Do it yourself

Wednesday, April 6, 2016

Rajan brings QE to India

Thought for the day

"To a philosopher all news, as it is called, is gossip, and they who edit and read it are old women over their tea."

—Henry David Thoreau (American, 1817-1862)

Word for the day

Pugnacious (Adj)

Inclined to quarrel or fight readily; quarrelsome; belligerent; combative.

(Source: Dictionary.com)

Malice towards none

CPM almost ended UPA-I by withdrawing support over civil nuclear deal.

A. Raja and Kanimozhi of DMK dented the image of UPA-II government so badly that Congress is reduced to just 44 MPs in Lok Sabha.

Now Congress is joining these forces as minor partner in state polls.

Rahul Gandhi was talking about some ideological warfare in Assam!!!

First random thought this morning

A large part of foreign investments in India comes through "tax friendly" jurisdictions like Mauritius. We all know it well that not all this money is dirty.

Likewise, many Indian businessmen may have invested money overseas by routing it through "tax friendly" jurisdictions like BVI. Not all this money is illegal.

So why are we so excited over Panama leaks? Are we further degenerating into an agitating society, from an argumentative one?

Rajan brings QE to India

Governor Rajan once again performed a perfect balancing act. He pleased almost everyone - the bankers, the government, the traders and the analysts.

Like before, there were many things which were not said in the policy statement made by the governor but were too obvious for anyone to infer. Some of the more prominent "between the lines" things were as follows:

(a) The governor Rajan added his two cents to the global QE program by announcing reversal of RBI's stance on market liquidity.

It is important to note that for some time now RBI has kept the system liquidity in deficit mode, with an average liquidity shortfall equivalent to one per cent of banks’ NDTL. The rationale has been that the banking system would borrow from RBI liquidity facilities, ensuring that the repo rate become the effective ST money market rates.

Reversing this stance, RBI has now announced that it will bring the system liquidity to neutral position within a year. This could be done through open market purchases of government securities and foreign currency.

This should ensure that (i) the NRI deposits raised in 2013 and due for redemption later this year are redeemed without any material impact on INR exchange rate; and (b) the additional government borrowing for meeting pay commission and OROP payments and public investment happen at reasonable rates, without disturbing the bond market much.

What it also means is that RBI is now more confident of the effectiveness of the policy rates, which in its view are now trending down.

(b) RBI is also quite realistic on inflation targets and anticipates supply side constraints to prevail, despite good monsoon and continued global deflation. It may be a good news for corporates as pricing power may return to them soon.

(c) Despite all political rhetoric, RBI has been realistic on growth projections. The governor has maintained that the growth will remain close to 7.5% even next year, assuming a normal monsoon.

This means that RBI believes that the higher public sector investment demand (defence, railways, roads, et. al.), and private consumption demand (pay commission, OROP, good monsoon) will just be enough to compensate for the poor external sector demand.

(d) The effective easing is much higher than the headline 25bps cut in repo rate. MSF rate has been effectively cut by 75bps and reverse repo is higher by 25bps. Also there is an effective concession of 5% in net daily CRR obligation. This shall bring the overnight and short term rates materially lower, thus transmitting the easing almost immediately.

(e) RBI has virtually announced OTC new bank licenses. The market in past has given huge premium to the likely candidates for new license. That anomaly now ends

Tuesday, April 5, 2016

Strategy

Thought for the day

"It is not enough to be busy. So are the ants. The question is: What are we busy about?"

—Henry David Thoreau (American, 1817-1862)

Word for the day

Nimiety (n)

Excess; overabundance. E.g., nimiety of mere niceties in conversation.

(Source: Dictionary.com)

Malice towards none

Will Congress both Assam & Kerala; and with that the claim to be a National Party?

