Do it yourself

Friday, October 7, 2016

"Beginning of the end" or a "New beginning"

Thought for the day

"Man never thinks himself happy, but when he enjoys those things which others want or desire."

— Alexander Pope (English, 1688-1744)

Word for the day

Potboiler (n)

A mediocre work of literature or art produced merely for financial gain.

Malice towards none

Congress is desperately trying every trick in the trade to stay relevant in UP.

Genuflecting to Ms. Mayawati is perhaps the only thing left!

First random thought this morning

The online retailers are joyously claiming huge growth in sales this season. Their offline counterparts are echoing their sentiments.

This may therefore be a case of some shift of customers from off-line to on-line; and not necessarily reflect the growth in consumer spending.

Regardless, the customer is benefitting from lower prices and manufacturers may also benefit from lower sales and distribution expense. The retailers in both the worlds may end up funding the Diwali of producers and consumers:)

"Beginning of the end" or a "New beginning"

Global asset prices have been all over the place in past three months; diverging materially from mean in some cases. For example consider the following:

(a) After rising 8% from the lows of Brexit vote (US$1256/oz) gold prices have fallen to the same level. (Some analysts are now suggesting that it may still be overvalued by 20-25%, (See here)). Base metals like copper have also seen similar trends.

(b) After falling 20% in July (~US$42/bbl) from highs of early June (~US$52/bbl), the Brent crude prices and are almost back to those levels.

(c) The benchmark 10yr US treasury yields fell 25% from highs of June (~1.84%) in July (~1.36%) and have recouped most of the ground since.

(d) Equity prices have seen a wider divergence. Nasdaq (~10%), FTSE (~9%), Nikkei (~10%), Hang Seng (~16%) have seen material gains in past 3months; while most EM indices (including) are higher by 3-5% in this period. S&P5001 and Dow Jones are up just ~2% in past 3months.

(e) Currencies have also seen a wider and diverging movement against USD. While EUR and CHF are almost flat, GBP has depreciated materially and JPY has appreciated. CNY has depreciated ~1.5% and INR has appreciated ~1.5% over this period.

It is easy to guess that the life of most market participants traders must have been quite challenging and less rewarding in this period.

If someone asks me, I am completely at loss in understanding the reasons behind such volatility and divergence. However, I must say, I am clear about the following three things:

1. The conditions (including policy narrative) that have prevailed since collapse of Lehman Brothers in autumn of 2008, are set to change in next few years. You may call it "beginning of the end" or a "new beginning", as you like.

2. The central bankers have propped up many a bubbles in the global markets since 2008 - including in currencies, gold, bonds and equity markets (more on this next week). The major challenge therefore would be to deflate this bubbles in an orderly fashion.

I am unable to lay my hands on any empirical evidence of such orderly deflation of a bubble. Nonetheless, I accept that all things once happen for the first time.

3. The geo-political realignment shall have a role to play in the "next global market era." I am inclined to order some cold war era books (both fiction and non-fiction) to get some guidance as to how the global markets may look like in next 20years. As things stand today, India seems set to play an active role this time (Nehruvian legacy of non-alignment has been given a quiet burial).

Thursday, October 6, 2016

Show me the evidence

Thought for the day

"Some old men, continually praise the time of their youth. In fact, you would almost think that there were no fools in their days, but unluckily they themselves are left as an example."

— Alexander Pope (English, 1688-1744)

Word for the day

Understory (n)

The shrubs and plants growing beneath the main canopy of a forest.

Malice towards none

First random thought this morning

For past many days, the front page of my news paper starts from page 5 or page 7 and its usually a half page in width.

The notions like Front page, main headline, Page 3 have all lost their meaning. "Discount" is the key operative word these days. I heavily discount whatever people want to "sell" or 'tell" me.

Show me the evidence

These days everyone in India suddenly seem to have become rationalist - a trait not usually associated with us. Everyone is seeking evidence before believing in something! Whereas in recent history, the world has known us as an emotional society driven by utmost (read blind) faith in everything that cannot be explained rationally.

Post independence there have been some famous cases of evidence seeking. But in most such cases the inquisitors were in insignificant minority. For example, someone wanted evidence of Lord Ram having been born in Ayodhya. Some other wanted evidence of the bridge constructed over Indian Ocean by the Lord's army to reach Sri Lanka. Many have been seeking evidence of the death of Neta Ji in plane crash many decades ago. There is a section of people who wants more evidence to believe the official version of the death of Lal Bahadur Shastri and Shayma Prasad Mukherjee; etc.

