Wednesday, December 2, 2015

Negawatt more valuable than Megawatt

" I sit on a man's back, choking him and making him carry me, and yet assure myself and others that I am very sorry for him and wish to ease his lot by all possible means - except by getting off his back."
—Leo Tolstoy (Russian, 1828-1910)
Word for the day
Quixotic (adj)
Extravagantly chivalrous or romantic; visionary, impractical, or impracticable.
(Source: Dictionary.com)
Malice towards none
The developed nations' stance on climate control - नौ सो चूहे खा कर बिल्ली हज को चली!
First random thought this morning
One can understand politicians to preach tolerance to people so that no one raises voice against their misdeeds.
But thinkers, writers, artists, who have always lead revolutions from the front, wanting people to be tolerant is little perplexing.
सबसे ख़तरनाक होता है
मुर्दा शांति से भर जाना

तड़प का न होना सब सहन कर जाना
घर से निकलना काम पर
और काम से लौटकर घर जाना
सबसे ख़तरनाक होता है
हमारे सपनों का मर जाना
(Avtar Singh Sandhu 'Pash')

Negawatt more valuable than Megawatt

The government's desired path of double digit GDP growth would require energy consumption to grow at around 7% annual rate, even allowing for the trend growth in energy intensity.
As IEA stated in a recent report, despite gradual rise in domestic production, the import of energy by India would continue to be rise in next decade.
Moreover, in achieving sustained higher growth double digit growth target, the challenges to protect the environment will also intensify. It will be necessary to evolve mechanisms through which a suitable balance can be struck between the energy requirements of development and the environmental needs.
The government resolve to change the energy mix by materially increasing the share of energy from renewable sources is commendable, but the imperative need to achieve higher level of energy efficiency besides focusing on augmentation of domestic supplies of energy cannot be ignored.
The domestic consumption of electricity in India is about one fourth of the total. In past decade per capita availability of electricity for households has improved significantly, but is still abysmally low in global comparison. However, the steadily rising household income and village electrification program is leading to accelerated rise in demand for electricity.
Currently, in India, 14 out of every thousand people own a car as against 20 in China and 140 in Brazil. Developed countries like Germany, UK, Japan and US have a ratio of 400 cars per thousand people. The rising household disposable income has led to conspicuous increase in the total addressable market for the passenger cars.
The relatively low cost, energy savings and carbon emission reduction potential that could come from improving energy efficiency in buildings, transportation, industrial processes etc. is yet to be fully exploited; though there has been a conspicuous interest in renewable energy.
Therefore, while endeavoring to increase the production of energy through conventional and renewable means, it is also critical to promote energy efficiency. The efforts like promoting LED lamps for lighting are encouraging indicators.
A unit of energy saved by a user is greater than a unit produced, as it saves on production losses as well as transport, transmission and distribution losses. Thus a “Negawatt”, produced by a reduction of energy need has more value than a Megawatt generated.
I would be delighted to see government setting a target of 10,000 Negawatts of energy efficiency in next four years, besides 20GW target of renewable energy production.

Tuesday, December 1, 2015

2016 Budget Speculations - 1

"All happy families resemble one another, each unhappy family is unhappy in its own way."
—Leo Tolstoy (Russian, 1828-1910)
Word for the day
Nocturne (n)
Music: a piece appropriate to the night or evening.
(Source: Dictionary.com)
Malice towards none
GST may be a good beginning, but by no means it's panacea for all that ails Indian economy.
First random thought this morning
The Congress Party disrupted the entire monsoon session of the Parliament insisting that EAM Sushma Swaraj, MP CM Shivraj Singh and Rajasthan CM Vasundhra Raje must resign before the Parliament transacts any business. The winter session has begun and we are not hearing any such demand. What should we infer from this?
(a) Congress Party is not serious about the issues it raises. (b) The Party was actually bargaining for some something else and resignations were not the real issue. (c) The government has offered something really meaningful to Congress for not raising the issue of resignations again.
In any case where do the People of India come in the whole picture?

