Clinton & Trump - two sides of same dime

 

Thought for the day

"I love you the more in that I believe you had liked me for my own sake and for nothing else."

—John Keats (English, 1795-1821)

Word for the day

Hagiography (n)

The writing and critical study of the lives of the saints; hagiology.

Malice towards none

History is always written by the victorious.

First random thought this morning

I do not know why - but everyone I talk to these days is talking about war. Some fear an Indo-Pak war; whereas some other go much further and want to talk about the possibilities of a full-fledged World War III.

On a deeper inquiry I find that no one is prepared for a war. It is just fashionable. Surprisingly, the people of age 80 and above who do remember the destruction of WWII do not even want to think about a war. It is the people in 50s and 60s who are most interested in this talk. Perhaps, these are the people who want the script to be re-written. First they could not grow due to controlled economy and later because they could not keep pace with the dramatic transformation into a free economy.

Clinton & Trump - two sides of same dime

The US presidential election next week and FOMC meeting next month are inarguably the two most keenly watched events in the financial world currently.

As things stand this morning, FOMC decision is mostly being seen as a function of the election outcome next Wednesday. A consensus amongst traders is that a Trump victory will mean a certain hike by Fed on 14th December; whereas a Clinton victory will make it doubtful.

Ostensibly, the trades in past few days are driven more by fear than any anticipation and are therefore somewhat disparate. For example, the sell-off in equities and buying in gold to safeguard against a Trump win seem incongruent with the sell-off in USD and bonds. A hike by Fed in December should theoretically add strength to USD and lead gold and bonds lower.

If we see in Indian context, the sell off is being attributed to the fear of a Trump win. But the most severe selling is happening in Pharma sector - indicating a Clinton victory and consequent stricter drug price controls.

In my view, investors should not bother about US elections and look beyond it. In that sense, any inexplicable fall in markets should be used as a buying opportunity.

Insofar as the impact of the outcome of the elections on India is concerned, my intuitive, and perhaps over simplistic, thoughts are as follows:

·         India policy of US: Republican Bush loved Manmohan Singh (a socialist) and Democrat Obama is a proclaimed Modi (a right wing nationalist) Bro. It is evident that both the principal US parties have accepted India as a key strategic ally of US. I do not see any reason why Clinton or Trump should change this. To the contrary, in the emerging scenario, where US would be looking for stronger allies, especially in our part of the world, it is difficult to presume any negative shift in US policy towards India. Trump in particular would need India's help if he wants to implement his plan to isolate China. Check on illegal immigration from Mexico may also help Indian Diaspora in US, who compete fiercely with these illegal Mexicans for many unskilled and semi skilled jobs.

·         Business opportunities: It is a proven fact that historically Indian companies have helped the US establishment and corporations in bringing down the cost, enhancing productivity and generating more and newer avenues of employment. Any US recovery plan therefore must provide for a Indian role. At policy level therefore one should not worry too much.

There may however be a business case where the companies may have to face greater competition or pricing pressure due to change market dynamics or overall policy changes. Correlating these business cases to election may not be appropriate, in my view.

·         Foreign flows: Irrespective of the elections, the gap between US and Indian bonds yields is shrinking. The trend may only accelerate given (a) the Fed's commitment to normalize ZIRP and (b) current macro conditions in India. This convergence of yields and stronger USD may make the USD carry trade unviable in the short term. It is thus possible that we may see some of the portfolio flows received in past three years returning back to US shores.

       However, given the opportunities opening in a number of sectors, e.g., real estate, defence manufacturing, and infra asset ownership, with decent long term annuity earning potential, this money shall soon return in a new and much better color.

·         INR vs. USD: Hike in Fed policy rates and consequent rise in US yields may take USD higher, irrespective of the election outcome. RBI does not have much ammunition left to support INR. A rate hike by RBI to support INR is not conceivable at this point in time. 2-4% depreciation in next 4months looks likely.

·         Equity markets: Unlike Brexit market crash, the outflow of foreign funds is not likely to be matched by the domestic investors. The equity prices are therefore most likely to correct materially. The pain may be particularly severe in case of mid and small cap stocks which have seen significant PE expansion in recent past. In my view, as I suggested hereinabove, the outflows could be irrespective of the election outcome.

