Do it yourself

Friday, December 8, 2017

Gujarat 2017 - 2

Thought for the day

"I received free health care."

—J. K. Rowling (English, 1965-)

Word for the day

Xanadu (n)

A place of beauty, luxury and contentment.

Malice towards none

In case the scaremongering by Hindi News Channels does bother you, please note that an average Indian is likely to die much younger than an average citizen of North Korea, Nicaragua, Bangladesh, Guatemala, Jordan, Syria, Gaza Strip, Iraq, Serbia, Libya and Lebanon, among others.

On the world Life Expectancy Index India stands at 163/224 place, just 4 places ahead of Pakistan.

First random thought this morning

Kapil Sibal is one of the most accomplished law professionals in the country. His father was also an illustrated lawyer. His sons are also doing very well as Senior Counsels. His brother had been one of the most accomplished diplomats.

But why Mr. Sibal is important to Indian politics?

He entered Parliament first, before entering mainstream politics. Has not motivated any social or political movement. He's not known for strongly adhering to any particular political ideology. He's not set any commendable standards of statesmanship, governance, ethical conduct or policy initiatives in past two decades.

The same could be said about a majority of parliamentarians today. But that fact does not change the argument.

Gujarat 2017 - 2

Gujarat is one of the five large states, besides Tamil Nadu, West Bengal, Bihar and Uttar Pradesh, in the country where the post independence political history is clearly divided into pre and post Congress periods.

The Congress Party dominated the politics in TN (upto 1967), West Bengal (upto 1977), UP & Gujarat (upto 1989) and Bihar (upto 1990). But since then it has failed to even come closer to forming a government in any of these large states. Odisha is another State going this way.

It is pertinent to note that in West Bengal, Gujarat and Odisha Congress has remained the principal opposition party for most of the post Congress period, but never appeared coming close to forming the government. The current Gujarat elections must be seen in this context, in my view.

Anyone expecting a reversal in this trend is mistaken. The Congress party is not an alternative to BJP in Gujarat. A regional alternative is taking place and it may decimate the Congress further in the coming years, just like TMC did in West Bengal, BSP did in UP and JDU did in Bihar.

Now coming to the current elections.

In my Discover India trip in summer of 2013, I had travelled through Gujarat extensively and noted the following:

"(1) The most striking observation was the huge socio-economic disparities especially in semi-urban and rural areas.

People suggested that a large part of prosperity in past two decades has come primarily from two sources

(a) economic boom and bust in developed world that has seen substantial rise in remittances from prosperous overseas Gujarati community; and (b) Narmada water that has resulted in higher agriculture growth and astronomical rise in land prices.

Consequently, it has not led to commensurate employment growth and therefore a large part of the population has not participated in the growth.

(2) However, the real surprise was that the rising disparities in Gujarat are motivating the underprivileged people to do well, unlike Karnataka and Maharashtra where it is resulting in disillusionment and unrest.

(3) Due to enterprising spirit, the household leverage, especially amongst middle and lower middle class is high in Gujarat. “Cash lending” market is vibrant and exploitive.

(4) Most in Rural areas, believed that their Chief Minister is blessed. More than two third believed that the change in weather pattern (more rains, less dust storms) is due to CM only. So much so for the “Gujarat Economic Model”! Exit of Modi from Gujarat may not be seen favorably by rural voters.

(5) I discovered that alcohol business in the state is managed by one of the best supply chains in the country. Global universities which found Mumbai Dabba wala model interesting would be surprised by this, perhaps one of the largest undercover supply chains in the world. RBI trying to curb gold import may also take a lesson from this.

(6) The communal divide is deep in almost all areas. Contrary to popular perception, people believe that but for Modi, the state would have had seen many more riots."

Four years later, many things seems to have changed. The most notable being the following:

(A) The economic disparities have risen even more sharply in past four years since (a) the farm prices have not risen adequately; (b) real estate market has collapsed in many cities leading to material rise in debt burden on neo-entrepreneurs.

(B) The cash lending market has contracted materially in past one year. This has compounded the problem of small businessmen who were dependent on this source of funding for working capital finance.