2016 Budget Speculations - 1

The government looks determined to make laws and procedures relating taxation simpler, transparent and predictable. The objective is to promote ease of doing business, improve compliance level, minimize litigation and disputes, and augment revenue collection through better Tax-GDP ratio.
Everyone acknowledges it is going to be a tall order. It may lead to higher incidence of tax in the short to medium term. For many who are used to exploiting the loop holes in the extant system or have managed to stay out of the taxation net, the process may rather excruciating.
Some of the most garrulous supporters of the tax reforms may actually not savor the actual implementation of taxation reforms, inasmuch as the tax reform for them usually means more exemptions & lower incidence of tax.
In my view, the process of taxation reforms may actually impact the sentiments in stock market negatively.
Though I sincerely believe that the government may not want to rock stock markets when, inter alia:
(a)   The global markets are entering a period of turbulence with rate hike by US Fed;
(b)   The government might need to raise much higher amount of resources through sale of public sector equity;
(c)    The public sector banks may need to raise resources to meet capital adequacy and growth requirements;
(d)   FPI flows could turn materially negative due to unwinding of US carry trade and risk-off conditions in global markets.
From the bytes I have gathered from the ministers and officials at North Block, in particular the following tax proposals in the Union Budget for FY17 could rattle the sentiments of market participants:
(1)   Abolishing the complete exemption of long term capital gain on sale of equity share and equity mutual funds. This may not have much revenue impact, but may be considered critical for improving compliance, especially in light of the recent SEBI probe into blatant misuse of this provision for money laundering and tax evasion.
(2)   High service tax to align service tax rates with proposed GST rates.
(3)   Withdrawal of a multitude of exemptions for business class assesses so that the marginal rate of tax could be brought down to target 25%. This will definitely result in higher incidence of taxation of business.
(4)   The implementation of 7th Pay Commission and OROP will leave a large hole in finances of governments (state and center) and railways. The hole may be sought to be filled partially through higher effective tax on discretionary consumption and lower subsidies.
(5)   The government may also consider some sort of "smart city cess".

Sunday, November 29, 2015

Nifty: Fear and greed indicator peaking

Thought for the day
"If you want to be happy, be."
Leo Tolstoy (Russian, 1828-1910)
Word for the day
Gormandize (v)
To eat greedily or ravenously.
(Source: Dictionary.com)
Malice towards none
Besides PK, Arun Jaitely, Amit Shah, Satish Mishra, Jairam Ramesh, et. al. have all enjoyed the status of master election strategists in past one decade.
First random thought this morning
To fulfill his poll promise, Nitish Kumar has expressed his intention to ban consumption of alcohol in the state of Bihar from next fiscal year. Gujarat has prohibition in force since the formation of the State in 1960. Nagaland enforced complete prohibition in 1989. Manipur and Lakshdweep have enforced prohibition in select parts of the respective states. Kerala government has also proposed similar law. Andhra Pradesh, Tamil Nadu, Mizoram & Haryana have implemented but later repealed prohibition laws.
It's a noble thought. I hope Bihar government will learn from the mistakes of other states and enforce an effective law. To test the waters he should prohibit GA legislatures and all seniors officers of the State from consuming alcohol with immediate effect.

Nifty: Fear and greed indicator peaking

Historically, one of the most successful, though intuitive indicator of greed overtaking the fear in market is outperformance of small cap stocks over large cap stocks. On this parameter market is ripe for a major correction.
In past an outperformance level of 25-35%, in a given period has marked the cycle peak for the market. The correction thereafter have been sharp, painful and very broad based. In one year post peaking, the broader market corrected much more sharply as compared the benchmark indices.
In last instance the outperformance peaked in January 2008 and broader markets corrected over 80% in the following one year as compared to ~60% for the benchmark indices.
 