·         Bond yields: Rise in US bond yields, a stronger USD may further accelerate foreign funds' selling in Indian bonds. The bond yields may therefore come under pressure in next 3-4months. The trend may reverse if the government sustains its resolve to maintain fiscal discipline in the FY18 budget to be presented in the first week of February.

More generally speaking, I am little worried as the USA is forced to chose between the bad and the worst. The world has been struggling with a leadership vacuum since past many years. The crisis will only deepen after the election results are declared next week. None of the two candidates enjoys the respect and credibility with the global community.

Under these circumstances, I am inclined to unleash my wishes and imagine our PM, who commands both respect & credibility with global leaders, assuming a much greater role in international affairs, of course with the support and concurrence of a weaker US leadership. Amen!

Arranging pieces of the puzzle

Thought for the day

Land and sea, weakness and decline are great separators, but death is the great divorcer forever.

—John Keats (English, 1795-1821)

Word for the day

Apparition (n)

Anything that appears, especially something remarkable or startling, e.g., the surprising apparition of cowboys in New York City.

Malice towards none

The current inflation adjusted price of beer in US is down by 33% since 1952.

During the same period, the inflation adjusted prices of cigarettes are higher by 350%.

Replicate that trend in India during 1990-2050 and you get a great investment theme.

 

First random thought this morning

Those who are worried about Trump winning the US presidential election are presuming:

·         US president is omnipotent and he could drive the economic, foreign and defence policies of the country as per his whims and fancies;

·         Donald Trump is a knucklehead who immediately after assuming office in January 2017 would close all US borders; snap all commercial relations with China; throw all Muslims in pacific ocean; and trigger WWIII;

·         Hillary Clinton is better than Trump.

If you promise to forgive my inanity, may I ask what is the basis of these presumptions; I mean apart from the election rhetoric.

 

Arranging pieces of the puzzle

In recent months, five things have frequently impacted the market sentiments and volatility in India, viz.,

1.    US Fed's decision (or rater indecision) on hiking policy rates and consequent movement in USD and treasuries.

2.    Outcome of US elections.

3.    Implications of UK vote to leave European Union (Brexit).

4.    RBI monetary easing.

5.    Anticipation of GST implementation and its impact on Indian economy and corporate bottom-line.

The impact of earnings has mostly been confined to the individual companies, though in some cases sector wide impact was felt briefly, e.g., in IT. The impact of the controversy involving Tata group management has also been mostly localized to the group companies.

The impact of macro-economic data like PMI, core sector growth, GDP growth, 1HFY17 fiscal deficit, spectrum auction etc has been seen just for a couple of hours during intraday trade.

The geo-political tension, especially Indo-Pak relations, has impacted market sentiments for a couple of days.

The policy statements of ECB, BoJ, BoE and PBoC have mostly been noted without much excitement.

The global macro data like China PMI, US retail sale and employment numbers, Japan, UK, Europe inflation, has mostly evoked academic interest; even though these data have been often cited as key input for policy decision by respective central bankers.

The initial euphoria over GST has mostly subsided. We might see another spurt when the rules are notified and a definite timeline is set.

The current stock prices are not reflecting the RBI easing, and consequent reduction in lending rates by banks (reportedly SBI has cut home loan rates to six year low levels). One could argue that but for RBI easing the fall could have been sharper. But that argument may not convince many to go out and buy stocks of stressed banks, highly indebted infra builders, and/or real estate companies. Neither it seems to be encouraging someone to initiate major capex or buy new houses.

7th PCR money has been disbursed and Kharif crop has been harvested. Except for auto, the impact is rarely visible elsewhere.

Despite some earnings beats, the FY18 earnings growth forecast of 15-18% looks challenging.

In next couple of days of I would share my thoughts on the likely impact of the aforementioned five events on my investment strategy.

Seeking divine guidance

Thought for the day

My imagination is a monastery and I am its monk.

