Do it yourself

Wednesday, October 3, 2018

What's making investors jittery?

Some food for thought

"It is better to travel well than to arrive."

—Buddha (Indian Saint Philosopher, 563BC - 483BC)

Word for the day

Applesauce (n)

Nonsense; bunk.

First random thought this morning

For past 3months, I have been daily watching the fury of nature of on my TV screen. Scenes of incessant rains; massive floods; cloud bursts; landslides; broken roads; submerged schools; inundated pathways; colonies, fields & villages; and buses & trucks drifting haplessly in furious streams etc. all made me believe that we have witnessed a furious monsoon season with bountiful rains all across the country.

But the final IMD data says that the country received 9% below average rainfall this year, against an official forecast of +4%. Some analysts have found fault with the IMD data and concluded that the rains may be even lesser than what IMD is claiming. This is fifth straight year when IMD has overestimated rains. Lots of people are thus raising doubts over credibility and integrity of IMD.

Many people are wondering why IMD people were so aggressive about their normal monsoon forecast! There are doubts over this 9% deficit number too. A 10% deficit would mean official declaration of drought, triggering a lot of claims and procedures.

I find it pertinent to highlight that many village folks had suggested to me as early as February 2018 that the weather this year may be abnormal and we may see poor rains. (See here)

Last week, PM Modi has emphasized on some revolutionary changes in our education system. I think, it would be highly pragmatic to incorporate our traditional knowledge base in the formal education system. IMD may also consider tweaking its models after making a scientific evaluation of the conventional wisdom.

Chart of the Day

What's making investors jittery?

In the month of September the benchmark Nifty fell ~6%; Broader NSE500 fell ~9%; and Nifty Small Cap 100 corrected over 20%

The precipitous fall in equities has made the investors jittery for the following reasons:

(a) This was for the first time in past one year that Indian equities moved contrary to the global trend. Even though for the 12months ending September 2018, Indian equities have still outperformed the major global markets, for the month of September India was the worst performer. This raises the probability of further underperformance of Indian equities in an attempt to revert to the mean.

(b) It was not only equities, but many debt portfolios also recorded negative returns in the month of September. This trend may have reignited the memories of post Lehman market freeze. To make the matter worst, the performance of well diversified portfolios and balanced fund was no better. (See table on next page)

(c) Given that the government is walking a very tight rope on fiscal front, and there is little leeway available for monetary easing, investors are not anticipating any material stimulus for economy or markets.

(d) The country is entering a prolonged election season that should last till May 2019. The early indications are that the battle is going to be extremely intense and acrimonious. Though it is too early to reasonably forecast any outcome, it would be fair to say that unlike 2014 there is no clear wave in favor of PM Modi. Though PM Modi remains the most popular national leader, BJP may have to fight intensely for every seat. To that extent, an element of political uncertainty has certainly arisen.

(e) A spate of news about corporate misgovernance has shaken the confidence of investors, especially in many stocks popular with active traders.

(f) The real estate market in many pockets has shown distinct signs of stabilization. The commercial real estate in fact has shown decent improvement in past one year or so. Many market participants fear that the large investors may get diverted to the real estate in next few months. The market may therefore not see any "V" shape recovery even after the elections, unless the foreign flows return meaningfully to India.

(g) The earnings downgrades post 1QFY19 results suggest that the market expectations of full fledged earnings growth revival may be belied yet again. Though earnings improvement is seen in many pockets, overall earnings have failed to justify the market valuation levels. There is little indication to suggest any material improvement on this front.

Friday, September 28, 2018

Leaving a trail of simmering issues and ashes

Some food for thought

"If I take death into my life, acknowledge it, and face it squarely, I will free myself from the anxiety of death and the pettiness of life - and only then will I be free to become myself."

—Martin Heidegger (German Philosopher, 1889-1976)

Word for the day

Habiliment (n)

Characteristic trappings or dress

First random thought this morning

The Supreme Court of India is in overdrive these days. Destroying many archaic structures and creating new pathways. After reading down section 377 of IPC (decriminalizing same sex relationships), it has struck down Section 497 of IPC (decriminalizing adultery) completely. In the interim, SC upheld that the Right to Privacy is integral to the Right to Life, and hence effectively scuttled the State's attempts to invasion in our private lives. Aadhar Act verdict is a landmark in that sense. Allowing live streaming of SC proceedings in select cases is also a major milestone. Hopefully we shall see another remarkable judgment on Ayodhya dispute.

The government did a Shah Bano with the verdict on SC/ST Act. It is reportedly considering a legislation to undermine the Aadhar Act judgment also. It is inappropriate and unacceptable.

To the contrary, it's high time that the government takes a cue from the SC's line of thinking and initiates a comprehensive review of IPC and synchronizes it with the modern times.

Various laws should be suitably amended to provide for a "Dignified Life" to all citizens of the country. Do whatever it may take to ensure that.

Chart of the Day

Leaving a trail of simmering issues and ashes

Adhocism is the key word in policy making these days. Without a robust conceptual framework, the governance and administration has been reduced to mere fire fighting. Short of resources and constricted by poor vision, they are leaving a long trail of simmering issues and ashes, as they set out to fight a new fire every morning.

With most couples needing to work and many singles forced to stay alone for work, refrigerator and washing machine are commonly acknowledged as nothing but essential accessories, just like mobile phone.

It's not even two months when the government cut GST on air conditioners and washing machines materially. I took this as an recognition by the government of ground realities.

Suddenly comes a rude shock. Custom duties are hiked, inter alia, on air conditioners, and domestic washing machines.

Worst, it's not only the import of white goods, the government might have hit the investments made in "Make in India", by hiking the duty on AC compressors.

Given the insignificant amount of potential revenue and forex savings through this hike, the only inference I could draw is that somewhere it is a mindset problem. Apparently, the bureaucrats sitting in North Block at Raisina Hills are still not able to reconcile with the ground realities.

The political establishment is torn between the necessity to keep the middle class in good humor, while addressing the concerns of the people at bottom of the pyramid and protecting the interest of India Inc. Obviously they are not successful in pleasing anyone.

By committing to complete normalization of the policy by 2019, US Federal Reserve has further queered the pitch for our policy makers. A stronger USD consequent to higher US rates, will certainly impact capital flows to emerging markets, including India. Higher crude prices shall also keep the current account position persistently under pressure.

The imported inflation, at a time the domestic prices are also looking to rise due to rain caused supply disruptions and rise in logistics cost, shall add to the complexities being faced by the Monetary Policy Committee of RBI.

Conceptually, if MPC adheres to its mandate of price stability, it shall be looking at raising rates rather aggressively at its review meeting early next week, to stem INR depreciation, augment foreign flows and curtail domestic consumption demand.

This may result in collateral damage in the form of growth slowdown, renewed cycle of financial slippages, and increasing fiscal pressure as cost of government borrowing rises. This all is happening when the incumbent government is going to face the toughest test of its popularity in BJP's home turfs (MP, Rajasthan, Chhattisgarh) in next couple of months.

The question is what the government should be doing under the circumstances! The answer in opinion lies in politics and not in economics. For example, if I were PM today, I would not be scared to go to my people today. I would admit shortcomings in the DeMo exercise and thank them for bearing the pain. I would strongly commend their contribution in terms of voluntarily surrendering LPG subsidy, and committing to better tax compliance. I will seek their cooperation in managing the current account by minimizing the fuel consumption for 3months. Request them to travel only if necessary, use car pool & public transport and deferring their foreign travel programs to next summer. Most important, for once I will focus on delivery and refrain from making tall promises that cannot be delivered in next 6months.