Do it yourself

Tuesday, July 17, 2018

Pain of professional investing

Thought for the day

"If you are the master be sometimes blind, if you are the servant be sometimes deaf."

— R. Buckminster Fuller (American, 1895-1983)

Word for the day

Garbology (n)

The study of the material discarded by a society to learn what it reveals about social or cultural patterns.

Malice towards none

Will it be Nath vs. Scindhia in MP and Gehlot vs. Pilot in Rajasthan assembly elections later this year, to give a walk over to BJP?

First random thought this morning

The Uttar Pradesh government is relentless in propaganda of its "achievements in past one year. Last week too it issued multi page color insertions in national Dailies. The listed achievements included (a) laying foundation stone of an expressway planned a decade ago; (b) water pipelines in some villages; (c) electricity polls in some villages; (d) city gas distribution in Varanasi; (e) community health center in a village; (f) a TCS BPO; (g) cleaning and renovation of few ghats in Varanasi; (h) improvement and upgradation of few roads, etc.

It would be interesting to see if the government would like to take credit for Mukesh Ambani becoming richest Asian during its tenure!

Pain of professional investing

Since past couple of weeks, markets participants have been quite actively discussing the worrisome dichotomy in market, i.e., outperformance of benchmark indices (Nifty and Sensex) over broader market. Nifty has in fact outperformed most of the EM indices in past couple of months.

The outperformance of benchmark indices is giving an optical illusion of "all is well" in Indian markets, whereas most of the investors are experiencing serious loss of value in their respective portfolios.

After 4yrs of bull market (August 2013 to July 2017), it is normal for the broader markets to underperform and market breadth to stay negative during the course of the correction. What has surprised the market participants, in past 8weeks in particular, is that the move has been totally in opposite direction, viz. Benchmark indices have gained ~4%, while the small and midcap indices have fallen over 10%. Market breadth in this period has been very poor.

This dichotomy has created some peculiar problems for investors. For example:

(a) The portfolio investors who hold a large proportion of stocks outside Nifty universe are not able hedge their portfolios by shorting Nifty.

(b) Sectoral portfolio construction has become difficult as there are no discernible sectoral trends. The divergences are mostly based on market capitalization weight.

(d) Concentrated portfolio in top Nifty stocks has outperformed, but given the valuation premium over mid and small cap, the risk has increased significantly.

(e) In past couple of years, maximum money has been raised by mutual funds and PMS that aim to invest in mid and small cap stocks or stocks from specific theme or sectors. Most of these funds are underperforming the benchmarks, making investor jittery.

Ideally, these short term market aberrations should not bother an "investor". To the contrary, these are opportunities for investors where they can buy good stocks at bargain value. However, this time more investors are worried than ever. The reason, in my view, is meaningful institutionalization of the equity investment in past couple of years.

The asset under management (AUM) of mutual fund, PMS and other institutional investors has grown substantially in past couple of years. But most of these professional investors (managers who invest money on others' behalf) are in a fix.

They are given supposedly long term money to manage but get evaluated on month to month basis, and in some case even day to day basis. Their remuneration depends on their quarterly "trading" performance and net new money collected and not on the basis of new investment idea discovery.

These investors are therefore under tremendous pressure to generate return on "monthly basis" rather than creating wealth by investing for long term.

The following viral message on social media captures the true essence of the point I am trying to make here. (Please note that I have no means to verify the authenticity of this. I am reproducing it just to highlight my point without any comment on the performance or appropriateness of the strategy of the concerned fund house)...to continue tomorrow

Friday, July 13, 2018

Challenges investors face this morning

Thought for the day

"When things begin to go bad, the perception of people makes it worse."

—James Mirrlees (Scottish, 1936-)

Word for the day

Eggbeater (n)

A helicopter (slang)

Malice towards none

India beats France to take 6th spot on economic ladder.

Can Croatia also beat them to take their first FIFA cup?

First random thought this morning

The government has accepted net neutrality. It has also virtually accepted decriminalization of Section 377 of IPC. It is on the verge of bringing legislation to make Triple Talaq illegal. It is reportedly considering moving Supreme Court for banning the regressive practice of Nikah Halala. Though it has so far dithered on the issues like banning marital rape, but there are some voices of dissent to this view within BJP.