First random thought this morning

Five key takeaways from the recently concluded T20 World Cup: (a) The shortest version of the game is inarguably the benchmark now (purist may please excuse me); (b) West Indies has definitely re-emerged as a major force in the international cricket (Is basketball declining in the Caribbean?) ; (c) Bangladesh has restored the balance in sub-continent, that got disturbed with decline of Pakistan (look forward to more bi-lateral business with the eastern neighbor as Mirpur emerges as new Sharjah); (d) Afghans are strong and look natural at the game (get some of them in IPL); (e) India will have tough times ahead.

These views are personal and very strong. Arguments are not welcome.

Strategy

Continuing from last week (see here and here) I would like to share my thoughts on the investment strategy for the likely next economic and therefore market cycle.

I have mentioned it earlier that in my view this cycle is likely to be much longer both in terms of time duration as well the distance benchmark indices would be covering through the cycle.

(a) Consumption will remain the dominant theme in my equity investment portfolio. However, I would focus more on consumable services, e.g., telecom, transportation & logistics, health, education, organized retailing, entertainment, banking etc.

On product side, I will continue to focus on discretionary products, especially aspirational one.

The complication here is that while the strategy may sound good for academic discussions, there are few actionable ideas to implement the thoughts.

There is no denying that on society level, we are still not used to pay for services. The cases of complaints and agitation against free (or very cheap) non-basic services are not uncommon. Given this complication, there are very few private service providers of some scale. These service providers are (a) either expensive (being in short supply) or unviable (due to overregulation).

I would look at some market leaders in retailing, entertainment, service oriented banking, transportation & logistics, and healthcare sectors.

On product side, I would like to focus on aspirational products like lifestyle drugs, beer, premium liquor, household upgrade (lighting, tiles, plywood), luxury housing, premium automobile, packaged food (non-basic), etc.

(b) Technology will also remain a core theme in the portfolio. However, focis will be on innovators, designers, and engineering services. I would mostly avoid body shops.

(c) I would completely avoid SME players in industry and construction space, unless they own some niche IPR or designing capabilities.

(d) Global inflation trade shall be back during this cycle. A balanced portfolio would therefore require commodities to be included. I am inclined towards commodity processors rather than resource owners at this point in time. For resources, in due course I would prefer to trade directly in respective commodities, rather than buying the equity in the resource owner.

(e) A stable INR and rate regime may guide this economic cycle. I therefore do not see any material investment opportunity in currency and bond markets. Though there might arise occasional trading opportunities.

Monday, April 4, 2016

Nifty: Near term hurdle at 8K, midterm path clear

Thought for the day

"Wealth is the ability to fully experience life."

—Henry David Thoreau (American, 1817-1862)

Word for the day

Insouciant (Adj)

Free from concern, worry, or anxiety; carefree; nonchalant.

(Source: Dictionary.com)

Malice towards none

Do you think, like jewellers, the cigarette manufacturers are also fighting a lost battle?

First random thought this morning

The first sub Rs5 bidding for solar power bidding in India by American SunEdison was celebrated by the government a few month ago. Later, the company sought an exit from the project it had bid for. The same SunEdison has now filed for bankruptcy.

One Enron had materially damaged Indian banking industry in 1990s. Do we another one?

Nifty: Near term hurdle at 8K, midterm path clear

Supported by huge FPI buying, Nifty ended the month of March materially above its earlier resistance of 7610 on monthly charts. This confirms the market trend reversal on midterm basis.

Nifty faces a strong resistance in 7925-7960 range in the near term. A monthly close above this range will set Nifty on course for new highs.

A sustained monthly close above 7960 shall see Nifty testing its new cyclical peak of 13200 in the next following 39 months.

From midterm perspective a very strong bottom is in place in 7215-7550 range. Any intermediate fall to this range may provide an opportunity to create large leveraged long positions.

Friday, April 1, 2016

Strategy for the detour

Thought for the day

"In general, pride is at the bottom of all great mistakes."

—John Ruskin (English, 1819-1900)

Word for the day

Hibernian (Adj)

Irish

(Source: Dictionary.com)

Malice towards none

Reportedly about 4000 uber rich people have moved overseas from India in 2015.

This has been a trend for past few years.

What could be the primary motivation behind this?