Nonetheless, most of these pursuit of evidence have been confined to drawing rooms, club tables or court rooms. Rarely did it become a rage. However, in past one decade, evidence seeking has assumed much wider spectrum. In my view, it all started with some people coercing others to provide evidence of their secular, patriotic and nationalistic credentials by chanting Bharat Mata ki Jai, wearing skull cap, not eating beef, not posing for magazine covers in Ram Lila attire, etc.

Given the rich political dividend this pursuit of evidence has yielded in past 5years, its spectrum has naturally expanded. People have asked the PM evidence of his educational qualification. Now people are even asking evidence of military operations!

Unlike many studio experts, I have no issues with Chidambarams, Digvijays, Kejriwals and Nirupams of the world. These people will remain relevant till the time a typical Indian male does not start watching and admiring Kim Kardashian, Sunny Leone, Poonam Pandey et. al. without any hesitation and/or sense of guilt.

Nonetheless, as distracted and exasperated as I am, I would also like to join the army of legendary evidence seekers and ask:

(a) Mr. Arvind Kejriwal - "You say AAP government in Delhi is the only corruption free government - what is the evidence?"

(b) Mr. Sanjay Nirupam - "Your leader Mr. Rahul Gandhi has promised full loan waiver and 50% cut in power tariff to the farmers of UP. Please provide evidence of the sources of funds that he proposes to utilize for fulfilling his promise."

(c) Mr. P. Chidambaram and Mr. Digvijay Singh - "Please provide evidence to the effect that in 10yrs of UPA government Indian Army/RAW never violated the ceasefire at LoC; did not carry out any surgical strike; or supported rebels in Baluchistan as regularly alleged by Pak authorities and media."

(d) Mr. Nana Patekar and Thackeray family - I fully agree all Pakistanis should be declared persona non grata. "Please define who is a Pakistani for the convenience of authorities who will implement this plan."

Wednesday, October 5, 2016

Accommodation is the word

Thought for the day

"The same ambition can destroy or save, and make a patriot as it makes a knave."

— Alexander Pope (English, 1688-1744)

Word for the day

Gale (n)

A very strong wind.

Malice towards none

Heard an IT Commissioner issuing an open challenge - 'Those who have avoided paying 45% will definitely end up paying 60% (30% tax and penalty @100%, i.e., another 30%)!

First random thought this morning

Why Arvind Kejriwal is important to Indian media?

He is obviously the least powerful, and therefore least important, of the 31 chief ministers in the country.

Why is it so that the national media, especially electronics, considers it important and necessary to highlight whatever he says or does?

In Delhi or Mumbai, did you bother to know what Pawan Chamling, Okram Ibobi Singh, Lal Thanhawla or Mukul Sangma have to say on the surgical strikes on Pakistan?

Accommodation is the word

The Monetary Policy Committee of RBI made its first policy statement yesterday. On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 per cent to 6.25 per cent with immediate effect.

Overall the Committee sounded neutral on the macroeconomic and monetary conditions and very accommodative, as it expected the domestic momentum to get somewhat offset by the global slowdown.

The Committee said, "The momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award. The accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors. The continuing sluggishness in world trade and smaller terms of trade gains than in the past point, however, to further slackening of external demand going forward. Accordingly, the projection of growth of real gross value added (GVA) for 2016-17 is retained at 7.6 per cent, with risks evenly balanced around it."

In this context it is pertinent to note that the rating agency CRISIL in its latest report has observed material improvement in the credit quality of Indian companies during 1HFY17. As per the rating agency, for the first time in the last 10 semi-annual periods, the number of debt upgrades outnumbered the number of debt downgrades. The ratio for 1HFY17 stood at 1.2 compared with 0.8 2HFY16.

The report highlights that there were 646 upgrades to 553 downgrades in the first half. Upgrades were concentrated in the domestic consumption-linked sectors such as auto ancillaries and packaging, and in the exports-linked pharmaceutical sector. On other hand, downgrades were mainly in the investment-linked sectors such as construction, industrial machinery, real estate and metals. Financial (capital structure, debt protection and liquidity) and business (demand, profitability and working capital cycle) reasons contributed equally to rating actions.

