Greed still dominating the market sentiments

Thought for the day

"If the Confederacy fails, there should be written on its tombstone: Died of a Theory."

—Jefferson Davis (American, 2909-1889)

Word for the day

Disneyfy (v)

To create or alter in a simplified, sentimentalized, or contrived form or manner.

Malice towards none

Nothing comes out of nothing, and nothing ever could.

 

First random thought this morning

A visit to a summer cricket coaching camp in south west Delhi was encouraging and shocking.

Encouraging because 60odd children aged between 12-17, all attired in proper white cricketing gears were slogging in 42°C temperature. Some parents were also waiting on the sidelines. Most of these aspiring cricketers were from lower middle families. Their parents could hardly afford the cost of proper gears and coaching fee.

Speaking to some of these children, it was discovered that playing IPL and make tons of money, is latest dream career for many children these days. The shocking part was that none of these appeared to have a Plan B in place.

 

Greed still dominating the market sentiments

Historically, one of the most successful, though intuitive indicator of the greed dominating the fear in market is outperformance of small cap stocks over large cap stocks. The outperformance peak often marks the peak of a market cycle. Subsequent correction in the outperformance of broader markets coincides with the bottoming process.

A strong cycle bottom is formed when the fear begins to dominate and benchmark indices begin to outperform the broader markets materially.

In past, an outperformance level of 25-35%, in a given period has marked the cycle peak for the market. The correction thereafter have been sharp, painful and very broad based. In one year post peaking, the broader market corrected much more sharply as compared the benchmark indices.

In last instance (2006-2009), the outperformance peaked in January 2008 and broader markets corrected sharply thereafter.

During July 2006 and January 2008, BSE Sensex gained 106%, while BSE Small Cap (187%) and BSE Midcap (150%) sharply outperformed the Sensex. IN Next one year till the market cycle bottomed in March 2009, Sensex had lost 18% (from July 2006 level), while Small Cap (41%) and Midcap (36%) lost much more than the Sensex.

On that parameter, the current market cycle might have peaked in January 2018. In the Cycle that began from august 2013, Sensex gained 98%, while Small cap 267% and Midcap 233% sharply outperformed. That outperformance has corrected somewhat in past 5 months. However, it may still be far away from the likely market bottom, that could be reached by March 2019.

There is an argument that the market cycle that began in August 2013 had already ended in February 2016. And the current market cycle is a new one.

I personally do not agree with this viewpoint, as none of my parameters for market bottoming were satisfied in February 2016.

Nonetheless, even if we consider the cycle that started in August 2013, to have completed in February 2016, still the broader market outperformance is material. The market cycle therefore may not be anywhere close to the likely bottom.

 

Is it dotcom all over again?

Thought for the day

"Never be haughty to the humble or humble to the haughty."

—Jefferson Davis (American, 2909-1889)

Word for the day

Superluminal (adj)

Appearing to travel faster than the speed of light.

Malice towards none

Does yog guru cum industrialist Baba Ramdev want to become UP Chief Minister?

 

First random thought this morning

In the present political scenario, Indian voters face really tough choice. Between the incumbent prime minister Modi, who is being seen as not being able to meet peoples' elevated aspirations (which he himself has raised in past 5yrs); Rahul Gandhi who is still untested in any administrative role; and a host of regional leaders who lack national appeal.

If the recent voting trends are any indication, we are heading for a 1996 like situation, where some BJP supporters may press NOTA; Congress may only be able to increase its vote share marginally from 2014 and regional parties which got decimated in 2014, emerge stronger.

If this assessment proves correct, expect 5 out of 7 Delhi seats for AAP!!!

Is it dotcom all over again?

The greed trade that dominated the Indian equity market for past couple of years has suddenly weakened in past few weeks. There are signs of fear emerging as the dominating factor in the market. Though they may not have capitulated as yet, but a sense of unease is palpable amongst investors.

This is a typical case of hangover after a spell of ecstasy and overindulgence, and a key sign of the beginning of the market cycle bottoming.