The outperformance of BSE small cap Index during past 24months is not as sharp as it was during 2006-08, but if we adjust it for slower economic growth this time and substantially poorer corporate earnings performance, the outperformance might not only look sharper but ominous also.
 
 
I therefore sincerely believe that it is reasonable to raise guards against a potential sharp correction in broader markets in next few months. 
 

Friday, November 27, 2015

Shaken not stirred!

" Realists do not fear the results of their study."
—Fyodor Dostoyevsky
(Russian, 1821-1881)
Word for the day
Uxorious (adj)
Doting upon, foolishly fond of, or affectionately submissive toward one's wife.
(Source: Dictionary.com)
Malice towards none
Who is bigger enemy of Congress Party?
(a) Manishankar Aiyer
(b) Rahul Gandhi
(c) Digvijay Singh
(d) Salman Khurshid
(e) Other (Pl specifiy)
First random thought this morning
Amir Khan enjoys a serious love hate relationship with right wing activists. First came Sarfrosh (1999) and Lagaan (2001) - Amir was a top nationalist and patriot. Then he decided to sit on dharna with Medha Patkar Narmada Bachao Andolan during promotions of Fanaa (2006) - he was suddenly an anti national, obstructionist and traitor. With 3 Idiots (2006) - Amir again became a youth icon, everyone wanted to emulate Rancho. In 2014 PK made him blasphemous. His decision to share with public a byte of his bedroom talk with his wife has now turned him a top rated traitor. In the meantime he has made a lot of people cry with him on his TV show Satyamev Jayate.
Quite a roller coaster! What the heck!!!

Shaken not stirred!

Post Paris attacks, the hostilities in Europe are rising by the day. This is developing into, inarguably, the largest geo-political crisis since Iraq invasion led by US led allied forces in 2003.
The economic data in US is encouraging for Fed hawks. December 4 non-farm payroll report (NFP) is widely expected to provide final thrust for the eventual Lift off on December 16. (see here)
The recent report of virtual crash in Australia's private capex (long considered a proxy to Chinese hunger for raw material) suggest that despite all assurances, all might not be well with China. (see here)
These three factors may be sufficient to stir a perfect storm for global markets in next three months, likely causing sharp correction in almost all assets, and a deep cut in risk appetite.
At this point in time it is rather difficult to assess the potential damage as the conditions are quite different from 2008. For example consider the following:
·         The market participants are more prepared and well bunkered for a disaster as compared to 2008-09. In 2008 the storm struck when most participants were drunk and partying in the open.
·         The central bankers are much more experienced in handling the liquidity crisis as compared to 2008 and perhaps enjoy more credibility insofar as disaster management capabilities are concerned.
·         The global economy is much weaker after a persistent struggle with deflation for over five years.
·         The global economy is estimated to be burdened with over US$200tn of debt, a large part of which could be perpetual and may never be repaid. QE may therefore not be as potent a weapon this time as it was in 2008-09.
·         The engine of global growth in 2008, viz., BRIC, is out of steam and perhaps backfiring.
·         The political cooperation seen during 2008-09 may not be seen in 2016 due to a variety of reasons.
·         The disaster will impact much larger governments as compared to smaller PIGS in 2008.
These thoughts do shake me but I am not stirred. I continue to believe that the world is not entering any major war. The threat of ISIS in its present form may get neutralized sooner than later. US liftoff will be smoother than most anticipate, much like tapering. China perhaps has already landed hard, though official data may not admit. Commodity super cycle is over and prices may hit the rock in next few months.
For me the recovery in Indian corporate earnings is the foremost concern.

Tuesday, November 24, 2015

Binary solution won't work for me!