CRISIL forecasts the overall ratio to stay above 1 in the near term led by an expected rural leg-up to private consumption following a near-normal monsoon. However, the agency warns that the debt downgrades in value terms are expected to be more in the second half because of continuing pressure on the investment-linked sectors.

In view of the rating agency the investment cycle is yet to pick up, there hasn't been a material deleveraging in corporate balance sheets, and weak assets continue to mount in banking. The focus therefore has to be on the sustainability of this improvement in credit ratio.

Tuesday, October 4, 2016

Gather amunition before the war begins

Thought for the day

"And, after all, what is a lie? 'Tis but the truth in a masquerade."

— Alexander Pope (English, 1688-1744)

Word for the day

Knave (n)

An unprincipled, untrustworthy, or dishonest person.

Malice towards none

Is our fight with Pakistan or Pakistanis?

And have we already defined who is a Pakistani?

First random thought this morning

I have not heard anyone who seriously believed that the latest Indo-Pak standoff could actually escalate into a full-fledged war.

I am therefore totally unable to explain the losses in financial markets on last Thursday.

I suspect it could either be a case of foul play or something serious taking shape in the womb of time that will be revealed in due course.

Gather amunition before the war begins

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.

The analysts and economists have been arguing against any decision to cut repo rate in today's MPC meet. However, the bond traders and investors appear convinced of a rate cut.

This dichotomy is not unprecedented. Rather it is very common during periods when the monetary policy is expected to play an aggressive role in the overall macroeconomic conditions. Usually it occurs closer to the peak and troughs of the rate and economic cycles.

More often the traders get it right. However, whenever they are wrong, the losses are huge. Whereas economists and analysts usually have not much to lose, should their expectations not materialize.

Though as usual I would avoid speculating what MPC statement to be released later in the day will read like; in the current instance, I would wish that a 25bps cut in repo rate is done in each of next three MPC meetings, beginning today.

This is nothing to do with the FM, industry or traders urging for a rate cut. I intuitively believe that under the current circumstance it would be the right thing to do. For example, consider the following:

(a) BoJ in its last policy statement has indicated that the current monetary policy direction may have lost its utility and a change would in the order. It is likely that US Fed may hike the key policy rates in next 3-6months, reversing its stance taken since December 2015. Some other key central banks may also be forced to change their current policy stance in 2017.

The immediate impact of such changes on global economy and market is unpredictable, thus higher volatility is likely, especially in the currency market.

Under the circumstances it might be desirable for RBI to create some policy cushion for defending INR and attracting higher flows by raising rates. This cushion is almost absent currently, in my view.

(b) The rate cut today will come at almost no cost as inflation outlook has improved materially; with IDS, disinvestment and spectrum sale the fiscal balance appears supportive of lower rates; economy is far from heated and with real estate market is at bottom no bubble is floating around. To the contrary, a rate cut today will help banks repair their bleeding balance sheets and get prepared for the next credit cycle as well as for any crisis like situation, should the global conditions deteriorate rather precipitately.

(d) The demand outlook is improving with government willing to spend more. Lower rates will have the desired multiplier impact

Monday, October 3, 2016

Nifty: tighten your belt

Thought for the day

"Lulled in the countless chambers of the brain, our thoughts are linked by many a hidden chain; awake but one, and in, what myriads rise!"

— Alexander Pope (English, 1688-1744)

Word for the day

Sublime (adj)

Complete; absolute; utter; supreme or outstanding.

Elevated or lofty in thought, language, etc. e.g., Paradise Lost is sublime poetry.

Malice towards none

Have the surgical strikes in PoK by Indian Army taken the government beyond any criticism?

First random thought this morning

The farmers in the border areas of Punjab have been evacuated by the Indian Army for security reasons. Many of them have the crops standing ready for harvest.

I am sure the State will compensate for them adequately for the financial loss. But the loss of precious food grain will not get compensated.

Nifty: tighten your belt

As pointed out last week, in September the divergence between the MoM change in headline Nifty value and the change in MoM average traded value has widened to the largest since March 2016.

There is enough evidence to suggest that this divergence shall get minimized in the month of October. In simple terms it implies that Nifty shall move in a much larger range this month, mostly trading in the upper half of the range and perhaps settling around or below the average.

Given the present chart patterns and placement of momentum indicators, it appears that after a week of consolidation, we may see a sharp jump higher in Nifty, before it settles down little lower to end the month with decent gains.

