Do it yourself

The economic growth in first quarter of current fiscal year (FY21) contracted ~24% as compared to 1QFY20. The data released on Monday evening was not shocking as this quarter was impacted by the total lockdown of economy to mitigate the impact of COVID-19 pandemic. However, it was surprising to the extent that it surpassed all the worst case estimates and is the worst economic performance amongst all major global economies.

The sharp economic contraction has come after a sustained economic slowdown over past four years. The investment activity and new employment creation has virtually collapsed in post demonetization (November 2016) period. The household savings, which traditionally cushioned the fiscal profligacy of governments, have declined sharply and rate of incremental rise in per capita income has also declined. The wealth and income inequalities have seen sharp rise causing widespread civic disquiet in the country. The stress on financial sector is not easing materially despite a number of measures taken to this end.

To me the data is worrisome on many counts. For example—

(b)   The government seems to be in denial mode still. The economic manager of the government like Chief Economic Advisor of PM, Principal Economic Advisor of FM, Finance Minister, Commerce Minister et al, are still talking about a "V" shaped recovery, refusing to accept the broken supply chains and diminishing demand.

The suggestions like make toys and export Kohlapuri chappals sound totally incongruent. Indian manufacturers have not invented any toys or video games since Indus Valley civilization. Our traditional toys made of earth and wood are all inspired by the ancient toys; while the modern (even soft toys) toys are all poor copies of the "imported" toys. Building capacities that can produce modern toys at rates competitive to Chinese imports would need massive investment. Is it desirable to do so, when the trend is moving towards digital games?

The Kohlapuri chappal trade is facing multiple problems due to issues with bovine leather availability. The minister wants $1bn worth of annual exports of Kohlapuri chappals; which comes to ~2lac pair of chappals every day (assuming average price of $15/per pair). A tough ask by any standard! (see here)

The vision and experience needed to accelerate growth while facing the challenges of sustainability, survival, equity, capital scarcity, fiscal discipline, etc is certainly lacking. And that is worrisome.

(c)    The growth has been on the decline for past 4years now. Notwithstanding the claims made by the government and political parties, we have not seen much progress on socio-economic equity aspect. However, no one has accepted accountability for the inadequate and misdirected policy response. This lack of accountability is in a democracy is also worrisome.

(d)   The federal structure of the country has got severely damaged in past few years due to rise in mistrust between the ruling and opposition parties. Under these circumstances, forming consensus on any issue of national importance appears difficult. This is worrisome.

(e)    The rising incidence of unemployment and unemployability amongst youth is leading to rise in instances of crimes like theft, looting, kidnapping for ransom, mugging and even rapes etc. This restricts the mobility of people, especially women, having serious economic implications. This is worrisome.

Many years ago Mr. Kishore Biyani started the business of organized retail of readymade garments. Few years later he expanded his offering to groceries, electronics, furniture, ethnic crafts etc. He grew fast through organic and inorganic methods. He brilliantly assessed the markets and conceived the business formats to suit those markets. Established good quality stores across the country and gave organized retail a strong foothold in the country, before the likes of Tata, Birla, Goenka, Damani and Ambani entered in the fray. However, business of Mr. Biyani always remained in stress. Lot of hopes were raised when he reorganized his business post global financial crisis by selling his flagship Pantaloon format to Birla and rechristened his business group as Future Group. However, as I understand, inventory and financial mismanagement always kept the group under stress.

For some years it was very clear that Mr. Biyani will have to materially dilute his stake in the group to mitigate the corporate and personal stress. The deal with Prem Ji Investment and Amazon Inc provided a glimmer of hope that Mr Biyani may resurrect and continue to be a dominant force in the promising Indian organized retail market. However, the denouncement that came over last weekend was not expected.

Mr. Biyani has been forced to out rightly sell a substantial part of his retail, logistics and real estate (warehousing) business to the mighty Reliance Industries. The wording of the statement made by Ms. Isha Ambani, Director of Reliance Retail - the entity which has agreed to acquire the business of Biyani's Future Group, succinctly summarized the situation and the circumstances of the deal.

Ms. Ambani said, "Pleased to provide a home to the renowned formats and brands of Future Group. Hope to continue the growth momentum of the retail industry with our unique model".