(C) Anandi Benand Vijay Rupani have been uninspiring leaders and have distanced the rural and tribal population from BJP. This segment of population feels departure of Modi has brought misfortune to them in form of poor crop yields and floods.

(D) Gujarat had been divided on religious lines, unlike the neighboring Rajasthan which is mostly divided on caste lines. However, for the first time we see caste based fissures appearing in Gujarati society.

This has diluted the religion based appeal of BJP. This highlights the fallacy in the Congress strategy, which is trying to appeal voters on religious lines. They have clearly read the voters wrong and ten years too late in taking the soft Hindutava line.

(E) The new automobile center that has developed fast in and around Sanand, has not benefitted poor and lower middle class Gujaratis. These plants are mostly owned by Non-Gujaratis and employ many people from outside. Besides helping the local land owners, it has not benefitted a larger section of the society.

(F) The current generation of middle class Gujaratis is not skilled enough to take jobs outside their family domains. Most of them had entered their family businesses quite early or became "real estate developers", most of which are not doing well. The debt levels are distressing.

(G) The recovery in western economies has actually slowed the inflows through remittances. Stricter visa rules have slowed down the rate of immigration also. That is also worrisome for a section of population.

Now coming to forecast for the current election outcome.

A number of opinion polls have been conducted in Gujarat to gaze the voters' sentiments. Almost all of these polls have suggested a BJP victory. However, there is huge divergence in terms of the scale of BJP victory. The forecast ranges between barely managing the majority (91-99 seats) to an overwhelming majority (131-141 seats).

My sense, based on my discussions with a number of people watching these elections closely, is as follows:

(a) BJP will make the next government in Gujarat.

There are many voters who traditionally voted for BJP, but are no longer committed to it. A negligible proportion of these voters is however attracted to Congress. So, most likely they may abstain from voting. In this case BJP may get more than 127 seats (its highest tally so far, attained in 2002).

However, if my reading is wrong and all this dissenters come out to vote, BJP may be reduced to 85-87 and may need support of few independents to form the government.

I would rate the probability of 127+ seats more than 80%.

(b) This may be the last election for Congress as a dominant force in Gujarat. From 2022 onwards a regional set up shall replace Congress as the principle alternative to BJP.

(c) Through their aggressive campaign in past few weeks, Rahul Gandhi has gained admiration of some middle aged tribal and rural women. Narendra Modi on the other hand had lost some supporters in the educated middle class with foreign connections.

Thursday, December 7, 2017

Gujarat 2017

Thought for the day

"The truth. It is a beautiful and terrible thing, and must therefore be treated with great caution."

—J. K. Rowling (English, 1965-)

Word for the day

Logomachy (n)

A dispute about or concerning words.

Malice towards none

Key take away from the recent developments in Ayodhya case:

(a) Only Muslim lawyers should represent Muslim parties in the courts.

(b) The Bench hearing cases involving people from different communities, must comprise Judges representing all the communities involved. Even if it means enlarging bench to 5 or 7 Judges.

First random thought this morning

In the capital city of Delhi, these days it is a common sight to see a number of people wearing face masks. Many people have stopped going for their morning walks. Some of the foreign tourists come to the city advised by their governments to use face masks and take other health precautions, in view of the poor air quality. The clinics of the city are usually full with desperate children struggling with sore throats, running noses, fever and a variety of allergies. The life has become hell for people suffering from respiratory complications like asthma.

The point I am trying to make is that instead of ridiculing Sri Lankan cricketers, it would have been better if everyone had joined them and motivated a white mask revolution aimed at improving Delhi air.

Gujarat 2017

Once again the market talk is overwhelming dominated by elections. Though I am very confident that politics has almost no impact on the markets, or economy for that matter, the intensity of discussion and surreal belief of traders in political developments is surely distracting.

Like before, I am getting unusually high number of requests for my assessment about the forthcoming Gujarat election results. Though I do not find it of any utility, I did make some efforts to make an assessment, just to honor the sentiments of my readers.