At the same time, it is critical to note that the intermediate uptrend from the intraday lows of September (8555.20) could be the last such up move in the larger up move that started from February intraday low (6825.80).

I expect Nifty to record an intraday high between 9370-9410 in this up move that may last anywhere between 3-13 weeks. A 8-10% shall likely follow post the tryst with the new peak.

In short technically expect a 8-10% Nifty up move from the current level followed by a 8-10% correction; all in the next 6months.

Last week, Nifty has defended the 8606-8630 range (on closing basis) despite rise in momentum. This morning there is nothing to suggest that this support base will be broken meaningfully this week also.

Bank Nifty though is looking shaky. As suggested last week, I would continue to avoid banks for any short term trading.

Friday, September 30, 2016

Strategy

Thought for the day

"Gratitude is usually the secret hope of further favors."

—Francois de La Rochefoucauld (French, 1613-1680)

Word for the day

Lodestone (n)

Something that attracts strongly.

Malice towards none

Everyone gets to retreat back to barracks.

Indian Army can claim "We did it". Twiterrati can finally rest claiming "we are great". Politicians can submit ATR.

First random thought this morning

None of the members of the family of Mr. Bansal were co-accused in CBI's case.

Why even after 2days no process has been initiated against the CBI officers who allegedly drove them to death. Usually an FIR for abetment to suicide u/s 306 IPC is filed immediately on the basis of suicide note.

Is morality again overriding the legality?

Strategy

Based on the assumptions highlighted yesterday (see here), other strategy inputs that I have been sharing with the readers from time to time through this column, and market performance of the 1HFY17, my strategy for 2HFY17 and FY18 would be as follows.

It is pertinent to note, there are some key changes with respect to currency and rate outlook mentioned in my last strategy outline (see here) shared with readers in April 2016.

The strategy

(a) In the past one year, the government has shown strong resolve to afford a good deal of autonomy to the public sector enterprises (PSEs) which have been performing well. However, this resolve is yet to be tested in adverse circumstances, e.g., fuel pricing autonomy if crude price rise above US$80/bbl; or autonomy to banks if political considerations require loan waivers or sale of sick units if unions oppose the move etc.

For now, despite sharp outperformance of many PSEs, I would continue to avoid them. The exceptions could be couple of large banks and couple of other enterprises that may become irresistible due to short term business opportunities. (The change is from complete "no go" to surgical strike.)

(b) Consumption will remain the dominant theme in my equity investment portfolio. I would continue to focus more on consumable services - especially health, retailing, entertainment, and financing.

On product side, I would continue 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. (No change in this.)

(c) Technology & pharma will continue to be core theme in the portfolio. Focus will remain on innovators, designers, and engineering services. I would mostly avoid body shops and pure generic plays.

(d) Will begin to accumulate capital goods players (ex power equipment) and only niche EPC service providers.

(e) Would like to maintain a 5yr duration in my bond portfolio.

(f) Prefer USD exposure over EUR and YEN

(g) Mostly avoid commodity producers except cement.

(h) Lower return expectation from equity portfolio to 9-10% plus 1% dividend yield from earlier 11-12% plus 1% dividend yield.

(i) Will continue to avoid SME segment companies a and focus on upper end of the market, mostly BSE200.

Will divulge more in my regular Samvat strategy note later next month.

Thursday, September 29, 2016

Assumptions for Strategy

Thought for the day

"We have no patience with other people's vanity because it is offensive to our own."

—Francois de La Rochefoucauld (French, 1613-1680)

Word for the day

Eristic (n)

A person who engages in disputation; controversialist.

Malice towards none

How relevant are SAARC, NAM and Commonwealth in the present context?

First random thought this morning

Watched the video of presidential debate between Ms. Clinton and Mr. Trump. Three observations:

(1) None of the two candidates appear worthy of becoming head of the most powerful state in the world.

(2) The degeneration in the quality of the leadership might be reflective of the general state of American society itself.

(3) Whosoever wins, it will not make any difference to my life.

Assumptions for Strategy

Continuing from yesterday (see here), I may share with my readers the latest assumptions that would, inter alia, drive my investment strategy for next couple of years; and the key highlights of my investment strategy.

Assumptions

1. The monetary policy of most developed nations and meaningful emerging markets will continue to be accommodative till at least 2018; though there is no evidence available to suggest that BoJ, ECB, BoE, SNB, US Fed, PoBC and RBI etc. will need to materially tighten their monetary policy even after 2018.