It is pertinent to note that the bottoming of stock markets is usually confused with the lowest point of indices in a cycle. In my view, it is a complicated and often long drawn out process through which the factors supporting a positive environment for “risk investments”, e.g., equities, fall in place, and a foundation for the next cycle is laid.

The following pieces, in particular, should fall in place before we could call the market bottom.

• Psychological bottom should occur, i.e., greed should conquer the fear.
• Macro environment should be supportive of corporate initiatives for growth.
• Valuations should be fairly cheap to entice investors into taking higher risk.
• Earnings upgrade momentum should be positive.
• Technical bottom should be achieved.
• The alternatives to equity (debt, bank deposits, gold, real estate) should sound less attractive on risk-reward basis.
• Moderate to low volatility.

However, before I try to make any analysis of the bottoming process and form a strategy for the new cycle, it is important to assimilate the anatomy of the extant market cycle.

In past four years (FY14 to FY18), Nifty EPS has grown at measly ~2.8% CAGR, whereas Nifty has risen by ~12.2% CAGR. In this period, real GDP growth rate has fallen.

It is therefore important to examine if the extant market cycle that started in summer of 2013, is more like 1998-2000 dotcom cycle.

The dotcom cycle was purely a global phenomenon, in which Indian markets also participated, returning a phenomenal ~88% CAGR during November 1998 and February 2000. The retail participation in that cycle was overwhelming. But in hindsight we all know that it was mostly a "bogus" and "manipulated" market as rise in equity prices was not supported by earnings improvement or macro growth pick up. The gains were ephemeral and evaporated totally in less than a year.

In next few days I shall share my views on the same. Comments welcome.

Labor pain

Thought for the day

"To one who loves his country in all its parts, it is natural to rejoice in whatever contributes to the prosperity and honor and marks the stability and progress of any portion of its people."

—Jefferson Davis (American, 2909-1889)

Word for the day

Schlimazel (n)

An inept, bungling person who suffers from unremitting bad luck.

Malice towards none

Sharad Pawar must note that for a Janta Party encore, opposition parties would need some senior and still relevant BJP leaders to join them. Mere Sinha couple would not be adequate!

First random thought this morning

Water scarcity in Shimla must ring alarm bells in the corridors of power, both center and state. The day is not far when the locals will turn violent against the unmindful tourists and government agencies, thus destroying of whatever is left of this once heavenly place. Delhi is also witnessing riots like situation in many areas over water scarcity.

Experts and courts have been warning about deteriorating conditions of ground water across the country.

Any government or politician who makes a claim of development must account for water first.

Labor pain

Speaking with some traders in the Delhi wholesale markets, I realized that pain for migrant laborers is going to rise further in next few years.

Many of these markets are located in old Delhi congested areas. The only way to evacuate goods from these markets is through hand pulled rickshaws &, carts, and coolies carrying goods on their heads. I know for sure that this true for most old cities like Mumbai and Kolkata.

Most of these markets are likely to be either relocated or decongested in next few years, rendering this manual labor totally unemployed, just like the poor manual rickshaw pullers who lost their wages to E-rickshaws.

Construction work in large infrastructure projects is also becoming much less labor intensive now, with rising use of modern technology and automation.

If the civic authorities are to be believed, these migrant laborers are avoidable burden on the civic infrastructure. It is also a common complaint of law enforcement agencies that migrant laborers are also a major source of criminal activities in cities.

Having worked on some social projects to help these migrant laborers, I know the plight of these laborers rather well.

Many of these laborers mostly live in inhumane conditions, with little access to civic amenities like water, electricity, education, toilets, adequate health services, child care, etc. Many of them do not have a proper shelter to sleep in hot summer and chilly winters. Most of them have dependent family back home, but still work at much below the prescribed minimum wage rate, thus subsidizing the traders, MSME manufacturing units, builders etc.; and even households who use their services as rickshaw puller, vegetable & fruit vendors, domestic helps etc.

Worst, these laborers have to often face racist attacks from locals who believe that these migrants are encroaching upon locals' share of employment by undercutting the wage rate.

