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Thursday, December 19, 2019
Wednesday, December 18, 2019
2019 - In retrospect
As an investor, I would describe the 2019th year of Christ as
"befuddling".
The domestic economy worsened materially despite better global
opportunities, improved infrastructure and supportive policy environment. The
private consumption and investment were the worst affected areas of the
economy, despite introduction of an elementary Universal Basic Income (UBI)
program for farmers, best monsoon in decades, 135bps fall in policy rates
(which have been mostly transmitted), and persistently low inflation for most
part of the year.
For most of the financial investors, the year 2019 was
disappointing in terms of return on portfolios, even though the benchmark
equity indices are ruling at all time high levels, foreign flows have been best
in 5years, and benchmark bond yields are lower by almost 100bps.
Domestic economy worsens
The year 2019 witnessed significant deterioration in the
macroeconomic parameters like GDP growth, fiscal deficit, foreign trade,
unemployment, credit growth, savings rate, private consumption and investment,
etc. The inflation has also started worsening in last 3months months. Almost
70% of the population is facing stagflation like conditions with stagnant to
lower wages and rising cost of living. Besides, some new sectors of stress
emerged in the economy. The business and consumer sentiments are despondent.
On the positive side, many legislative and procedural changes
started to support the stability and growth. For example, the bankruptcy
resolution process gathered some pace, lending some stability to the banking
system; RERA also began to show some positive results with real estate sector
consolidating and developers with stronger balance sheets benefitting; bank
recapitalization and consolidation has progressed well and shall bear fruits in
next couple of years.
Besides, in principle decisions have been taken to privatize
large PSUs like Air India, BPCL, Shipping Corporation etc; the process for
development of a vibrant retail debt market has started on an encouraging note
with launch of PSU Bond ETFs; some significant changes have been implemented to
strengthen the regulation of financial markets and preventing frauds and misuse
of investors' funds.
Overall, many global & domestic agencies and experts have
expressed serious concern over the state of India's economic affairs, while
downgrading the growth forecast. Global rating agencies have even cautioned
about a possible rating downgrade, should the economic growth continue to
remain low.
Global economy remained in slow lane, but ending the year on
positive notes
The global economy, including the USA, Europe and China mostly
remained in the slow lane for most part of the year. Multiple trade conflicts,
most notably between US & China, US & Europe, Japan & Korea, slowed
down the trade considerably. The uncertainty over Brexit kept the businesses in
UK and Europe on the edge. The geo-political tensions, especially in the Middle
East Asia, Indian sub-continent and Korean peninsula also impacted global
trade. Consequently, most commodity producing economies struggled with
deflationary pressures.
However, towards the end of the year, some signs of stability
are emerging. A decisive mandate for conservative party in UK and lessened the
Brexit uncertainty considerably. There is some thaw in Sino-US trade relations.
The latest data from China has signaled bottoming out of commodity demand. The
central banks of US, BoJ, EU, UK, Canada, India, Australia etc., have all hit
the pause button in their latest policy reviews.
Sensing a revival in global economy, the global equities have
recorded decent gains in past few weeks.
The financial markets are jittery
While the benchmark equity indices have returned ~11% YTD 2019,
the broader markets have given up most of the gains made in 2017. Out of the 12
major sectors, only three could give positive return YTD, while 9 sectors gave
negative return. Core sectors like Commodities, Auto, Pharma and Consumption
have yielded a negative return YTD in 2019. Private Banks is the only segment
that has outperformed Nifty this year.
Cash (Liquid Fund and Bank Deposit) returns outperformed most of
the debt fund returns during the year.
This has happened despite five year high foreign inflows into
equities.
Socio-political conditions are tense
Insofar as socio-political conditions are concerned, the year
2019 has been marked with widespread student protests and cases of mob outrage.
Legislative changes like Abrogation of Article 370 and Enactment of Citizenship
Amendment Act has caused civil unrest in many states. The state center
relations seem to have worsened due to rising mistrust and antagonism.
Despite winning an overwhelming mandate in the general
elections, the BJP's footprints continue to shrink in state legislatures. After
losing the key states of Madhya Pradesh, Chhattisgarh and Rajasthan to the
Congress last year, BJP lost Maharashtra this year; and could form government
in Haryana with the help of opponent Chautala family.