Notwithstanding the opinions freely expressed by various individuals within BJP and government, the legislative business so far has not indicated any regressive or bigoted stance of the government.

Challenges investors face this morning

Defying the recent global trend, the benchmark equity indices in India have risen close to their all time high levels recorded in late January 2018. The broader markets though have not kept pace with the benchmark indices and have underperformed by 12-15%.

If we consider YTD performance of markets, my strategy of focusing on large cap strong balance sheets, discretionary consumption, IT and Pharma and underweight financials & consumer staples has mostly worked well.

Considering almost NIL return in benchmark indices, my 25-30% tactical cash position (that has returned ~3% absolute YTD) has also worked well fro me. (See here)

In view of the benchmark indices trying to get past their previous all time highs and breaking into new territory, I have got recently lot of queries from readers. Most of the readers want to know if I am considering any change in my investment strategy!

At the outset I would like to inform that I am seriously concerned about the massive rally in so called "quality" stocks that has made their valuations beyond my reasoning capabilities.

I can find no reason to support sustainability of their current price levels. Nonetheless, the market is indicating that we may see the current trend continue to extend further.

This puts me in the most challenging phase of investing, where—

(a) You are happy for your strategy is working well;

(b) You have almost no conviction in sustainability of returns in your investment portfolio;

(d) Alternatives to equity look even less attractive;

(e) Optically market is giving illusion of "all is well"; and

(f) Technical charts are telling you to buy crap.

The options before me this morning therefore are—

(i) To stay tightly wrapped in my cocoon and do nothing;

(ii) To play contrarian, sell quality at crazy valuations and look for bargains in lower rungs, fully aware that prices may correct further and perhaps dramatically;

(iii) Raise cash level beyond 30%; and/or

(iv) Go with the emerging consensus and rotate the portfolio within quality to overweight underperforming pharma and commodities.

I shall share my thoughts on this with the readers next week.

Thursday, July 12, 2018

If you find it tough, well it is!

Thought for the day

"The world's been pretty good at coming up with new ways of doing things."

—James Mirrlees (Scottish, 1936-)

Word for the day

Solecism (n)

A breach of good manners or etiquette.

Any error, impropriety, or inconsistency

Malice towards none

Honestly, with hand on your heart, "Did you bet for France in FIFA finals"?

First random thought this morning

Past four weeks have been overwhelming for Indian sports lovers. Soccer, tennis, badminton, cricket, hockey, gymnastic etc have seen major events. India earned some glory in cricket, hockey and gymnastic.

Nonetheless, millions of people have remained busy following numerous sporting events. People have been opening newspapers from backside. New soccer stars have become household names, while TV channels have remained submerged in Mumbai floods, Burari suicides, and rapes.

No one is discussing or highlighting any economic distress or failing monsoon. All seems well and stock market continues to rise.

If you find it tough, well it is!

At the risk of sounding irritatingly repetitive, I would like to reiterate that in past 7 decades we have focused too much on our weaknesses and tried hard to overcome these by importing technology, energy, intellectual property, capital, and consumption patterns. The root cause of many economic problems, e.g., current account deficit, fiscal deficit, energy deficiency, excessive dependence on external IPR & capital flows, etc. could be traced to this misplaced focus.

In my view, just by focusing on our intrinsic strengths, we can not only conveniently reverse the flow of trade to pre British era but also be successful in achieving our secular goals of sustainable and faster economic growth.

I have been suggesting that implementing the programs like the few illustrated below, we could improve the balance of payment substantially and structurally:

(a) Indians spend approx USD25bn annually on education and related overseas travel. Creating 5 Special Education Zones (SEZ) with liberal VISA, forex, taxation and real estate ownership rules, and allowing foreign institutions to freely set up campuses could potentially reverse this flow. Students from India, far-east, middle-east and Africa who find it difficult to get VISA for US/UK etc. or find that expensive could also benefit from this. Our politicians have often spoken about recreating Nalanda and Takshila. This in my view is the easiest way to do that.