Despite a host of programs for rural employment, most of these laborers from UP, Bihar, Jharkhand, and Odisha have little to fall back, and cannot afford to return to their villages. Moreover, with rising automation, the opportunity to work in farms is also shrinking with time.

The question however is, in a large and diverse country like India, with frustrating and unpardonable regional inequalities, demographic imbalances and pervasive socio-economic disparities, should we not have a national labor migration policy.

Instead of providing random solutions like accident insurance, few night shelters, additional railway reservation counters during festivals and pulse polio camps, the government should consider regulating the interstate labor migration with a comprehensive legislation to safeguard everyone's interests.

Affordability of affordable housing

Thought for the day

"Be like a postage stamp. Stick to one thing until you get there."

—Josh Billings (American, 1818-1885)

Word for the day

Velitation (n)

A minor dispute or contest.

Malice towards none

Heard a senior socialist leader from UP claiming — "Now only Rahul Gandhi stands between Modi and defeat in 2019"!

 

First random thought this morning

After terrorism, now rapes in India also have a distinct religious and caste identities. Rapists are identified as Hindu, Muslim, Christian, Saint Maulavi, Pastor etc. and victims (or as fashionably called survivors now a days) are identified as SC/ST, Dalit, North Eastern, etc.

The two pillars of democracy (Politicians and Media) are surely and fast degenerating. The confidence in the third support pillar (Judiciary) is also at its Nadir, with the voices of severe criticism coming from within. It is for the Executive now to take all the burden on itself and save country from slithering into the world of chaos.

Affordability of affordable housing

Across the world, housing is one of the key drivers of economic growth. In the high growth phase of Indian economy between 2004-2009, housing did play a major role. Nonetheless, affordability has remained a key constraint in growth of housing sector.

Many analysts, including CLAS Greed & Fear, have suggested in their recent reports that affordability factor may be coming back to 2003-04 levels in Indian housing market.

Latest issue of Greed & Fear reads that the best stories to invest in in India remain the affordable housing story and the dramatic, albeit healthy, consolidation of the residential property market triggered by the “double whammy” of the Real Estate Regulation Act (RERA) (implemented from May 2017) and demonetisation."

As per the report, the residential property market in India has begun to pick up, "after years of oversupply, helped by dramatically improved affordability." As per CLSA estimates, the mortgage payment to post-tax income ratio has declined from 56% in FY07 to an estimated 31% in FY18, the lowest level since FY04."

There is no doubt that compliance led disruptions, and raw material constraints (especially sand) have resulted in lower supply at a time when the government is pushing the affordable housing segment investment hard. On aggregate basis therefore the net new sales are outpacing net new supply (including new launches and delivery), and lower inventory of built up and under construction houses.

It would however be totally wrong to conclude that housing sector has turned around and is ready to play a leadership role in faster  and sustainable economic growth.

The affordability statistics presented by equity analysts is based on the data for actual borrowers from the banks. This data though useful may not be (a) a good representative sample of the economy; and (b) may not address the issue of affordability holistically.

The banks and housing finance companies have materially tightened the lending norms in past few years. They are now seeking much more margin of safety from borrowers. Lower mortgage payment to post-tax income ration may to some extent may be influenced by these stringent criteria.

Moreover, interest subsidy by the government for lower price houses may also be aiding to lower ratio, as interest subvention reduces the mortgage payment for individual borrowers.

But the large issue is the notion of affordability itself.

Measuring affordability only in terms of capacity to pay mortgage is structurally flawed.

A housing unit built 50kms from the city center, with negligible social infrastructure in the vicinity remains mostly unaffordable for the intended beneficiaries as the family has to travel long distances for job, schooling, health services etc.

Most of the affordable housing projects so far have failed to address the issue of affordability in a holistic manner. (Though in recent times, government has indicated that they mat redevelop government, port and railways land within the cities for affordable housing purposes, not much progress could be seen so far on the ground.)

Lower mortgage payments mean nothing if the house owner has to spend significantly higher on travel and other social services.