Socially, while no one is starving to death, the people in
general continue to be restless like last year. The primary reason is
unreasonably high expectations from the government and aspirations driven by
such expectations. There is little indication that this gap between political
promise and actual delivery will be mending anytime soon.
Tuesday, December 17, 2019
The Solution lies within
Some of the headlines in yesterday's newspapers made interesting
reading:
A few days ago, the finance minister had categorically dismissed
the talks about changes in the GST rates. She was quoted having said that
"Buzz is everywhere other than in my office". Yesterday, West Bengal
Finance Minister Amit Mitra, who is also former head of GST Council and FICCI
General Secretary, reportedly, wrote to the finance minister requesting, “We
should not in any way tinker with the rate structure or impose any new cess at
a time when the industry and consumers are going through the most distressing
times with ‘stagflation’ knocking at our door (stagnation accompanies by
growing inflation).” (see
here) It is very difficult for a common man to assimilate, how such a senior
person would write an official request, if there is no buzz around.
The commerce minister highlighted that he has taken an exercise
to consult country’s top 25 corporate houses and lenders, to assess their
investment plans and also try and resolve their issues that they may be facing
in their bid to expand operations. The list of 25 included Aditya Birla Group
Chairman K. M. Birla, among others. (see
here)
The telecom minister expressed his displeasure over the comments
made by the promoters of beleaguered Vodafone-Idea, in which Birla group is
co-promoter. Referring to the comments made by Vodafone CEO that running
business in India may not be viable unless the government helps, the minister
said, “I don’t appreciate this kind of statement. Very firmly and very clearly.
We have given all the opening for doing business but no one should dictate
terms on us. India is a sovereign country...,” It is pertinent to note that K.
M. Birla has recently echoed the views of his British partner. (see
here)
Reportedly, As many as 43 out of 85 coal blocks allotted after
2015 to PSUs have yet to receive 159 clearances, mostly because allottee PSUs
have not taken necessary actions. These blocks were either auctioned or
allotted to public sector companies by the government following cancellation of
204 blocks, including 33 operational blocks, by the Supreme Court in 2014. (see
here) Incidentally, the incumbent commerce minister was in charge of coal
ministry during May 2014 to May 2019.
India now ranks much lower than Bangladesh on many parameters,
including GDP growth (8.15% in FY19). The latest is the gender gap. India is
now ranked 112, down 4 places since last year, in terms of gender gap amid
widening disparity in terms of women's health and survival and economic participation
-- the two areas where the country is now ranked in the bottom-five. Political
rhetoric and shenanigans apart, Muslim countries like Bangladesh (50th) and
Indonesia (85th) are doing much better than us in bridging the gender gap. (see
here)
The point is that the government is obdurately refusing to
accept that the solution lies within. Instead of introspecting they are relying
on "experts", "vested interests" and
"uninterested" for solutions. Obviously, they would not get the
appropriate answers.
In the spirit of Christmas
If 2018 was a tough year for investors in Indian in financial
markets, the year 2019 has been a even tougher. YTD return of ~11% on Nifty may
not be reflecting the pain and agony that the investors in Indian financial
markets may have suffered. The larger pain in fact may have been suffered by
the investors in the perceived to be "safe" debt instruments.
The year began with low business expectations and political
nervousness. The hopes of a stronger mandate to the incumbent regime and
consequent economic reforms, led a strong rally in the stock prices as the
process of elections commenced in March. The Euphoria soon fizzled with
presentation of a disappointing budget and imploding NBFC market, erasing all
gains for the year by the month of August.
The corporate tax cuts, alongside global rally in equity prices
witnessed a sharp recovery that took the benchmark indices to new highs in
November. December so far has been little volatile but mostly flat.
YTD 2019, Indian benchmark indices have significantly
underperformed the peers like Brazil and China, and developed markets like USA,
Germany and France. The pain has however been seriously accentuated in the
broader markets, where the small caps and midcaps that did exceedingly well in
2017 and early 2018, suffered massive value erosion.
The domestic flows into equity mutual funds that underpinned the
market rally in 2017 and market resilience in 2018 (and most part of 2019)
appear to have tapered towards the end of the year. Though, foreign portfolio
investors (FPIs) turned significant buyers in 2019, after turning net sellers
in 2018. The net FPI investment in Indian equities in YTD 2019 is 65% more than
the cumulative net flows of previous 4 calendar years (2015-2018).
