Do it yourself

Friday, December 7, 2018

In spirit of Christmas

Some food for thought

"The less government interferes with private pursuits, the better for general prosperity."

—Martin Van Buren (American President, 1782-1862)

Word for the day

Postiche (n)

An imitation or substitute.

Pretense; sham

First thought this morning

The socio-economic developments in last five decades are distinctly characterized by reduction in size and faster speed.

Families have shrinked in size; so has the size of homes, appliances, data storage devices, and distances in terms of time, etc. Kings are no longer large hearted and magnanimous, like in good old times.

The speed of automobile, airplanes, rockets, camera shutters, voice & data travelling through cables, changes in ideologies & thoughts, execution of transactions, is increasing with each passing day. Children are maturing faster. Young are aging faster. Athletes are running/swimming faster.

Most purists argue that nothing New is being created now. The focus is entirely on enhancing whatever exists on the planet. We are discovering new methods of doing the old things. And in this rush to reach nowhere, the survival is increasingly dependent on how quickly one gets conditioned to the new standard of speed and size. Those who fail the test are doomed to live a life of discontent, or even depression in many cases.

In some sense we may be rushing back to the pre stone age, where the whole effort of human race was merely to survive. Any innovation was perhaps just a discovery by chance. The current political discourse (disparaging, vindictive, parochial) and social narrative (blasphemy, intolerance, etc.) is all a reflection of this race to the bottom.

As the innovation has dried up, the classical symbols of human evolution - Shakespeare, Beethoven, Picasso, Mozart, Tolstoy, Keats, Homer, Surdas, Kalidas, Tulsidas, Kabir, Jaydev, Tansen, Tagore, Jaishankar Prasad, Premchand, Ravishankar, et. al. — have all been appropriated by the elite. The commoners are left at the mercy of non-human like Siri and Google.

No one is writing Ramayan and Geet Govind these days. The messengers/incarnations of God are not descending on earth to preach Gita, Koran or Bible.

So what is the way forward? Will there be a course correction? or we go all the way down to complete the circle of time and then begin to evolve again?

Chart of the day

In spirit of Christmas

2018 has been a tough year for Indian equity investors. YTD flat Nifty may be failing in capturing the pain the investors must have experienced during the course of the year. From a jittery February-March to ecstatic July-August to traumatic September-October, it has been a roller coaster only few daredevils would have enjoyed. December so far is indicating a despondent end to the saga.

The market experts are however drawing comfort from the poor performance of Indian equities, in true Christmas spirit. Hoping that the markets might have already suffered their worst, and 2019 could be a positive year.

FY19 may end as fifth consecutive year of earnings disappointment. The expectations for earnings in FY20 are expectedly running high. Currently the consensus seems to be placed around 25% earnings growth in FY20, over a low base.

It is customary for experts to forecast their respective targets for the benchmark indices 12months hence, regardless of the accuracy or otherwise of such forecasts in the past.

I usually disregard these customary forecasts made in the spirit of Diwali or Christmas. Nonetheless, I do draw a matrix of likely scenarios, to draw my investment strategy and formulate my asset allocation.

I shall share my outlook and strategy for 2019 with readers next week.

My equity strategy would be based on the following matrix.

Thursday, December 6, 2018

Preparing for a shifting paradigm

Some food for thought

"A hen is only an egg's way of making another egg."

—Samuel Butler (British Poet, 1835-1902)

Word for the day

Brusquerie (n)

Abruptness and bluntness in manner; brusqueness.

First thought this morning

Brexit vote in summer of 2016 marked a beginning of a significant phase in the history of modern Europe. The recent protests in France over higher fuel prices (popularly known as Yellow Vest Movement) may be an important chapter in this.

The violent protests apparently enjoy wider support amongst both urban and rural populace of France, and neighboring countries like Italy, Belgium and Netherlands.

The global strategists, historians, and economists et. al. are busy analyzing the genesis, implications and repercussions of these protests. We would certainly know their views and opinion in due course. Regardless, I would like to add my two paisa to this.

In my view, these protests are primarily the following three sentiments:

(1) Vote of no confidence in the ECB's 'whatever it takes" stance of monetary policy.

(2) Realization of the fact fiscal profligacy of the pseudo socialist regimes in Europe cannot last much longer.

(3) Discomfort of natives about the demographic changes taking place in Europe, especially due to immigration.

The reorganization of European Union, in my view, may not pause with UK exiting the common market. We may either see wider reforms or more exist, rendering the 25year old experiment mostly redundant.

I shall be keenly reading the unfolding chapters in European history from my own lenses.

Chart of the day

Preparing for a shifting paradigm

Four noteworthy events have taken place in Indian financial markets in recent past:

1. The market regulator (SEBI) has issued a framework, requiring large corporate to source at least 25% of its total long term borrowing through bonds. Large corporate for this purpose is defined as firms rated "AA" or higher and having outstanding of more than Rs100cr loans with a maturity of 1yr or more.

2. Both major stock exchanges have launched online platforms for retail investors to trade in government securities.

3. Non Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) have emerged as the most important source of credit delivery.

4. Ostensibly, one odd transaction in bond market by a mutual fund triggered a panic attack both in the credit as well equity markets.

Collating all these four pieces in a single frame, I get the following picture:

(a) Banks alone cannot meet the burgeoning credit distribution needs of the country. One, most of the banks may be limited either by reach or resources; or may be both. Two, banks cannot serve the micro segments of the credit delivery that require high degree of specialization, e.g., consumer electronics and household goods funding; financing of consumption expenditure like vacations, marriages, vocational courses; infrastructure asset funding; infrastructure construction funding; SME working capital financing; small housing finance etc. We do require specialized institutions for delivery of these credits.

(b) The small savings that have been a traditional source of deficit financing may not remain viable for long due to a variety of reasons. Sourcing of deficit financing from the household investors directly is definitely a more efficient and sustainable method.

(c) The government is earnestly facilitating the deepening of financial markets for domestic investors. IBC to ensure quick and efficient resolution of defaults; online trading platform for better liquidity; regulatory mandate for companies to raise more debt from markets to deepen the market make the price discovery more efficient, are some noteworthy efforts.

Three things are however still conspicuous by their absence in this picture, viz.,:

1. I find the present level of understanding of debt markets at the distributor and investor level is abysmal and totally inadequate.

2. An equitable taxation framework. In an emerging market like India the debt investments generally carry higher risk as compared to the equity. It would therefore only be appropriate that tax treatment of both is equitable.

3. Some recent episodes of questionable corporate governance at some leading corporate highlight that our disclosure norms are not only inadequate, but poorly implemented also. Public companies are allowed to hide substantial transactions behind the veil of 'business compulsions' and 'contractual obligations of secrecy'. This all needs to change.

Recently, the rating agency CRISIL has issued an interesting study "Indian Debt Market 2018". I would like to share some of the interesting trends and data presented in the study with my readers in subsequent posts.

In case you are wondering why I have not taken note of the RBI policy statement made yesterday — well frankly dear, I found nothing noteworthy in that.