But before I say anything about Gujarat elections, I would like to highlight that after BJP got overwhelming majority in UP assembly elections earlier this year, four things have changed: (1) Nitish Kumar abandoned Lalu Yadav and return to NDA fold after a hiatus of 4yrs; (2) GST got implemented; (3) Indian stock market is up about 13% (vs. 18% rise in MSCI Emerging Market Index and ~11% in S&P500); and (4) Bitcoin, which was used by many in India to convert unaccounted cash in wake of demonetization in November 2016, has seen phenomenal rise in its value.

The readers may recall that UP elections were also being discussed and worried about as a make or break even for the PM and stock markets. But the election outcome per se has changed nothing on the ground. I am very confident that the Gujarat elections will not change much on the ground.

However, if I accept the popular argument that a defeat in Gujarat will seriously affect the 2019 campaign of BJP and strengthen the case for revival of the Congress Party, then I would presume that a defeat for BJP in Gujarat will be a very positive event for the economy and hence markets. I say so, because in my view, a defeat in Gujarat will (a) completely eliminate the possibility of any more disruptive reform by the Modi government; and (b) A BJP led government in 2019 where BJP is around 220 in Lok Sabha, would be much more inclusive and forward looking than it presently is.

Now coming to the current elections for the 182 seats of Gujarat assembly.

In past couple of months a number of surveys have been done to assess the mood of Gujarati voters. The outcome has been over-discussed on all media. In past couple of months studio experts have offered their view on prime time TV on daily basis. Based on these surveys and discussions, most of the media savvy population of India now has an opinion about the outcome, i.e., BJP will win the elections, but just about it.

Over past couple of days, I explored my phone diaries and phone contact list and made calls to all my 'contacts' in Gujarat or deeply connected with Gujarat. The 83 people I spoke to are spread over 11 districts across South, Central and Saurashtra regions of Gujarat, Mumbai and Delhi; and belong to diverse fields like trading, farming, industry, politics, education, governance, politics and social sector. In my almost 19hr endeavor, I got some useful insights into the current state of affairs in Gujarat, that may have bearing on the election outcome....to continue tomorrow

Wednesday, December 6, 2017

Choose your economic model

Thought for the day

"In fact, you couldn't give me anything to make me go back to being a teenager. Never. No, I hated it."

—J. K. Rowling (English, 1965-)

Word for the day

Literatim (adv)

Literally. Letter-for-Letter

Malice towards none

Mainstream media loves to designate every election in the country as the litmus test for NaMo. They have even extensively covered elections to Delhi University Student Union and Local Bodies in a number of states, hoping whatever.

They may please note my RWA is holding elections early next month:)

First random thought this morning

While all the parties to the Ayodhya dispute are eagerly waiting for the Supreme Court's judgment, no one is apparently ready to take verdict that goes against them.

This means what?

(a) No one actually believes that this matter could be decided by the court.

(b) No one is actually interested in this matter getting resolved. The pending court case is just a delaying tactic.

(d) None of the above

Choose your economic model

It is widely expected that the vehicle that transited most economies from underdeveloped to developing to middle income is fired by two engines - real estate and exports. Technology advancement and higher productivity have mostly played a supportive role in (a) enhancing export competiveness; and (b) raising affordability levels of households for buying houses.

For most larger economies the improvement in social indicators inclusiveness, sustainability, equity, quality of life etc. appear to have followed the economic development with lag (often in decades).

To keep things simple, I therefore like to assess the efficacy or otherwise of any economic development model on these two basis.

As the economy begin to open up in 1991, Indian exports started to rise noticeably. The growth however gained tremendous impetus from 2004 onwards. A lot of this I would like to contribute to the brave reform efforts made by the NDA government led by AB Vajpayee during 1998-2004.

Developing industrial and trade infrastructure at unprecedented pace through privatization of most core sectors was hallmark of that government. The technical capabilities developed, though under compulsion due to international sanctions post 1998 nuclear tests, during that period also aided the exports growth in engineering, technology and pharma sectors.

Stronger currency, stronger fiscal and stronger current account resulted in sharp decline in interest rates in the subsequent years. Low rates, higher employment level, rising wages, better connectivity and accessibility all combined to lead a strong growth cycle in real estate.