The debt funds returns continued to be impacted by losses on
NBFC portfolios, rise in bond yields and large number of rating downgrades.
Some Fixed Maturity Plans failed to deliver the promised returns. Many debt
fund returns were below the bank deposit rates, despite higher risk. Credit
risk fund (below AAA corporate bond funds) were very low to negative.
Like end 2018, many market experts are drawing comfort from the
below par performance of Indian equities in 2019, in true Christmas spirit.
Most are expecting (or rather hoping!) that the markets might have already
suffered their worst, and 2020 could be a positive year.
FY20 is most likely to end as sixth consecutive year of earnings
disappointment. The expectations for earnings in FY21 are expectedly running
high. Currently the consensus seems to be placed around 25-28% earnings growth
in FY21, over a low base. The corporate commentary however is not that sanguine
and leaves scope for disappointment and earnings downgrades.
As a ritual, regardless of the outcome and consequences, most
experts forecast their respective targets for the benchmark indices 12months
hence based on their respective assessment of the macro and corporate
environment. These forecasts are charitably received, notwithstanding the
accuracy or otherwise of previous such forecasts, only to be discarded just
like old calendar and diaries.
Following the rituals, I too invariably join in the spirit of
Diwali and Christmas. Using these discreet points in the ad infinitum, I
like to pause, reflect back, review and revise my strategy and action plans.
Accordingly, as part of the overall exercise, I would be
reviewing my outlook and investment strategy for 2020 and sharing my thoughts
with the readers through this column.
Friday, December 13, 2019
Household health survey
The National Statistical Office (NSO) recently released findings
of the 75th round of National Sample Survey relating to Household expenditure
on health (see
here). The findings highlight some important socio-economic trends,
especially related to the health of the nation. The following are some of the
noteworthy points:
(1) 7.5% of the respondents
reported having some ailment within 15 days preceding the survey.
The urban population, especially urban women, may be the
unhealthiest segment of the population. 10% of urban women reported ailment, as
compared to all India average of 7.5%. In urban population 9.1% people reported
ailments as compared to 6.8% for the rural population.
~28% of the people in 60+ age group reported ailment, whereas
only ~11% were ailing in 45-59 age group.
(2) ~3% of the respondents
were admitted to a hospital in preceding 365days. However, for persons in 60+
age category this ratio was 8.5%. While more women reported ailment, the
hospitalization rate was higher for male in general, and urban male in
particular.
(3) More people (55%)
availed treatment in a private hospital, as compared to government hospital
(42%). Charitable hospitals accounted for ~3% of the patients.
(4) Insofar as the ailment
wise treatment is concerned - private doctors/clinics were approached for 43%
of the ailments. Government hospitals (30%) and private hospitals (23%) were
approached for lesser number of ailments.
(5) Only 14% of rural
population and 19% of urban population is covered by medical insurance. Most of
the rural coverage is through government sponsored health insurance schemes.
About 9% (out of 19%) urban population is also covered through government
schemes. Only 1% of rural population is covered as employee of government/PSU,
while for urban population this ratio is 6%.
(6) Allopathy is the preferred method of treatment for 95% of the
population in both rural and urban areas.
(7) On an average, Indian
spend Rs26475 per hospitalization in urban areas and Rs16676 in rural areas.
The average expense in case of a government hospital is Rs4452, whereas for a
private hospital it is 7 times higher at Rs31845.
(8) Childbirths are now
mostly institutional. In rural areas 90% deliveries took place in hospitals.
For urban areas this ratio was 96%.
The notable point is that in government hospitals, only 17%
child births were done through surgery, while for private hospitals, this ratio
was staggering at 55%.
(9) 97% of both boys and
girls had received vaccination in rural India. 98% of boys and 97% of girls had
received vaccination in urban India. 59% of boys and 60% of girls at all-India
level had been fully immunised (i.e., received all 8 prescribed vaccinations).
I read three primary trends from these data points.
(a) Population is
increasingly becoming unhealthy and the insurance cover is not adequate.
(b) Private hospitals may
be disproportionately expensive, and may require more regulation.
(c) Healthcare may become
a major crisis in 20-25yrs, as the demography begins to change.
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