2. US Fed fund rates may rise quickly and peak in 1.5-1.75% range by end of 2018. The benchmark treasury yields may have already bottomed and may rise to 2 peak in .75-3% range.

3. US GDP growth might peak ~2.5% by end of 2017 and decelerate thereafter as economic cycle sets in. India & China will continue to grow in 6.5 - 7.5% range supporting the aggregate growth for Asian region. EU, UK and Japan may continue to flirt with recession but may muddle through avoiding any major contraction.

4. Brexit may actually not materialize by the end of 2018. The uncertainties and delays might impact the business to some extent.

5. The global consumption of fossil fuels may continue to underperform the supply. Prices of the conventional energy may continue to remain around the current levels, or moderate a little more.

6. Global demand (both consumption and investment) may not rise materially to cause any inflation scare. However, inflation could surprise on the upside if currency & rate adjustments are not managed well and investors move in a herd away from financial assets and into physical commodities. Precious metals in particular may remain in favor.

7. Indian bond yields may bottom around 5.5-5.75% and stabilize close to 6.5%.

8. INR may move between 65-69/per USD. No devaluation either by China or India.

9. The capex cycle in India may finally begin between 2H2017 and 1H2018. Demand for capital goods, industrial credit and EPC services may see material improvement.

10. The consumption demand - especially luxury consumption, credit and construction material (cement, paint, tiles, sanitary etc.) - to become stronger. Residential real estate to bottom out and start picking up....to continue

Wednesday, September 28, 2016

Lower....sooner

Thought for the day

"The surest way to be deceived is to consider oneself cleverer than others."

—Francois de La Rochefoucauld (French, 1613-1680)

Word for the day

Bon mot (n)

A witty remark or comment; clever saying; witticism

Malice towards none

War with Pakistan - Seriously!

First random thought this morning

If we go by the media perceptions - US citizens are faced with a dilemma of choosing the best from two worst presidential candidates.

If I have any idea about the psychology of an average American, expect the voters' participation to be extremely low. Yes, avoiding tough decisions to the extent possible is a common American trait.

Lower....sooner

Some of my readers termed my yesterday post (see here) rather alarmist. I think, it needs some clarifications.

If the contention is that I am hinting at a major correction (10% or more) in the benchmark indices in near term, I must say, that is not the idea. My simple point is that there are early signs of global flows turning erratic in next few months. This capriciousness of flows may cause market volatility to rise materially, which I do not like.

Nonetheless, intermediate corrections in a larger market trend are normal and desirable. As of this morning, I do see the current trend peaking within 3-5% of the previous Nifty closing high of 8997 and correcting 7-10% from there. Such a correction would be healthy for the market and an opportunity to increase equity allocation for investors. I shall be sharing my strategy for preparing for the volatility, correction, raising equity allocation and leveraging the portfolio in subsequent posts.

Now coming back to where we left yesterday.

In my view, The US Fed would need to hike rates not for any conventional reason, e.g., to tame inflation or cooling down the overheating economy. This would be more to help pensioners and bring down the prices of financial assets (stocks and bonds) in sync with the economic reality.

In past five years, Fed has erred materially in estimating the growth of US economy. The realized growth since 2011 has been almost 50% lower than the forecast. Now, the long term median real GDP growth forecast is below 2% against over 3.5% in 2011.

The corporate earnings have been broadly following the macro growth trend. As per some estimates, S&P500 profit peaked in September 2014 and has fallen 19% since then. However, S&P value has continued to rise through multiple expansion. Currently S&P500 is trading at ~25x or close to bubble territory.

Similarly, the rally in US bonds is also beyond rational explanation. With the shrinking tax revenue, rising fiscal deficit and burgeoning public debt, the yields on US bonds may have some solid reason to move up.

The full employment theory of some Fed members might only be partially correct. An overwhelming majority of new jobs are reportedly part-time and contractual. Besides, the denominator is the 4.9% may not be reflective of the true position of workforce. A large number of people are above 60yrs of age but still offering themselves for work. Secondly, there are many who are out of workforce because their skill sets obsolete.

I therefore believe that while the rate hike may be necessary to prick the bubble in the financial assets, the Fed may not be able realize its dream of 3% federal funds rate and 4-4.5% benchmark 10yr yields.

The normalization may occur at much lower levels and much sooner than most expect....continue