—John Keats (English, 1795-1821)

Word for the day

Logophobia (n)

An obsessive fear of words.

Malice towards none

Has anybody learned anything from the infamous Ishrat Jahan encounter episode?

 

First random thought this morning

Since 1947, our politicians have used (and sometimes created) the tension at borders to invoke the feelings of nationalism and patriotism amongst citizens. In past few years social media has more than adequately supplemented the efforts of the politicians in igniting and fueling these feelings.

The point worth pondering is, why do we need war & death to feel nationalist and patriot! Can't we be patriot in peace and prosperity?

Seeking divine guidance

After a refreshing Diwali break, I am back to my daily routine. During the break I resumed my research on the great epic Ramayana, after a break of 18years.

I strongly believe that though this epic has been told and re-told many times in various languages and from various perspectives, yet it has been denied its rightful place in our political, economic and social ethos.

In my view, Ramchritmanas penned by saint poet Tulsidas is indubitably the best treatise on the harmony of life - harmony of human being with nature and wildlife; harmony of human relationships inter se; harmony of geo-political relationships; harmony of thoughts; harmony of emotions; harmony amongst various organs & layers of the society; harmony of the relationship between state and people, etc.

The epic defines the most desirable governance structure, that is just & equitable. Moreover it defines the ideal social structure based on mutual respect, trust in which everyone (man, animal, forests, mountains, oceans, rivers) is assigned duties, accountabilities and authorities as per their capabilities and qualifications.

The epic not only provides to viable solutions to the most problems being faced today by our families, society, and economy - be it environment, sustainability, pervasive distrust & mistrust, degeneration of the value system, non-compliance, poor governance, non-governance, business ethics, etc. It could also sufficiently fill in the gaps in our educations system.

It's a pity that we have reduced this great source of learnings and wisdom to mere rituals and gimmickry.

I would like to discuss in much greater details the economic and investment aspects of Ramchritmanas at some later point in time.

Coming back to markets, a number of reputable money managers have expressed their confidence that India is an oasis of comfort and security in an uncertain and volatile global economic environment. TINA (there is no alternative) is the usual refrain.

Having heard, used and belied the term during the last global financial crisis (GFC), I know that the assurances of the celebrity fund managers would last only till their first sell order. So I am not really impressed.

For the first time I patiently heard the views of various market experts, decked up in best traditional attires and exuding confidence in Indian economy and markets.

I was really impressed by couple of them, but found most dishonest. It was conspicuous that they lack conviction in their views and are sounding confident just to maintain the sanctity of the occasion.

On my part, I am growing more confident about the Indian economy from mid-term perspective (5-10years). But in near term, I see the pain of reconstruction impacting investors....to continue

Wish a propitious Samvat 2073 - full of peace, prosperity and pleasures."

"Wish all our readers a joyous Diwali.

May the new Samvat be propitious for everyone - full of peace, prosperity and pleasures."

Thought for the day

"I hope to stay unemployed as a war photographer till the end of my life."

—Robert Capa (American, 1913-1954)

Word for the day

Stalwart (Adj)

Firm, steadfast, uncompromising, strong and brave; valiant, e.g., a stalwart knight.

Malice towards none

सिद्धि बुद्धि प्रदे देवि भुक्ति मुक्ति प्रदायिनि।
मन्त्र मूर्ते सदा देवि महालक्ष्मि नमोस्तुते ॥

 

First random thought this morning

Diwali without Chinese goods could be an innovative means of wealth distribution. The rich traders who have made tons of money by importing Chinese goods and selling these in India over past decade of so will incur some losses on the inventory of the stuff they have already imported; the middle class households will spend little more money for Diwali decorations and firecrackers etc; and the local cottage and MSME industry will make some extra money through the unexpected demand.

So far so good. Do we have any plan for post Diwali period?

Wish a propitious Samvat 2073 - full of peace, prosperity and pleasures."

For records, during the Samvat, Nifty has returned ~10%, led mostly by banks (Bank Nifty growing ~15%). Buoyed by lower interest and material cost, the mid and small cap have done exceedingly well growing ~25% and ~20% respectively.