The subsequent government however could not manage the growth well, especially in terms of regulating the credit, resource allocation and managing fiscal balance. Fiscal profligacy (high subsidies and unproductive welfare spending) for political advantage soon frittered away the low rate advantage. The global financial crisis also played an important part as exports slowed down and capital flows were affected.

The consequences are half dead real estate sector, exports moving in slow lane, humongous pile of nonperforming assets, poor investment growth, stagnant real wages and falling employment level.

In past three years, the incumbent government has made some progress in sorting out these issues. Unproductive subsidies have been rationalized (even at the cost of political advantage), inflation has been mostly reigned, resource allocation has been mostly regularized, NPA mess has begin to sort out, real estate sector now regulated is coming out of slumber, export decline has been arrested, and may begin to look up.

But I would like to add here, it is the Vajpayee model of development and not the Gujarat model of development (if there is any) that has succeeded. The learned economist Dr. Manmohan Singh's model of development is seriously questionable, in my view. Comments are welcome.

Tuesday, December 5, 2017

"To cut" or "To raise"

Thought for the day

"It takes a great deal of bravery to stand up to our enemies, but just as much to stand up to our friends."

—J. K. Rowling (English, 1965-)

Word for the day

Gerontocracy

A state or government in which old people rule.

Malice towards none

Ravan was son of a Brahmin and devotee of Shiva!

So what's the point?

First random thought this morning

While Baba Ramdev was kept busy fighting war on MNC tooth paste, confectionary and cosmetic brands, the global mobile phone makers (mostly Chinese), automobile makers, and readymade garment sellers have "plundered" billions from "gullible" Indian consumers.

Moreover, even on cosmetics, hair oil, ayurvedic products like Chyvanprash etc., confectionary and grocery etc. also, Baba may be competing more with pure domestic players like Dabur, Emami, Parle, LT Foods, DFM, Baidyanath, Marico, etc., rather than P&G, Colgate and HUL.

Should someone call his bluff and restrain him for carrying out a mostly misleading campaign?

"To cut" or "To raise"

When the members of Monetary Policy Committee (MPC) of RBI meets today for the Fifth Bi-Monthly review of monetary policy for FY18, the question before it might be "to raise or not to raise" rather than "to cut or not to cut".

An overwhelming majority of experts is forecasting a status quo on rates.

A near unanimity amongst forecasters over the likely decision of MPC on policy rates is rather unusual. Overwhelming consensus on any issue involving human intervention always bewilders my strategist mind. Consensus on economic issues is even more perturbing as it is against the basic concept of market.

In my view, MPC is presently faced with unprecedented complexities in policy making. Though the stated objective is to manage inflationary expectations, MPC must deal with prospects of worsening twin deficit, slowing growth and likely global liquidity and rate events.

As the recent GDP data (2QFY18) showed that Private consumption growth (6.5% in Q2) was weakest after Sep 2015 despite festive season and some pick-up in rural demand. The consumer confidence pointed that the urban consumer sentiment has stayed weak over this period, which suggests that the impact of 7th Pay Commission has mostly been digested, and a decent stimulus may be needed to encourage private consumption.

Government consumption growth dropped sharply to 4.1% in Q2 (17.2% in Q1) as fiscal deficit concerns prompt some belt-tightening. The rate hike by some banks on bulk deposits amply highlight the tight liquidity conditions. This tightness in my view is mostly due to the government's fiscal management jugglery (delay or deny tax refunds, delay contractor payments, delay subsidy payments and defer consumption and investment). This will reflect badly on FY19 fiscal, which may face political pressures also as general elections draw near.

The 4.7% growth in investment demand (GFCF) was the best in 5qtrs but as a proportion of GDP it remains ominously low. Given the still very low capacity utilization level and fiscal constraints, the visibility of investment demand recovering in FY19, without a significant stimulus, appears low.

The stimulus in turn will depend on improvement in revenue collections, which may largely be a function of consumption growth and revival in export demand. Exchange rate may play a critical role here. Many experts believe that a more than 10% correction in INR value would be needed to improve the competitiveness of our exports.

While the need for a monetary stimulus (rate cut) may appear overwhelming, as the finance ministry officials have also been insisting, the specter of inflation is rising (may rise aggressively if INR depreciates 10%) and trajectory of rates in global markets is no longer heading south.