"Man, so long as he remains free, has no more constant and agonizing anxiety than find as quickly as possible someone to worship."
Fyodor Dostoyevsky
(Russian, 1821-1881)
Word for the day
Gratulation (n)
A feeling of joy.
(Source: Dictionary.com)
Malice towards none
The school dropouts completely dominate the cabinet of Nitish Babu.
Who is the strategist behind this move?
First random thought this morning
It took gruesome killing of 150 innocents in Paris to wake up global superpower to unite against the menace of ISIS. I am sure ISIS will be neutralized or substantially weakened in 2016 as all the military might of US, Russia and France operates together against them.
However, the sheer number of destitute this battle will leave in Syria (and elsewhere) will keep the threat alive, as was the case with the battles fought in Afghanistan, Iraq, Yemen, Lebanon, and Libya etc.

Binary solution won't work for me!

Though Santa is yet to ring the bells and draw curtain over the 2015th year of the Christ, the urgency to foretell the market trends in 2016 is conspicuous amongst analysts. Most of these prophecies are coming with material contingencies, e.g., US Federal Reserve decision to hike and the trajectory of the lift thereafter; China crash landing; escalation of Europe refugee crisis; etc.
As a small investor I find it hard to think of a strategy, other than sitting largely in cash (USD), with these contingencies. This binary solution may be perfectly workable for a hands-on global traders; but may not work for a small domestic investor like me.
Given this constraint, I would like to make necessary adjustments to my investment strategy.
For next year or so I would like to work with following assumptions:
Domestic macro environment
Though not fully convinced, I would still like to build in marginal deterioration in India's macro fundamentals. In particular,
·         India's average economic growth may be lower at 7-7.2% (new series) in next four quarters.
·         Private consumption and savings may not accelerate materially.
·         Public sector investment may stagnate.
·         Private sector investment may see some acceleration due to higher FDI in manufacturing.
·         Fiscal balance may deteriorate. Consequently, the rates and bond yields may not ease much from current level.
·         INR may weaken against USD, but may remain stronger on trade weighted basis as EUR, CNY and currencies of other trading partners depreciate more.
·         Manufacturing inflation may bottom out in 1H2016 and see a sustained rise in 2H2016 on base effects and bottoming of global commodity prices and weaker INR vs. USD. CPI may also rise as food and electricity prices remain high.
·         Current account may see some deterioration as exports fail to pick up, non-oil imports rise, and remittances and FPI flows slow down. BoP condition may remain comfortable as FDI flows remain comfortable.
Corporate earnings
·         Corporate earnings may see a 5-7% growth in 2016. Most of this growth will be back-ended in 2H2016. Domestic businesses may better than exporters.
·         FY16 Sensex EPS are expected to be in the Rs1425-1450 range. FY17 earnings therefore could be 1575-1600.
Indian markets
·         We may not see any material re-rating of Indian equities from the present level.
·         I assume 2016 end Sensex level of 28800-29200. Therefore return expectations in 2016 should be moderate at 10-12%.
·         I assume average 10yr bond yields to remain around the current 7.7% level. Though, a sharper fall in INR due to global events may lead the yields higher in 1H2016.
Global economy
·         Global growth environment may remain challenging. Europe and Japanese economies may continue to flirt with recession and deflation.
·         US growth may decelerate marginally.
·         US Fed may begin hiking rates and reach 1% by end 2016. US 10yr bond yields may be above 2.75% by end 2016.
·         Emerging markets growth may decelerate materially in 1H2016 as commodity prices fall further and USD strengthens.
·         Chinese economy may continue to struggle. CNY may be devalued further.
·         Reserve unwinding by commodity producers and China may continue, pressurizing global yield. However, ECB and BoJ QE programs may prevent any major run on global bonds.
·         Geo-political conflicts may intensify in 1H2016 and may even create a liquidity condition in global financial markets. Panic thus created may trigger a major temporary correction in all financial asset prices.
Global commodities
·         I assume a material correction in global commodity prices from the current levels in 1H2016.
·         Gold could fall below US$1000/oz and WTI crude could fall below US$38/bbl. LME copper could fall below US$4500/t.
·         The global trade volumes may continue to shrink and accordingly the freight rates may remain low.
I find my investment strategy mostly aligned to these assumptions. However, in my next post I will share whatever adjustments that may needed in 2016.