Do it yourself

Tuesday, January 12, 2016

Growing like Ginger

"Where there is reverence there is fear, but there is not reverence everywhere that there is fear, because fear presumably has a wider extension than reverence."

—Socrates (Greek, 469-399BC)

Word for the day

Kvell (v)

To be extraordinarily pleased; especially, to be bursting with pride, as over one's family.

(Source: Dictionary.com)

Malice towards none

Why is it so difficult to accept that in Pakistan government and are different establishments independent of each other!

First random thought this morning

The global markets are more integrated than ever. Various segments of markets, e.g., currencies, commodities, equities, credit and money, are more integrated than ever.

Portending divergence in performance based on historical behavior could be fraught with serious risk. In very simple terms - today if I lose a wager in commodities, the obligation may have to be settled by liquidating position somewhere else. Similarly, if my bets on Europe go awry, I may not be able to hold on to my positions on other jurisdictions. Vice versa, if I make good money somewhere, I am encouraged to take similar bets elsewhere.

Growing like Ginger

In past two weeks I travelled through many expressways, highways, lanes, by-lanes, alleys, and trails in Uttar Pradesh and Uttrakhand. The experience was, as usual, enlightening and enthralling.

During my journey, I observed many emerging trends and changes (some structural in nature) in occupational & consumption patterns that would have material economic implications in coming years. I believe it is critical for investors in Indian assets to comprehend and assimilate these emerging trends in their investment strategy.

Over next few days I shall be discussing some generic observations and their likely economic implications.

I have been writing about the consistent struggle between the degenerated traditions & unmindful culturalism on one side and aspirational modernism & pursuit for basic standards of life on the other. With each journey through various parts of the country, I find this struggle intensifying and producing results which are extremely encouraging at one end of the spectrum and potentially explosive at the other end of it. In between it traverse through the realm of ridicule, humor and disaster.

For example, consider the following.

A decade ago, Bareilly, a typical Tier-II town in UP had just three outlets that would accept payment through credit cards and there were two internet cafes to serve a population of 700k. Today, a proposed smart city, it has Shopping Malls, hundreds of small shops accepting payment through electronic means, over 100% penetration of mobile telephones, and almost all adults hooked to Whatsapp and Facebook. A myriad of private management, engineering and medical collages have mushroomed all over.

For a city which proudly burned down theaters for displaying movie posters in English, now Queen's language is the preferred medium of education of children even for domestic helps. Consequently, each street of the city boasts of its children working as managers, engineers and doctors in large metropolis and foreign countries. The proud parents travel frequently to Mumbai, Delhi, Benguluru, USA, UK, Dubai, Singapore and Australia.

The city is growing like ginger - in all directions and without any plan. Each marriage adds a new room to already crumbling and overcrowded house. A shop mushrooms from nowhere for every unemployed youth.

The city has virtually no industrial base to create employment. A small camphor factory and a matchbox factory are the only traces of industrialization in the city.

Bareilly was a major center of traditional arts like Kashidakaari, embroidery, Zardozi, bamboo art etc. But in last decade or so these arts have lost ground to professions like mobile & auto mechanic, catering, E-Rickshaw, etc.

The roads which were occupied by cycle rickshaw and cows are now a melee of young rash bikers, mini busses, cars, auto rickshaws, cycle rickshaws, and cows. Brawls over parking are common and frequent.

Each street, club and hotel had an elaborate New Year Party. The scale of festivities and fervor was something I never saw in Delhi or Mumbai.

There is little awareness about the rich historical past of the city amongst youth.

New Year celebrations in Bareilly city

Changing face of the city

....to continue tomorrow

Monday, January 11, 2016

Nifty: Hope prevails

First random thought this morning

This winter has been unusually bright and warm. This has certainly extended the Christmas festivities for the urban populace in North India. The farmers are though a worried lot. Wheat farmers in Punjab, UP and MP who have been braving drought for past two years appear to be throwing in the towel.

Many agricultural tenants have defaulted on their obligations and many distressed marginal farmers have put their land on the block.

Thought for the day

"Wisdom begins in wonder."

—Socrates (Greek, 469-399BC)

Word for the day

Unputdownable (adj)

(especially of a book or periodical) so interesting or suspenseful as to compel reading.

(Source: Dictionary.com)

Malice towards none

If you have to name just one, what in your view would be the most critical problem afflicting India presently?

