needs "truck loads of youth". With "bed loads of old and infirm" people Europe and Japan cannot afford to go to a full war.

Some other may consider it desirable in order to correct the debilitating imbalances in the Euro area economies. However, considering the long history of rivalry and mistrust between the south and the north Europe, huge economic inequalities and social divergence between the peripheral and the core, thoroughly clouded economic outlook even in the medium term, there seems is little chance that a consensus could be reached.

So, at best the thoughts of President Hollande could evoke some academic discussion of no use, like the one I am doing here!

However, looking at the behavior of political parties in India, one can say that they are trying hard to seize on Indians' disenchantment with national institutions.

By denying consensus on critical economic issues, the politicians may be destroying the future of a whole generation.

And by jeopardizing the functioning of the enforcement agencies and law and order machinery, they might also be endangering the present of citizens.

Tuesday, July 21, 2015

Keep eye on the new dawn

Thought for the day

"Death and life have their determined appointments; riches and honors depend upon heaven."

- Confucius (Chinese, 551-479BCE)

Word for the day

Petrous (adj)

Like stone, especially in hardness; stony; rocky

(Source: Dictionary.com)

Malice towards none

Why media loves to stalk Virat and Anushka these days?

Who does actually care?

Keep eye on the new dawn

Continuing with the theme "To Micro from Macro", I would like to clarify that in my view we are still some distance away from a secular bull market in Indian equities. However, it is likely that the next cyclical recovery that is expected to shape up in 6-12 months may lay a solid foundation for such bull market. So the positioning for this cyclical recovery has to factor in the continuation of good times, of course with material rise in volatility.

I have been rather insistent that the bull market in Indian equities will commence mostly due to domestic reasons. The global factors, primarily liquidity and soft commodity prices may provide some extra impetus.

Therefore, the positioning has to be based on domestic growth drivers. I would therefore suggest the following areas for finding future leaders.

(a) Industrial companies with market and technology leadership, strong brand equity and access to global markets. Solution companies rather than product companies are more preferable as they can sustain margins through pricing power and better customer loyalty. The companies with substantial operating leverage in this space are more preferable.

(b) Consumer companies both in staple and discretionary space which may benefit from rise in consumption demand, stable global economy, weaker INR, and lower commodity prices. Again companies with material operating leverage are preferable.

(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.

(d) Financials will inevitably participate in any bull market. Reduced financial stress, better yielding bond portfolio, higher credit demand, geographical spread due to deeper financial inclusion efforts, and recapitalization are some ideas that will drive value of financial stocks higher. However, as a matter of strategy we are circumspect about the PSBs. I therefore prefer private sector lender.

Public sector banks may though be better prospects for a short term trade. I would though stay at the top end of this spectrum.

(e) One of the primary premises of our bull case is soft commodity prices. I would therefore not suggest any global commodity exposure. Domestically however cement could see a major spike up due to better utilization rate. Financially unleveraged large players with good operating leverage could be looked upon. I prefer regionally diversified companies to those whose operations are contained in smaller geographies.

(g) The exporters especially IT and pharma should continue to do well. A correction due to cyclical strength in INR would provide a good entry point.

I usually do not get into the midcap - large cap debate. However, some relatively smaller companies that have potential to become big due to material capacity expansion, innovation and better resource management always present great opportunity to optimize portfolio return.

Monday, July 20, 2015

Nifty breaks the shackles. How far will it travel?

Thought for the day

"A gentleman would be ashamed should his deeds not match his words."

- Confucius (Chinese, 551-479BCE)

Word for the day

Fogdog (n)

A bright spot sometimes seen in a fog bank.

(Source: Dictionary.com)

Malice towards none

The Congress' strategy is intriguing.

They are just busy cutting the BJP's line short instead of drawing a bigger line of their own.

The whole campaign is centered on the theme - "whatever we did bad, you are doing worse"!

Nifty breaks the shackles. How far will it travel?

Nifty completed a bullish reverse head & shoulder pattern last week. However the volumes and volatility was much lower indicating slower momentum and lack of conviction.

It is therefore less likely to show the kind of short covering and buying momentum seen usually seen post such bullish breakouts.

Infosys results this week may be a key trend decider. A close above 1060 for Infosys may lead NIFTY into its next resistance zone of 8865-8910.

This morning this looks like a likely scenario.

A close below 8470 only would terminate the current upmove.

The moot question however is will Nifty break past its previous all time high recorded earlier this year.

Sunday, July 19, 2015

Planning the move from Macro to Micro

Thought for the day

"You have no enemy except for yourself."

- Francis of Assisi (Italian, 1182-1226)

Word for the day

Assisi (Italian, 1182-1226)

Word for the day

Allegiant (adj)

Loyal; faithful.

(Source: Dictionary.com)

Malice towards none

The prerequisite for rectifying a mistake fully is honest admission of such mistake.

Have various authorities honestly admitted what went wrong in the case of Vyapam?

Planning the move from Macro to Micro

Continuing from yesterday, I believe that the macro trade that has mostly driven the returns in Indian equities in past one year shall gradually yield way to a cyclical micro trade over next 6-12months.

The cyclical micro trade may be driven by the following five primary factors:

(1) Improved execution led by clearance of stalled and incomplete projects. Prompt clearances and removal of administrative hurdles could unlock a huge amount of capital blocked in these projects.

Industry feedback suggests that there are some positive developments in this direction that should bear fruits in next 6-12months.

Increase in supply of coal and gas likely in next6-12 months shall boost power generation and lead to improved capacity utilization in many industries.

(2) Improved liquidity due to higher government spending on investment and social activities.

The government spending has been limited by the fiscal constraints, especially in past three years. Higher energy, farm and food subsidies have constricted the public investment as well as consumption. With energy price reforms in place and robust indirect tax collections (primarily due to higher service tax and excise duty on transportation fuel) shall enable government to resume investment in social and physical infrastructure, especially roads, energy and transportation.

(3) Improved profitability as the benefit of lower global commodity prices kicks in and inventory levels rationalize.

The export demand may not pick up in hurry given the trends in EU and China. The US could however see decent gains.

The key would however be the domestic private consumption and investment demand.

(4) Bottoming of credit cycle. The credit demand has slipped to multi decade lows in recent months, along with worsening credit quality. Given the inflation trajectory and credit demand, the rate cycle is certainly turning down with likely uptick in savings.

Next 12-15 months may see bottoming of credit cycle with NPAs peaking and credit growth and savings rate bottoming. The corporate leverage may see material correction either through asset sale or conversion to equity.

(5) With Bihar elections out of way, the government will have a window of 6-9 months (before the next cycle of states elections kicks in) to pursue key legislative measures like GST and other tax reforms. This could encourage investments

The key would be to orient the equity portfolio to this shift from macro trade to cyclical Micro trade. More on this next week.