Vikram Samvat 2072 began on a somber note. Corporate performance was below par. Socio-political environment was worsening. The outlook for any major economic reform appeared bleak due to the persistent logjam in Parliament.

The conditions have changed materially since then. Despite adverse conditions globally, the government showed unprecedented resolve and maintained fiscal discipline. Despite some electoral reverses, the government has materially rationalized fuel subsidies. Key economic reforms like Bankruptcy Law, GST, Real Estate regulation etc. have made significant progress. Inflation is under leash, currency is stable and the rates have begun to moderate. Other macro parameters like current account, GDP growth etc. are also encouraging.

Though the investment cycle and hence credit growth are still lagging and have low visibility of growth, the rate trajectory suggests that by end of the new Samvat the dark cloud over capacity addition may also blow over.

The global economic environment though has worsened in past one year. The relentless printing of new money and near zero interest rates have miserably failed in stimulating economic growth. The debt levels have worsened and financial system continues to be stressed.

Under the circumstances, to use the cliché, I am cautiously positive on Indian equities in the new Samvat. I expect the market volatility to rise materially as the Fed tries to further normalize the policy rates amidst sub-par domestic economic growth, slithering Europe, stagnant Japan, declining China and struggling commodities markets.

I continue to believe that US rate hike and consequently adjustments in global currency, credit and commodity markets may eventually benefit Indian businesses in the medium term. Nonetheless, the near term adjustments could be painful as liquidity may squeeze a bit and global flows may reverse the direction on winding down of carry trades.

My strategy under the circumstances would be as follows:

·         Lower the target return to 10-13% from 12-15% earlier.

·         Stay OW on domestic luxury consumption.

·         Add high rate sensitive Real Estate and related stocks in portfolio.

·         Avoid leverage completely.

·         Gradually increase exposure to domestic Cyclicals, excluding minerals and metals. Prefer solution providers, technology leaders and innovators rather than pure product or construction companies.

·         Increase allocation to longer duration debt.

·         Plan for lower tax benefits on financial investments.

·         Avoid precious metals.

·         Assume a stronger USD and weaker EUR in investment decisions.

The next post of Morning Trekk will be published on 02 November 2016.

Waiting for the tide to turn - 2

Thought for the day

"This war is like an actress who is getting old. It is less and less photogenic and more and more dangerous."

—Robert Capa (American, 1913-1954)

Word for the day

Compunction (n)

A feeling of uneasiness or anxiety of the conscience caused by regret for doing wrong or causing pain; contrition; remorse.

Malice towards none

How could Amar Singh, who has never been public servant, minister, police or judge, could save someone from going to jail?

Will SC take suo moto cognizance of MSY's 'confession' and order an inquiry?

First random thought this morning

I am not sure whether many people noticed it, but to me it was rather too conspicuous. The MSY and his clan treat the State of Uttar Pradesh as grocery shop run by their family. In their discourse, they sound like 'owner' of the State. And we all know MSY family is not the only one that sounds like that. The first families in many other States also behave in the same manner.

This failure to obliterate the feudal mindset is perhaps the most unfortunate aspect of our democracy.

Waiting for the tide to turn - 2

As I suggested yesterday, I am inclined to believe that the bull market in global financial assets that started in 2009 with adoption of "whatever it takes" style of monetary policies by central bankers is tiring and the tide may turn soon.

Under the circumstances, the winning investment strategy will naturally be the one that could anticipate the blind turn well in advance and moderate its pace accordingly.

To those who still suffer from the trauma of 2008-09 global financial crisis, I must say that the turn of the cycle this time may not be as dramatic as it was in 2008, given the hands on central bankers with "whatever it takes" mindsets. Nonetheless, the correction in asset prices could be severe.

My search for some early signs of turn in the global tide has made me dust off some old books - though to little avail. The history could only guide that take your guards well in time and do not wait till the last moment to jump off the ship. Hope could be your worst enemy in this case.