So, my sympathies with MPC, especially the market economists sitting on the committee, who would obviously want an aggressive easing.

Friday, December 1, 2017

Outlook for 2018 - 2

Thought for the day

"I think you could ask 10 English people the same question about class and get a very different answer."

—J. K. Rowling (English, 1965-)

Word for the day

Scrummy (adj)

Very pleasing, especially to the senses. Delectable. Splendid. Scrumptious.

Malice towards none

What has changed in West Bengal after the end of 35yrs of communist rule?

What will change if 22yrs of BJP rule does come to an end in Gujarat?

Fail to understand what this all brouhaha is all about!

First random thought this morning

In past two days the two principal political parties in the countries have used important terms like Hindu, Brahmin, Janeyu (sacred thread), Shiv Bhakt, Non-Hindu, rather contemptuously.

As per the traditional view of RSS and BJP, duly endorsed by SC, Hindu is not a religion but a way of living. At times they have said anyone living in Aryavrata (between Hindukush and Indian Ocean) is Hindu. Then how RaGa becomes a non-hindu, just on the basis of following a different way of worshipping.

Congress claims RaGa to be a Janeyu bearing Brahmin. Do they believe in caste system which says Brahmin is son of Brahmin? Or do they believe that Brahmin is any learned soul which works for the elevation of society? Does anyone become Brahmin just by bearing Janeyu? And Shiva Bhakti is mostly about renunciation, altruism, and abstinence. From what angle RaGa appears a Shaivaite?

Outlook for 2018 - 2

As highlighted yesterday (see here) the Economic Intelligence Unit (EIU) of The Economist released its outlook for six key industries for 2018. The summary of the outlook is reproduced below:

Automotive industry

In 2018 the automotive industry will see sales growth in all but eight of the 60 countries we cover, yet the industry will face huge challenges in its biggest markets, the US and China. Aggressive new targets on electric vehicles (EVs) in China will force the pace of their rollout worldwide. Governments will adjust the way in which they deploy incentives to spur take-up of EVs: a mix of congestion charges, parking permits and other measures will start to supplement or even supplant traditional subsidies. This will bring opportunities for carmakers, but also threats. EV development will require heavy investment, and it may not pay off for all carmakers. In China, for instance, local conditions favour domestic players, while elsewhere the plethora of new launches will lead to tough competition.

For the auto industry as a whole, rising trade barriers will be another dampening factor in 2018. On this front, the US’s desire to renegotiate the North Atlantic Free-Trade Agreement (NAFTA) is the greatest risk.

Consumer goods and retail

The outlook for consumer goods and retail firms looks brighter—but only superficially. Sales volumes will grow by 2.5% in 2018, slightly slower than in 2017. Bright spots will include the opening-up of markets such as Vietnam and Iran, but not everyone will benefit.

Among the countries facing a sales downturn is the UK, where Brexit will finally bite.

E-tailers are also likely to thrive more than bricks-and-mortar stores in both developed and developing markets. Alibaba, China’s e-tailing giant, will continue to report strong growth, while Amazon (US) is set for another year of aggressive expansion despite regulatory scrutiny: 2018 may even bring a push into ready-to-eat meals.

Amazon’s foray into bricks-and-mortar selling is especially disconcerting for traditional chains. The “retail apocalypse” feared by some will not materialise in 2018, but the rise of e-commerce will shake many old-fashioned shops and bring some crashing down.

Old retail’s troubles will be especially severe in the US, a US$4trn market, but will extend well beyond it. Consumer-goods makers will not only have to adapt to the changes in distribution but are also being harried by activist investors and upstart boutique brands.

Energy

In energy, it promises to be another year when US policies will be out of kilter with the rest of the world. Donald Trump’s administration will noisily try to dismantle the more climate-friendly policies of his predecessor, Barrack Obama, in a bid to boost the coal and oil industries. Slowly but irreversibly, though, the world is making the shift to cleaner energy. In green-minded Europe, Germany’s new coalition government will struggle to hammer out a coherent stance on energy policy, but the UK will take further steps towards decarbonising its economy. Most momentously, China will boost its renewables capacity by roughly 60 gigawatts in 2018—the equivalent of South Africa’s entire electricity needs.