Nifty: Hope prevails

As the benchmark indices tested the lows recorded in September 2015, the broader markets demonstrated remarkable resilience.

The current level of outperformance of mid and small cap is in fact widest since the current up move started from late August 2013.

Juxtaposed with the rising retail participation, strong response to new issues, improved market breadth and consistent domestic flows into the market, it is clear that:

(a) presently the equity is the most preferred asset class with domestic investors;

(b) despite uncertainty over economic reforms, and poor corporate performance the domestic investors have not lost faith in equities and remain mostly hopeful of a imminent recovery;

As I have been pointing out in recent months, historically, this outperformance of low quality and small cap has invariably marked the cyclical peak for the markets and is usually followed by a sharp correction.

It is though difficult to put a timeline on expected sharp correction in broader market, I will still hazard a guess - between 20th February and 20th May 2016.

Wednesday, December 30, 2015

Investment Strategy 2016 - 8: Investment Strategy

Next issue of Morning Trekk will be published on 11 January 2016.

We wish all the readers a great year ahead!

Thought for the day

"When I told the people of Northern Ireland that I was an atheist, a woman in the audience stood up and said, 'Yes, but is it the God of the Catholics or the God of the Protestants in whom you don't believe?"

—Quentin Crisp (English, 1908-1999)

Word for the day

Wing-Ding (adj)

A noisy, exciting celebration or party.

(Source: Dictionary.com)

Malice towards none

Rahul Gandhi is on leave, but this time with due permission of the Twiterrati!

First random thought this morning

Reportedly, 30 students in Kota have committed suicide in 2015, supposedly for failing to cope with the pressure to succeed in professional examinations.

Three things are worth pondering: (a) No one is crying for these children as they would normally do for farmers committing suicide; (b) To make matter worse, the government is considering to reverse "no hold till class eight" policy so that even younger students feel the pressure; and (c) 3 Idiots was highly overrated as a movie with social message - students have learned to take a leak at teacher's door, drink alcohol; commit suicide, and make fun of a language but parents have not learned to let children live their life!

Investment Strategy 2016 - 8: Investment Strategy

As discussed in one of my earlier posts, I believe that Indian investors are most likely entering once in five year phase when the return prospects on most asset classes are frustratingly low. Fortunately though the return of investment is not under threat as yet.

On YTD basis benchmark equity indices have given a negative return of ~4%. Given the poor earnings growth, slowdown in global flows and moderation in optimism over economic reforms, the outlook for 2016 continues to be clouded. Save for a major re-rating of Indian equities (no reason to foresee that today) the benchmark indices may return a moderate 10-12% return in 2016, with a reasonably higher degree of risk and volatility.

So what should be the investment strategy going into 2016?

Asset allocation

Since I do not expect much fall in interest rate, I would maintain equity overweight in my portfolio (65%). Presently I am holding a material part of my equity portfolio as tactical cash (25%). I would like to deploy this cash fully in equities over next 3months. My target return for overall financial asset portfolio for 2016 would be ~9%.

Debt investment

I would like to largely confine my debt investments to accrual products only; strictly avoiding search for capital gains in my debt portfolio.

However, I may consider debt funds with very long duration if benchmark yields rise over 8.25% due to some global event.

I would avoid undue credit risk in my debt portfolio to make few bps additional return. Though I would not like to be paranoid about the credit risk and not waste my time looking for risk where none exists.

I would target 7% post tax return on my debt portfolio.

Equity investment strategy

I would maintain a balanced stance on my equity investments and consider entire spectrum of companies rather than focusing on large caps only. I would:

(a) Target 10% price appreciation and 1% dividend yield from my equity portfolio;

(b) Normalize overweight on global pharma and IT;

(d) Continue NIL weight on pure commodity plays;

(e) Increase exposure to domestic cyclical businesses through solution providers, technology leaders and innovators rather than pure product or construction companies;

(f) Overweight luxury discretionary consumption;

(g) Continue to avoid PSU in general. However, I may consider some of the top PSU banks if stocks prices correct irrationally from the current levels.

Equity trading strategy

(a) I would like to trade frequently in at least one third of my equity portfolio and use 'buy & hold' strategy for the remaining part.

(b) I see strong pair trading opportunities in differentiated performances within same arena, e.g., private banks, consumers and exporters.