Besides books, I have also sought refuge under the aegis of St. Google. Got some useful advice and interesting anecdotes. For example, a Bloomberg Business Week report recounts that the year 2017 ends with digit 7 and "that makes us due for another financial crisis. The biggest one-day stock drop in Wall Street history happened in 1987. The Asian crisis was in 1997. And the worst global meltdown since the Great Depression got rolling in 2007 with the failure of mortgage lenders Northern Rock in the U.K. and New Century Financial in the U.S."

So far I have been able to note down five major trends that could potentially play a role in bringing up the anticipated course correction in the global financial markets:

(a)   The unprecedented global cooperation seen during the last financial crisis has waned considerably. BRICs are no longer moving in tandem. EU is struggling with Brexit. US is likely to have a leadership that may not inspire many NATO and G-20 colleagues.

(b)   China is no longer seeking higher growth. It seems to have adjusted to ~6% growth trajectory. Chinese financial system has been like a black box so far. Opening it may cause tremors across asset classes.

(c)    The aggregate global debt level is much higher as compared to the levels during the previous crisis; and to make the matter worse, a large part of this debt is yielding almost nothing. A decade of sub-par economic growth has constricted the fiscal maneuverability of the government across the globe.

(d)   The unconventional monetary policies followed by the central bankers have rendered the conventional method of currency valuation mostly useless. The managed currency values and unmanageable bond prices are right settings for a perfect storm.

(e)    The commodity producers are now much weaker as compared to 2007.

Will share some more thoughts on this next week.

Waiting for the tide to turn

Thought for the day

"In a war, you must hate somebody or love somebody; you must have a position or you cannot stand what goes on."

—Robert Capa (American, 1913-1954)

Word for the day

Thunderstruck (adj)

Overcome with consternation; confounded; astounded, e.g., He was thunderstruck by the news of his promotion.

Malice towards none

Is MSY's family taking Ram and Ramayana too seriously?

 

First random thought this morning

The way Virat Kohli is going, he may obliterate many great names from the Cricket's record book. The age is on his side and he is already a youth icon and worshipped ahead of the greats Sachin & Lara.

I wonder will that automatically entitle him for a Bharat Ratna, or he would need do little more to earn the honor!

Waiting for the tide to turn

Indian equity markets started attracting interest from common public in mid 1980s' when the erstwhile Controller of Capital Issues began to liberally allow initial public offers (IPOs) at fair value of companies and a spate of IPOs followed. Prior to this it was mostly a domain of higher echelon of the society and employees of MNCs who were allotted shares as part of mandatory dilution under the provision of Foreign Exchange regulation Act 1972 (FERA).

In past three decades Indian market has seen three major market cycles. The most notable bull markets have been in 1989-1992 and 2003-2007. In these two bull phases S&P BSE Sensex had returned approximately 5x to 6x returns from the lows of the immediately preceding bear market.

The current bull market that started in March 2009 is inarguably the longest one. Interestingly it follows the shortest bear market (January 2008 to March 2009) and has already yielded 3.5x return (8k to 28k).

I may lack any knowledge of data analytics beyond basic operations of MS Excel, but intuitively I know for sure that all market cycles in India so far have been a mirror image of a global trend.

·         Massive commodities cycle in late 1980s fueled the global rally in commodity stocks. The nascent and closed Indian markets also participated.

·         The mammoth global credit cycle in 2003-2007 that was created to stem the losses from the bust of dotcom bubble percolated to emerging markets and fueled a capex driven rally. The rally eventually ended with a colossal sub-prime crisis. Indian financial system is still buried under the debris.

·         The unconventional monetary policies (QE and ZIRP) followed by the global central bankers to stabilize the global financial system in the aftermath of the financial crisis have fueled the rally in global markets since 2009.

The current bull market, like the earlier ones, shall too end with the tide turning in the global markets. In my view, no one should have any doubts in that.

More important given the rise in the degree of integration with the global markets since previous instances, our markets should feel the tremors right away with virtually no reaction time available.

The questions which are bothering my mind presently are:

(a)   When the global tide is likely to turn?

(b)   What will signal the turn in the global tide putting an end to the current market rally?

(c)    Is there any likelihood that in near future India will have her own bull market as US and Japan had in Post WWII era?....to continue tomorrow

"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).