First random thought this morning

A recent visit to Uttrakhand was quite revealing. We could not find a restaurant in Dehradun, Mussoorie and Uttarkashi serving local food, while there were three in Mussoorie alone that served "authentic" Tibetan food. Despite a statewide ban on polythene, we saw most shops delivering goods in polythene bags. It was common to find heaps of plastic waste in Mussoorie.

The local people were completely passive to the political upheaval in the state. The extant Chief Minister does not seem to be enjoying popular support at all.

Strategy for the detour

As I mentioned yesterday (see here), instead of taking the Classical path to economic cycle recovery, the Indian economy is apparently taking a detour. This makes the task of formulating an appropriate investment strategy very complex. Investors' need to take this challenge and make necessary adjustment in their investment strategy.

The market trend of past few months is indicating a clear shift from non-cyclical pharma, FMCG, and IT to cyclical banking, infrastructure, industrial etc. This shift, in my view, is following the classical economic recovery fashion and therefore per se might not be appropriate to the circumstances.

I strongly feel that instead of taking a conventional cyclical vs. non-cyclical approach, investors should follow a pure bottom up approach in selecting individual investment instruments, be it equity, fixed asset, real estate or any other asset class.

The following factors in particular be helpful in selecting stocks.

(a) Consumption demand of services is rising much faster than the demand for consumer products. Demand for services like telecom, transportation & logistics, health, education, organized retailing, entertainment, banking etc. is growing much faster than the demand for food and clothing.

(b) Foreign capital & competition are essential to the cyclical recovery. Though the stated policy is to encourage local manufacturing, it could only be achieved if larger and efficient global firms are allowed to operate rather freely in the country.

This shall particularly cause serious disturbance in the domestic industrial space. The inefficient and inadequately capitalized players will definitely get eliminated in due course. In my view, they will not get much opportunity to reinvent themselves as the destruction may occur at an unprecedented speed and scale.

(c) Middlemen who have so far played a key role in the conduct of trade & commerce in the country are being replaced by technology. Besides, the trend in regulatory evolution is also palpably anti-middlemen.

This is resulting in lower cost of selling and distribution for the producers. The benefits of this lower cost are being enjoyed by a wider section of the society, including consumers (lower prices), workers (better employment terms), and government (improved revenue collection).

(e) Wider redistribution of wealth and material rise in purchasing power at in the lower half of the demographic pyramid is the foundation of the recovery.

(d) Technology is also at the core of economic recovery.

...to continue next week

Thursday, March 31, 2016

A detour to economic recovery

Thought for the day

"Nothing can be beautiful which is not true."

—John Ruskin (English, 1819-1900)

Word for the day

Ostentatious (Adj)

Characterized by or given to pretentious or conspicuous show in an attempt to impress others

(Source: Dictionary.com)

Malice towards none

One of the accused in infamous Sheena Bora murder case - Peter Mukerjea is reportedly selling his house to pay for his legal fees.

This is certainly not an isolated instance. There are hundreds of litigants who have to sell their house, land, organs and even family members to pay for legal fees. Unfortunately, many of them still do not get justice!

First random thought this morning

I could not help noticing that after rattling that world markets for better part of past 12months, "China" is gradually disappearing from front pages and top headlines.

I am unable to decide whether "China" has cease to be a concern for global economy; or it's a strategy of Chinese authorities to keep low profile and carry out necessary corrections; or the global markets are just playing ostrich to the Chinese threat; or it's just a temporary pause before Chinese concerns again start dominating the headlines!

A detour to economic recovery

In a classical economic recovery (a) consumption rises, usually led by rise in wages and/or lower interest; (b) prices rise as demand growth outpaces supply; (c) demand for investment rises as producers rush to create additional capacities; and eventually (d) employment rises leading to further rise in consumption.