(c) I also see strong trading opportunities emerging in commodities' space. Though I would mostly like to trade in this space on the short side after each technical bounce.

(d) I would actively look for shorting opportunities in PSU space, especially those who will see (a) material rise in wage bill due to implementation of 7th Pay Commission recommendation; or (b) lose out to foreign competition as government opens up more areas to global competition.

Miscellaneous

(a) I would not consider precious metals for financial asset allocation.

(b) I assume a relatively stronger USD and weaker EUR & CNY in investment decisions. Therefore I would be discreet in choosing exporters and foreign currency borrowers for investments.

What will change my view?

1. Full blown recession in US.

2. Surprise recovery in Europe and Japan.

3. Hard landing in China.

4. INR breaking and sustaining over 70/USD.

5. Full blown economic crisis in middle east led by lower energy prices.

It is critical to note that short selling and derivative trading involves materially higher risk. These require much higher level of technical expertise and knowledge and therefore not suitable for all investors/traders. The readers should seek expert advice before making any investment or taking a trading call.

Also Read

Adapt to lower return on investments

10 things to watch

2016: Technical trend

Global growth and flows

Investment, savings & consumption

Corporate earnings & valuations

Market outlook

Tuesday, December 29, 2015

Investment Strategy 2016 - 7: Market outlook

Thought for the day

"There is no need to do any housework at all. After the first four years the dirt doesn't get any worse."

—Quentin Crisp (English, 1908-1999)

Word for the day

Abdominous (adj)

Having a large belly; potbellied.

(Source: Dictionary.com)

Malice towards none

Akhand Bharat, as apolitical entity was created by whom and when? And it stayed so Akhand for how long?

First random thought this morning

After South India, now cities in north England and South America face unusual floods. Mother Nature is certainly happy with the way this world is growing. We shall continue to face Mother's angst, if we do not mend our ways ASAP. If past five years are a trend 2016 should see even worst of Mother Nature.

I guess, Paris climate agreement needs to become a substantive accord to please Mother Nature and not just remain a piece of diplomatic hypocrisy.

Investment Strategy 2016 - 7: Market outlook

Unlike past couple of years, this year portending a clear market outlook is much tougher. In December 2013 the greed was a dominating factor as the market was well supported by rising global liquidity and ZIRP and pregnant with hope of a new dawn. In December 2014 the fear was clearly overpowering greed. Global weather was wet and windy as QE began to taper, China's slip became conspicuous and indubitable leading commodity world to crumble; and in domestic arena also skepticism began to grow as the things did not appear working out as expected.

Today as we stand at the exit point of 2015, most fears have come true. The markets, especially commodities, seem to have mostly adjusted to the worst case scenario. Given this, normally the greed should be the dominating factor. Looking at internals of the domestic market movement in past quarter or so, it indeed appears to be so.

However, the global narrative continues to be worrisome. The entire commodities' space looks rather hopeless. There is general consensus that USD strength consequent to end of Fed's ZIRP regime and likely CNY devaluation will add to deflationary pressure. The Eurozone yields and ECB and BoJ stance also appears to be subscribing to this likelihood.

Seesawing between hope of recovery gathering some steam and fear of a global meltdown, outlook for 2016 remains sketchy. In my view, we will have intermittent phases of grey and sunshine during the year and trading short term cycles will be the dominant theme.

The forces of Fear are likely to get fresh ammunition during 2016 with the disinflationary impact of stronger USD and higher Fed rates taking roots, EU and Japan continue to flirt with recession, commodity universe continuing to sink and the impact of fall in commodity prices begins to reflect on global financial system.

Like before, many battles of this ongoing global war will be fought in India too. Indian politicians continue to side with the Fearful, providing them with enough ammunition and food to survive.

The forces of hope may get traction from the policy reset in India becoming tangible. The investors’ sentiment at present is positive about the cyclical recovery. Investor positioning and market internals are clearly pointing towards that. The market implied volatility, volumes and breadth continues to remain low. The volume concentration in top 25 traded stocks is close to all time high.

I am not too excited about a conventional cyclical recovery in 2016. Cost efficiencies, productivity gains and ground breaking for some of the prominent FDI projects in manufacturing area would create excitement in market. Staple consumption could be supported by higher urban wages and normal rural income (assuming a normal monsoon). Export demand may continue to remain sluggish.