(b) It is common knowledge that India holds tremendous potential for tourism. However lack of proper infrastructure and a holistic approach to harness the potential has traditionally constricted the growth of this sector. On the other hand Indian outbound tourists flow is rising. The government and hospitality sector entrepreneurs will have to think really big to reverse these flows and bring India on world tourism map. Developing some world class self contained international tourism centers, e.g., on lines of Macau, Bangkok, Dubai, Santorini, Las Vegas, etc. with liberal VISA, forex, taxation and real estate ownership could be the first step in this direction.

(c) Vindavan, Tirupati, Varanasi, Gaya, etc. all have potential to be as desirable, venerable and popular destinations as Mecca, Vatican and Jerusalem.

Converting these centers of Indian religion and culture into self contained special zones with international airport, adequate number of high star category hotels, and annual event calendar could add substantially to India's external sector.

For example, Vrindavan can have two annual events Holi and Janamashtmi, when more than half million foreign tourist can visit the holy town

(d) Considering the worsening demographic profile of rich countries in Europe and Japan, the rising need for healthcare assistants can be hardly emphasized more. Opening one world class nurse training institute in each state with special emphasis on teaching foreign languages to the trainees, may do the same wonders as ITeS did in last two decades.

(e) Operating special incentive schemes for building global consumer brands may help in substantially enhancing the value of Indian exports. The government, for example, consider providing special incentives (tax rebates, promotion through government campaigns, etc.) for all locally developed consumer brands that are able to achieve more than US$500mn in merchandise sale in a year.

These projects also have the potential to generate large scale productive employment opportunity for local talent, besides contributing to economic growth and true globalization of Indian economy.

I acknowledge some of these suggestions may sound extremely difficult to implement in the current socio-political narrative. But then who said running a government in India is an easy task!

Wednesday, July 11, 2018

Budget tourists and assembly lines

Thought for the day

"Encourage your own curiosity; pursue the problems based on that."

—James Mirrlees (Scottish, 1936-)

Word for the day

Makebate (n)

A person who causes contention or discord.

Malice towards none

Why can't BJP just accept that AK is CM of Delhi and cooperate with him to improve life of the people living in Delhi!

First random thought this morning

Adi Godrej group is reportedly opposing the proposed acquisition of their Vikhroli land for Mumbai-Ahmadabad bullet train project.

So far the opposition to the ambitious project had come from farmers and opposition parties. This is the first instance an industrialist (that too someone who always sounded highly impressed by PM Modi) has opposed the pet project of the prime minister. This may signifies either of the following:

(a) Industrialists want everything but wouldn't give away even a small piece of land lying vacant for 100years for the development of the country. or

(b) Government has totally failed in convincing people about the need, necessity and importance of Bullet train project.

Budget tourists and assembly lines

The primary idea behind the activity of trading is to let everyone do whatever they can do best.

"Trade" thus allows the people use their scarce resources in most efficient way and exchange the output of their expertise with the output of others' expertise. Trade renders every one better off, as it facilitates the most efficient exploitation of scarce resources and enables production of goods and services at lowest feasible rates.

In an ideal world, the objectives of "Trade" are hence achieved when:

(a) All owners of resources, producers of goods and services, and consumers of such goods and services are allowed to freely trade with each other; and

(b) Everyone produces as per their specialization and everyone consumes as per their affordability.

If trade is restricted, optimum exploitation of resources would not be possible, and people will be forced to do things beyond their domain of expertise. This results in (a) irrational pricing of resources, goods and services; (b) economic imbalances; and (c) dissipation of scarce resources.

The erstwhile Soviet Block, which restricted trade with the western world, is a classic example of this phenomenon. India and China also followed largely restrictive trade policies till 1980s and suffered slower growth, poverty, and high inflation. Opening of Indian and Chinese economy may have significantly helped in containing global inflation through cheaper labor and resources.

Similarly, if people are allowed to consume more than what they can economically afford, the demand-price equilibrium of goods and services will get distorted leading to (a) abnormal pricing of resources; (b) avoidable wastage of resources; (c) poor sustainability; (d) frequent financial crisis; and (e) socio-economic inequalities.