Whereas in a pump primed recovery driven by government stimuli, rise in employment leads the cycle. To begin with usually the rise in employment is at the cost of productivity. Hence, if the rise in employment induced by fiscal incentives fails to kick start the virtuous cycle of income—consumption—investment—income, there is a risk of economy getting pushed even deeper into slowdown. In past one decade we have seen beginning of the pump primed virtuous cycle, albeit at a lower trajectory. But the effort has so far been futile in Europe and Japan.

Now coming to Indian economy. Arguably an economic turnaround is taking shape here. Though these are still early days, but I strongly feel that the recovery is not taking the Classical path. More importantly, severe fiscal constraints and unsupportive external environment may not allow the recovery to be materially pump primed.

In my view, the economic recovery in India is taking a detour to the Classical path. Some of the key highlights of the recovery, as I see it, are as follows:

(a) The consumption level in the economy is rising, but it is not rising in the classical Maslow's evolutionary style. The consumption rise is more aspirational in nature. Accordingly, the demand for services is rising much faster than the demand of products. The capacity addition therefore is more likely in "seats" rather than "machines".

(b) Productivity gains are likely to play major role in the growth. The recovery may therefore not result in creation of much real assets.

(c) Faster and wider redistribution of wealth is the key underlying theme of the growth strategy. Higher taxation, exploitation of high savers through low or negative real rates, elimination of middlemen, and higher social sector spending will be amongst the key features of the growth cycle.

The good part is that efficient social sector spending (minimum leakages in subsidy distribution, emphasis on building quality human capital through better education, health and training) shall add to productivity gains achieved through better use of technology and management of redundancies.

The flight of capital is a real risk in the short term as the rich try to protect their wealth from being snatched by an aggressive regime. But I am not worried on that count. I feel that the new businesses will generate enough resources to compensate for the withdraal by traditional businessmen. Besides, foreign capital will also be encouraged by an open, transparent and receptive regime.

I shall discuss the investment strategy implication of this scenario in coming days.

Wednesday, March 30, 2016

"To cut or not to cut" is not the question

Thought for the day

"Punishment is the last and the least effective instrument in the hands of the legislator for the prevention of crime."

—John Ruskin (English, 1819-1900)

Word for the day

Wordmonger (n)

A writer or speaker who uses words pretentiously or with careless disregard for meaning.

(Source: Dictionary.com)

Malice towards none

Any guess why "112" has been chosen as "911" of India?

My take - It might be the extension number of the PS to TRAI chief, the authority that has suggested this as the national emergency number.

First random thought this morning

One business that is flourishing these days is the business of "likes" on social media.

A chance meeting with some professionals, who provide "likes" and "followers" on social media on payment basis, informed me that after politicians, the religious gurus are the second largest users of their services. This group of three IT professionals claimed to be providing services to at least 12 gurus frequently appearing on various TV shows and public functions. They were elated to note that the top BJP leadership has recently provided them a huge business opportunity in UP!

Tuesday, March 29, 2016

Make hay when sun is shining!

Thought for the day

"The higher a man stands, the more the word vulgar becomes unintelligible to him."

—John Ruskin (English, 1819-1900)

Word for the day

Skullduggery (n)

Dishonorable proceedings; mean dishonesty or trickery; bribery; graft; an instance of dishonest or deceitful behavior

(Source: Dictionary.com)

Malice towards none

India could simply blame Pakistan for every act of terrorism on her soil.

But it's not easy for Pakistan.

In fact, in most cases, Pakistani establishment may end up blaming itself for the act of terrorism on their soil.

First random thought this morning

It has been a usual practice in India to put pictures or idols of Gods in staircase and on outside walls of properties to dissuade passerby from spitting and urinating on the walls.

I find a similar pattern in invocation of names of Ambedkar and Gandhi by the politicians these days. These two names are being frequently (mis)used to dissuade any kind of opposition to their respective ideas and arguments.

The funny part is that since no one appears to be an actual believer in strength of this Shield, they may not be using it when needed most.

Make hay when sun is shining!

In spring of 1992, soon after completing my education and training, I had my first tryst with the world of trade & commerce. It was the time when PVNR led government had just begun to unshackle the Indian economy from the clutches of pseudo socialist regime that worked under material influence of feudal lords and capitalist cronies. Many landmark events took place in the ensuing years.