Also Read

Adapt to lower return on investments

10 things to watch

2016: Technical trend

Global growth and flows

Investment, savings & consumption

Corporate earnings & valuations

Monday, December 28, 2015

Long equities - short gold

Thought for the day

"The formula for achieving a successful relationship is simple: you should treat all disasters as if they were trivialities but never treat a triviality as if it were a disaster."

—Quentin Crisp (English, 1908-1999)

Word for the day

Munificence (n)

Generosity, benevolence

(Source: Dictionary.com)

Malice towards none

Shocked by the PM Modi's Lahore surprise, Indian opposition leaders make demented comments.

First random thought this morning

In past senior political leaders from other States, especially UP, Bihar, Haryana and Tamil Nadu have used much vulgar language than AAP leaders in Delhi.

It would therefore be inappropriate to credit AAP for lowering the level of political discourse.

Long equities - short gold

Over a 10yr timeframe Indian equities have outperformed most financially tradable asset classes, except gold. Apparently gold has outperformed, but adjusted for duty element, gold would also underperformed equities.

The point of interest here is whether over next couple of quarters, this outperformance will continue or we may see commodities or USD outperforming Indian equities.

From the following chart of relative performance it appears that it might be little early to initiate long commodities short equities trade, but a relative trade might still exist in short gold vs long equities.

Thursday, December 24, 2015

Investment Strategy 2016 - 6: Corporate earnings & valuations

Thought for the day

"We sometimes congratulate ourselves at the moment of waking from a troubled dream."

—Nathaniel Hawthorne (American, 1804-1864)

Word for the day

Schmuck (n)

An obnoxious or contemptible person.

(Source: Dictionary.com)

Malice towards none

Imagine the bedlam (intolerance) that would ensue if some Indian male politician uses Trump's language for a female politician!

First random thought this morning

The indignation over release of the juvenile culprit in infamous Nirbhaya rape case if baffling. The unmindful social media 'forwards' imply that the public is manifestly agitated and anguished. It is not only challenging the primary tenets of classical jurisprudence but also holding a distinct preference for the savage "eye for an eye" law.

The moot point is that if we completely reject the reformative aspect of punishment, we may need to isolate (or eliminate) all sentenced criminals for whole life, irrespective of the severity of their crime. And what about those who could not be sentenced due to poor evidence or inefficiency of prosecution.

Investment Strategy 2016 - 6: Corporate earnings & valuations

The Indian businesses are passing through interesting times, and there is nothing to suggest that the conditions will change in next couple of quarters at the least.

A multitude of challenges and opportunities present for Indian businesses makes the task of forecasting a trend in earnings extremely difficult. In particular, the following factors appear to be creating material uncertainty for Indian businesses:

(a) The policy environment is in state of flux. Ideally, the direction will be towards further opening of the economy to global capital, technology and competition. Save for a total failure of political establishment (not likely), we may see more and more global players dominating the Indian industrial space in near future. Influx of foreign competition in services sector may be rather gradual and partial. This may make many large Indian corporates operationally uncompetitive, financially unviable and technologically redundant. On the other hand many smaller niche businesses that can potentially play a supporting role to global players can see substantial growth in their businesses.

(b) The global competition may materially impact the margins of domestic businesses, for example due to (a) erosion of pricing power; (b) higher investment in technology and therefore lower ROCE; and (c) higher compliance cost due to adoption of best global business practices.

(c) If the rout in global commodities continues, the earnings of many businesses would be impacted, at least in nominal terms. Moreover, economic turbulence in commodity economies, which incidentally happen to be largest export destinations for Indian businesses, may impact the export demand also.

On the positive side, the structural reforms initiated by the government may lead to lower cost for many businesses. For example, the success of Jan Dhan and DBT schemes could materially lower cost of funds for banks.

Easier FDI and ease of doing business norms could bring in unprecedented capital and intellectual property igniting a virtuous cycle of economic growth that would be much stronger and sustainable than the easier credit led growth cycle of 2000's.

For limited purpose of ST (one year) investment strategy, I would assume 10-12% earnings growth for CY2016, and believe most of it will be back-ended.

At this point in time there is little argument for re-rating of Indian equities, as these still enjoy premium (deservedly so) over EM peers. However, the premium may grow larger in later part of the year if execution improves and domestic demand pick up post a good monsoon.

Also Read

Adapt to lower return on investments

10 things to watch

2016: Technical trend

Global growth and flows

Investment, savings & consumption