OPEC will continue its herculean efforts to make oil more expensive—partly motivated, in Saudi Arabia, by the upcoming listing of a valuable stake in its national oil company, Saudi Aramco. A barrel of Brent crude will cost an average of just US$59 in 2018, barely up from 2017.

Financial Services

The deep scar left by GFC on the financial services sector will at last start to feel healed. Steady economic growth, loftier interest rates and a plateau in re-regulation will give financial firms renewed confidence. Banks, especially those headquartered in Asia, will chase after opportunities abroad. As interest rates rise gradually, higher bond yields should burnish the appeal of fixed-income products, taking the shine off equities.

There are risks to our optimistic outlook for finance, chief among them China’s massive debt pile. But the state—headed by Xi Jinping, his powers newly reinforced by a recent reshuffle at the top—has ample resources to fend off a devastating outcome. Neighbouring India will start to recapitalise its lenders in 2018. Wobbly banks in parts of Europe will keep tumbling, but the threat will not be systemic. Taxpayers, who must mop up the mess, may still fume.

Healthcare

US health spending will hit US$3.5trn, over two-fifths of the global total, yet outcomes will remain average for such a wealthy country. The news agenda will be dominated by Republicans’ continued efforts to replace Barrack Obama’s Affordable Care Act.

Other countries will make better headway with health reforms, among them developing nations such as India and Pakistan, which are extending care to more of their citizens. China will bolster its national health system.

Population ageing will add to the pressures on health systems, particularly in Japan. By 2018, 18m Japanese people will be 75 or older, and their ranks are set to swell fast. So too are the associated long-term care costs, lending urgency to Japan’s health reforms in 2018. Pharma companies will watch nervously as the UK’s departure from the EU nears, praying that negotiators can avoid a precipitous rise in non-tariff barriers.

Telecom

Telecoms companies, meanwhile, will face both opportunities and threats from the global rollout of mobile networks. For every 100 people around the world there will be an average of 113 mobile subscriptions in 2018, with rapid growth in places such as India and Sub-Saharan Africa. In developing countries, the focus will increasingly be on expanding 4G coverage, while in developed ones it will be on testing 5G technologies. Consumers will take advantage of the opportunity to bring yet more of their lives online.

But funding this is placing an intense strain on telecoms companies’ balance sheets. Simultaneously, competition is pushing down prices for consumers—who are adding to operators’ woes by favouring over-the-top providers of services such as messaging apps, which piggyback on utilities’ networks. Another blight will be the close regulatory scrutiny of mergers, particularly in Europe. Still, at least in the US telecoms companies can look forward to the slashing of red tape.

I shall be sharing my views on implications for Indian industries later this month, when I present my thoughts on my strategy for 2018.

Thursday, November 30, 2017

Outlook for 2018 - 1

Thought for the day

"I would like to be remembered as someone who did the best she could with the talent she had."

—J. K. Rowling (English, 1965-)

Word for the day

Benevolence (n)

Desire to do good to others; goodwill; charitableness

Malice towards none

A CM of a state, who happens to be an ex IRS officer, calls certain action of IT department a political vendetta.

I do not know who is on the right side in this case.

But whosoever it is, the one on the wrong side should not go unpunished, if we want people to respect institutions.

First random thought this morning

As per popular sayings a diamond cuts the diamond, steel cuts the steel, venom cures the venom and lion defeats lion, so on and so forth.

Our politicians have taken these adages too seriously. They are trying to counter false propaganda of their opponents by even bigger lies.

The mud-slinging match between them is no longer funny. The sight has rather become repugnant.

A revolution would be in order here. Any correction may not work.

Outlook for 2018 - 1

The Economic Intelligence Unit (EIU) of The Economist released its outlook for global economy and industries for 2018.

In general the economic outlook is cautious. EIU believes that "global economic conditions will not be bad—although not quite as good as in 2017".