I would in particular like to highlight three of those events - (a) Private competition for the civil aviation monopolies Air India (Overseas) and Indian Airlines (Domestic); (b) Private competition for the twin telecom monopolies MTNL (Delhi & Bombay) and BSNL (Rest of India) and (c) Private competition for monopoly fund manager UTI.

How these monopolies ended in ruins is there for everyone to see. BSNL that was reportedly valued at Rs1trn as late as 2007, is a cash guzzler today, so is MTNL and Air India. UTI survives in a miniature version of its old self.

In the events of past 2-3years, I see 1992 occurring all over again.

· Private competition in power equipment manufacturing is diminishing the stature of public sector behemoth BHEL. The day may not be too far when this cash cow will start reporting loss and guzzling cash.

· The commercial mining of coal is being experimented in a small way. I do not see why Coal India should not go the MTNL or Air India in next 10-15yrs, given its bloated cost structure, strong unions, bureaucratic management setup and peaking demand for coal as a preferred fuel.

· The government is making sincere efforts to boost local production of defence equipment by engaging domestic and foreign manufacturers. This will seriously undermine the dominance of companies like BEL and BEML.

· It may look little farfetched at this point in time, but I do not mind imaging demise of public sector banks from number 11 to 27 in next two decades. (I am leaving the top 10 just out of the fear that my readers may find me insane and stop reading further.)

The point I am trying to make that the government and trade unions (IDBI union please note) need to draw a lesson from the past experience.

The government should seriously consider selling larger stakes in these large institutions and let these reinvent themselves to stay competitive in the evolving scenario where global competition in domestic markets is going to intensify manifold.

The trade unions should actually be asking the government to initiate steps to professionalize these valuable institutions to safeguard the future of their kids. They need to realize and accept that by resisting the change they can save their jobs (with no growth whatsoever). But by adapting to change they can seek growth in their career and ensure a better future for their future generations.

Monday, March 28, 2016

Nifty: Preparing for the next market cycle

Thought for the day

"The essence of lying is in deception, not in words."

—John Ruskin (English, 1819-1900)

Word for the day

Amaranthine (Adj)

Unfading; everlasting

(Source: Dictionary.com)

Malice towards none

AK makes to Fortune's 50 greatest!

What does this reflect?

First random thought this morning

All appears well and the country has moved on. MSD has regained his mojo. We have got a new God in Virat Kohli. Mehbooba has finally yielded to the charm of PM Modi. Rahul Gandhi has proved his nationalistic credentials by playing Holi and dispelling rumors of his British citizenship. Shashi Tharoor has stormed the social media. NaMo is now following AK. Most important, no one bothered to report who played (and who did not) Holi with LKA.

Nifty: Preparing for the next market cycle

As I have been insisting for past few weeks, Indian markets have completed the market cycle that started on 28 August 2013. The cycle started from Nifty 5285 level (closing), peaked at 8922 on 04 March 2015, and ended on 29 February 2016 at 6987 Nifty level.

The cycle was one of the smaller ones, both in terms of time period and the distance covered. I expect the next market cycle to be the largest one yet both in terms of time period and the distance covered.

However, as of today, the market appears to be in no hurry to announce beginning of the new cycle. I would say the market is presently witnessing some nice sunny days in the winter.

It is difficult to say whether we would get some wet, chilly and grey weather before the spring arrives. But I would not lower my guards. I would rather stock up dry wood, keep my woolen stuff ready and carry my umbrella and fur coat even during warm sunny afternoon stroll in the market.

Simultaneously, I would be preparing for the spring as well. I shall diligently plough the fields, buy good seeds that would blossom into colorful fragrant flowers and sweet & juicy fruits in spring time.

Though I have not yet fixed my tryst with the spring, I expect this to take place sometime in next 4-5months.

In the meantime, I do not expect Nifty to fall below 7200 level, with a 50% probability of it not falling below 7490 level.