The sub-prime crisis that rattled the global economy a decade ago is a classical example of this "eating more than you can digest" phenomenon.

I also see consumption of fossil fuel by Indians as a reflection of consuming beyond affordability. Had successive Indian governments since independence, focused on harnessing the abundantly available solar, wind, and hydel sources of energy, rather than over relying on imports of fossil fuels, the trajectory of Indian economic development could have been very different.

Similarly, constricting free trade in agri produce and making the farmers dependent on subsidies and loan waivers etc. is another trade distortion that may have seriously hindered India's position in global trade, besides introducing serious discrepancies (almost irreparable now due to political compulsions) in the socio-economic structure of the country.

The short point I would like to make is that to increase its share in global trade to a respectable level (say 5%) from the current ~2%, India needs to focus on its core strengths and expertise.

If someone asks me "what are the 10 key strengths of India" in socio-economic context, I would list the following:

Food
Languages
Religion & Mythology
Spiritual knowledge
Traditional arts
History & culture
Variety of beautiful landscapes
Hard working people with better than average IQ
Abundant sunshine and water flowing through rivers
Second largest pool of arable land

As a minister for trade and commerce, I would therefore focus on these strengths to increase my share in global trade, rather than simply importing crude oil and exporting petroleum products; or importing raw diamonds and bullion and making jewelry as per the specification and designs provided by foreign buyers; or providing a base to foreign manufacturers for assembling mobile phones or motor vehicles from mostly imported parts; or worst be contended with small number of low budget foreign tourists!

Tuesday, July 10, 2018

High street or flea market

Thought for the day

When things begin to go bad, the perception of people makes it worse.

—James Mirrlees (Scottish, 1936-)

Word for the day

Ullage (n)

The amount by which the contents fall short of filling a container, as a cask or bottle.

The quantity of wine, liquor, or the like, remaining in a container that has lost part of its contents by evaporation, leakage, or use.

Malice towards none

If the government can convince that "nominal growth" is the "real growth", and raise inflation to 6%, we will definitely have sustainable double digit growth.

First random thought this morning

While 24X7 news channels are scaring people by showing images of furious floods across the country, the official IMD data indicates that about 50% of country has received normal rains so far this season. The rest of the areas are either dry or inundated. As the monsoon progress has slowed considerably, last week, only about one third of the country received normal rainfall, while another one third was mostly dry.

The statistics however tells that the rainfall so far has only been 7% less than the long term average.

How does one decide if monsoon is good, normal or poor?

High street or flea market

In past many decades, cheaper labor has been at the core of Indian exports competitiveness. The traditional engine of Indian export growth, e.g., textile, gems and jewelry, ITeS, banking services, CRAMs, etc. have all been mostly running primarily on the fuel of wage rate arbitrage.

Though it would be foolish to deny the specialized skills and expertise of various businesses, but I must say that the primary driver of export growth has been the availability of abundant skilled labor at much cheaper rates.

Engineering exports, especially automotive sector exports, could be marked as exception. Perhaps because the development and growth of this sector has been primarily driven by companies from developed countries, especially Japan and Germany, known for manufacturing prowess and process orientation. These foreign OEMs have successfully introduced best practices, processes and work culture in their Indian operations, besides investing in local enterprises to make them competitive enough to become their global partners. Otherwise, consider the following:

(a) How many Indian brands do you find in top 100 global apparels brands? How many Indian textile designers are known globally? Though a number of Indian textile manufacturers like Arvind Mills, figure in the list top 100 textile producers of the world.

(b) How many Indian jewelry designers are there in top 100 globally? Though, India is one of the largest manufacturers of jewelry products in the world.

(c) India is widely considered as the IT powerhouse of the world. How many Indian IT products and innovations could you recall?

(d) We have a fledgling CRAM industry that does research function for almost all renowned global pharmaceutical innovators, on contract basis. But how many "New Drugs" have been innovated by Indian companies in past seven decades?

(e) Indian bankers and technology professionals manage operations (both front desk and back end), of global banking giants. But how many Indian banks figure in top 50 global banks list?