A summary of the global economic outlook of EIU is reproduced below:

"The global economy has been at its healthiest for some time in 2017, but this will prove a fleeting state. Inflation will pick up and central banks will begin to tighten somewhat more aggressively. The European Central Bank (ECB) will start to taper its quantitative easing in 2018. Moreover, political risk is at its highest level for years: there is long-term policy uncertainty in the US, little clarity on Brexit negotiations in the EU, and North Korea is flexing its muscles. Global GDP growth will thus tail off slightly in 2018, to 2.7% at market exchange rates.

The non-OECD world will manage to grow by 4.4%, while the expansion among OECD countries will slow gently to 2%. The US economy will grow by 2.2%, a level that is fast becoming the new normal. The greatest shadow of unpredictability hangs over the world’s largest economy. Donald Trump is an erratic leader, making him a difficult ally at home (for his fellow Republicans) and abroad. This will give the US’s rivals, including Russia and China, the chance to extend their influence.

Still, the debt-laden Chinese economy will slow to 5.8% in 2018, marking a steeper decline compared with recent years. The slowdown will be policy-induced, however, so the credit bubble will deflate rather than burst. Countries such as Australia, Chile and Mongolia, which export non-oil commodities to China, will also feel the chill.

Higher oil demand in Asia and OPEC members’ willingness to extend a supply agreement into 2018 will at least offer some support to oil prices, which will rise to US$59/barrel, from an estimated US$55/barrel in 2017. In oil-dependent Russia, structural weaknesses will dampen economic growth, and The Economist Intelligence Unit does not expect significant reforms before the presidential election in March 2018.

In Europe, political risks will again be in evidence, but the biggest challenge for the euro zone will come from the economy, given the underperformance of markets in southern Europe, such as Italy and Greece. Higher borrowing costs in the US, China and Europe will also temper global growth—another reason why it will fall a touch in 2018."

EIU has also made some very interesting forecast about the likely trend in six key industrial sectors. I shall be discussing these forecast and my views on that tomorrow.

Wednesday, November 29, 2017

Driver of rally suffer from fatigue

Thought for the day

"It is our choices... that show what we truly are, far more than our abilities."

—J. K. Rowling (English, 1965-)

Word for the day

Complicit (adj)

Choosing to be involved in an illegal or questionable act, especially with others; having complicity.

Malice towards none

There is no Punjabi pride working for Virat Kohli. Who will root for a Bharat Ratna for him?

First random thought this morning

Nothing could be more unfortunate that the fact that after 70yrs of independence from alien rule, we are still debating who, how, when and where should sing the National Anthem.

The courts of law, already saddled with millions of pending cases, are busy hearing these mostly frivolous cases and passing some ridiculous orders. State administrations have to force students, and even older citizens to sing the Anthem, and stand up when singing.

Don't you think, this is one of the three major failures of our political establishment in post independence era, besides failure to eradicate manual scavenging and prevent female infanticide.

Driver of rally suffer from fatigue

The current bull market in Indian equities, that started in August 2013, is mostly driven by macroeconomic improvements and political changes.

The twin deficit situation improved materially. Interest rates fell over 200bps. RBI successfully targeted inflation and tamed it effectively. INR decline was arrested and forex reserves improved significantly. Change in political leadership led to improvement in sentiments and confidence. Some key pending economic reforms like GST, regulator for real estate sector, modern bankruptcy law, have been implemented.

The upmove has been strongly supported by abundant liquidity in the global financial system, declining domestic investment demand and poor real estate market.

The corporate earnings though have not shown any encouraging trend in past four years.

All these driver of the current bull market in India appear fatigued now. For example—

(a) The current account deficit improvement that started with drastic steps taken by the then new RBI governor and the then Finance Minister working in tandem, has peaked at 0.7% of GDP a few months back and is forecast to deteriorate to 1.75% by 2020. Higher energy import bill and lower export growth are primary reasons for the deterioration.

(b) The gross fiscal deficit of the central government is peaking in range of 3-3.5% of GDP. It is highly unlikely to improve any further from here. To the contrary there is a strong case for it to deteriorate in next couple of years as we approach the next general election.

(d) The chances of any further cut in interest rates appear dim. Bond yields have risen sharply over past few weeks. INRUSD also likely bottomed close to Rs64/USD.

(e) The global flow look uncertain as central bankers in the developed world look to contract their respective balance sheets.

(f) The popularity of political leadership is at the peak. The improvement in sentiment and confidence of businesses and consumer seems to be peaking close to decade high level.

(g) Investment demand continues to struggle.

(h) The impact of wage hike post implementation of 7th pay commission and OROP has been mostly factored. The implementation by PSUs and state governments may occur over next 12months.

(i) Earning downgrades continue, though at a slower pace. But given that the consensus is estimating a 25-30% earnings growth over next one and a half year, the disappointment is more likely there.

Tuesday, November 28, 2017

Bull markets are all same, or are they?

Thought for the day

"Youth cannot know how age thinks and feels. But old men are guilty if they forget what it was to be young."

—J. K. Rowling (English, 1965-)

Word for the day

Hearth (n)

Home, Fireside

The floor of a fireplace, usually of stone, brick, etc., often extending a short distance into a room.

Malice towards none

Controversy over Padmavati is not yet settled and an MLA and former minister in Bihar, hs threatens the Deputy CM, and the Deputy CM had to shift the venue of his Son's wedding.

"Law & Order"— is anyone bothered?

First random thought this morning

Last week I had the opportunity to interact with school children of a government school in a small town of UP. While I was sharing my experiences and thoughts with intermediate students, a young teacher raised a question. She asked, "why do we celebrate achievements of Indians living abroad, like Satya Nadella, Sundar Pichai et. al. These individuals indubitably have done very well for themselves. But what have they done for the country. And for that matter why are we celebrating an Indian girl winning Miss World title. The girls who won this title in past, have not really done anything for the country or countrymen to feel proud about, unless you want to feel proud over Priyanka Chopra playing a role in an English TV serial?"

As the question was fired out of blue, I could not answer this young lady. But I do want to satisfy her inquisition. May I seek your help!

Bull markets are all same, or are they?

In my view, most human being are naturally inclined towards positivity, progress, and prosperity. The cynics and skeptics are usually in abysmal minority. Celebrating rise in asset prices causing increase in wealth hence is a natural human reaction.

Bull markets are therefore usually welcome. The up cycles in real asset prices are mostly celebrated uniformly. However, the bull market in financial assets are fiercely contested, almost always. The current instance is no different. The reasons could be varied and justified. But that is not the point I want to discuss here. My point is limited to analyze the current bull market in India to optimize my returns on my investment portfolio.

In my view, though most bull markets in equities look the same from 35k feet, a closer look would reveal a different set of drivers in each case. It is important to note because it is the fatigue of these driver that eventually causes the reversal in price trends.

For example, the key driver of previous bull market in Indian equities (2003-2007) was the surge in credit. An unprecedented investment cycle was unleashed by easy credit.

Asian Financial crisis and successive poor monsoon resulted in economic growth plummeting in 1997-2003 to an average of 5.4 per cent. Economic sanctions post 1998 nuclear tests also played their role. The government responded with fiscal compromises and massive economic reforms. The government gave away its control over key sectors like roads, coal, energy, telecom, ports, airports and opened multiple areas for FDI. Implementation of VAT at state levels and expansion of Service Tax augmented the revenue considerably.

Consequently, fiscal discipline was restored after FY03, with the next five years up to FY08 witnessing a major reduction in the combined fiscal deficit from 9.3% of GDP in FY03 to a then record low of 4.7% in FY08. Lower fiscal deficits led to materially lower interest rates, which promoted higher investment and growth, which, in turn, increased revenues and thus further reduced deficits. Economic growth soared to record highs to average 8.7% during 2003-08.

The equity market celebrated its best bull market in history with Nifty rising from a low of 920 in April 2003 to a high of 6357 in January 2008 a 7x rise in less than five years, regardless of the most popular PM losing elections.

The market faltered when fiscal discipline was set aside in FY09 (combined deficit @ 10.6%) and the easy credit (rates begin to rise and NPA begin to build up) and freedom to operate to infra developers (scams in telecom, coal, real estate, roads) that drove the market started to falter. Global financial crisis pushed the markets deeper into abyss. The house of cards collapsed, with an unusually large number of infra builders losing over 80% of their market value and lenders left to collect the debris....to continue tomorrow