(f) Despite being surrounded by hostile neighbors ever since independence, India is still one of the largest importers of arms and ammunitions. We figure nowhere in the global list of arms suppliers.

The point I am trying to make is that innovation, advanced technology, branding, niche marketing and high value addition has been mostly missing from the Indian export enterprise. We have either been a low cost, faceless contract manufacturer for the rich of the world or a flea market selling spurious goods to the poor of the world. This needs to change, and change fast, if we need to turn trade balance positive on sustainable basis....to continue

Friday, July 6, 2018

Focus on strengths

Thought for the day

"Shadow owes its birth to light."

—John Gay (American, 1685-1732)

Word for the day

Debonair (adj)

Courteous, gracious, and having a sophisticated charm.

Malice towards none

While in Delhi, Congress leaders, especially P. Chidambaram, are clamoring for reduction in taxes on fuel, their government in Karnataka has announced 2% hike in tax rates for petrol and diesel.

First random thought this morning

Tata Nano was once hailed as revolution by many. It was celebrated as the best example of Indian Jugaad (low cost innovative solution); and marketed as most affordable mobility solution for rising middle class of India.

After a massive controversy was raised in West Bengal, the original location for Nano's production, the plant was shifted to Gujarat near Ahemdabad. The then Gujarat government marketed it as harbinger of its business friendliness.

In June 2018, Tata Motor produced just one (and perhaps the last) unit of Nano. Management experts will perform the autopsy to find out what went wrong and management students will be taught how not to do things.

Focus on strengths

As I mentioned yesterday (see here), the government has been repeatedly stating that increase the domestic production of energy and electronic products to substitute import.

The government has placed significant focus on renewable sources of energy, especially solar, and incentive for producing electronics products within the country under Make in India program.

There have been some notable achievements in these areas in recent years. For example consider the following:

FDI grew 4.4 times in Electronics & IT sector- from $2.77 billion (2011-14) to $12.24 billion (2014-17)
1.9 lakh crore of electronics products manufactured indigenously in 2014-15.
Highest ever wind power capacity addition of 3,300 MW in 2015-16.
140% increase in solar power capacity addition during 2014-16 as compared to 2012-14.
34 solar parks of aggregate capacity of 20,000 MW sanctioned for 21 states.
31,472 solar water pumps installed in 2015-16, highest ever since 1991.

I believe that “roof top solar panel” has the potential greater than what has been seen in the mobile telephoney in past 15years. The government has been giving decent cash subsidies for installation of solar panels and roof top solar is gaining momentum in many states, but still it is not being done on mission mode. This needs to be transformed into a peoples' movement to accelerate the outcome.

A change in housing policy to mandatory accommodate the solar panels in all new building designs, especially in affordable housing projects, may help to great effect in my view.

Reducing energy intensity of water and developing a world class public transport infrastructure on priority basis, especially in tier II and III cities, and strict legal enforcement of energy efficiency are two other steps that are urgently needed to reduce the reliance on energy import. (Also read here)

Insofar as increase in the production of electronic goods in India to substitute the import is concerned, I totally differ from the Make in India approach taken by the government.

So far whatever actual investment or planned investment in electronic production I have heard is mostly in assembly lines with low value add products like plastics sourced from India. The key components like semi conductors, micro processors, memory chips etc. are all still imported. With this practice, not much help could be expected on trade balance in my view.

Establishing highly capital intensive integrated manufacturing facilities for electronic products within the country may not be a good idea after all. Especially, when significant capacities are available globally to cater to the Indian demand,

If we consider the high and still worsening obsolescence rate in technology and need for heavy recurring investment in new technologies and upgrades, this becomes even more avoidable. Imagine, a US$20bn manufacturing business suddenly going out of business due to technology obsolescence!

The better idea would be let Indian entrepreneurs to lease manufacturing facilities in Asian countries, produce their and import into India.

The government should rather focus on, in partnership with industry, investing in development of new technologies. It should make provision for training of millions of young IT professionals, who can then serve the global industry and earn enough foreign exchange to pay for import of mobile phones and television sets.

The emphasis should be on building on our strengths (manpower) rather than wasting scarce resources on building vulnerable and redundant factories.

...to continue on Tuesday