To me this statement implies two things:

1.    The Future Group under the stewardship of Mr. Biyani had become directionless like an orphan child. The Reliance has obliged by adopting it and providing a shelter. Obviously the Future Group's brands and reputation will be obliterated in next few years.

2.    Reliance believes that their "Unique Model" is the best way to grow retail industry in India.

I first did my monthly grocery shopping from Big Bazaar (BB) 17yrs ago. Since then I had been visiting BB once every two months. It has mostly been a pleasant experience. The stores have been consistently improving in terms of ambience, layout and offerings. The places have always been clean, well lit, and well organized. The people there have been mostly trained, active and willing to help the customers. The pricing has been competitive. The quality (even of house labels) of the goods and the variety also has been mostly good.

To the contrary, the Reliance Retail stores have usually provided the worst possible shopping experience. I have one Reliance Fresh store very close to my home. I sometime go there for picking up a thing or two. The place is dirty, disheveled, badly lit, and unorganized. The people there are poorly trained and mostly uninterested. The quality of merchandize is poor, especially the "house labels"; and the variety is limited. I am confident that many readers will agree with me on this. The same thing is mostly true with Reliance Jio stores and services also.

If this "unique model" is applied to Big Bazaar, I will have to certainly find a new place for my bimonthly outing to buy grocery and conduct a market survey.

Given the size and reach of the Reliance Retail post consummation of the deal, it is obviously a potential threat for many regional and local organized retail players. More so, considering that many retailers are already in distress due to extended lockdown.

As promised yesterday, my technical view of Indian equities is as follows. The readers need to note that I am just an armature student of stocks markets and not a professional technical or fundamental analyst. The following view is based on the combination of technical studies I often used for determining my entry and exit points. This analysis is also one of the parameter in review of my asset allocation strategy; though it does not carry any significant weight in this exercise.

General

Overall I believe that the up move that started from the panic bottom of 7610 (Nifty closing) recorded on 23 March 2020, could continue for few more weeks. In this up move, broader markets have materially outperformed the benchmark indices. In this up move The Nifty Small Cap 100 index has gained ~75%, while Nifty 50 (+52%) and Nifty Midcap 100 (+57%) have lagged. The market breadth has accordingly been significantly positive.

As the up move enters its last phase in next 2-4 weeks, the trend may reverse and the benchmark may perform better than the broader markets, before a meaningful correction sets in. I would therefore be materially reducing my allocation to mid and small cap funds and moving to large cap oriented funds.

Nifty 50

In my view, Nifty 50 may peak around 12600-12740 in next 19-27 weeks. From the present ~11550-11600 levels, Nifty faces a significant hurdle in 11890-11940 range. A successful cross over this hurdle shall see Nifty moving to ~12700 level rather quickly.

The move up to ~11900 may be broad based, but the onward journey shall be led by few heavyweights only.

After peaking, Nifty may correct 50% of its gains from the low of 7610 and trade in 9950-10150 range in the following 13-17 weeks.

A close below 10795 anytime in next 6 weeks will negate this view; in which case I will reassess my position. However, if asked specifically, I would rate the probability of my present view holding correct as high (65%).

Nifty Bank

Nifty Bank position however is not as clear to me as is the case with Nifty 50. The implied momentum in this index is very high hence the projections are changing very fast.

Nonetheless, let me share my current view on Nifty Bank.

In my view, Nifty Bank may peak earlier than Nifty 50. It may peak in the range of 25750-28800, in 13-17 weeks.

A close below 20730 anytime in next 6 weeks will negate this view; in which case I will reassess my position. Anyways, I am hugely underweight on banks and NBFCs and shall continue to remain so till 16400 on Nifty Bank or 43 weeks, whichever is later.

I have shared my view, since many readers had specifically asked for it. If someone finds it materially off the mark, I have absolutely no objection. I would not like to entertain questions or arguments about this.

Continuing from yesterday (see De-institutionalization of household savings)

It is important to note that investors moving away from passive investing to active investing is not an India specific phenomenon; rather it is a global shift. For example, there is massive outflow of funds from equity mutual funds in US, while benchmark indices have been scaling new highs. This outflow of funds has coincided with the tremendous rise in "Robinhood" investors - people buying and selling stocks directly on discount brokerage platforms.

As Sanjay Satapahty, a fund manager at Ampersand Capital, highlights "Trend of ETF was a megatrend over last decade and the reversal can have huge implications." (see here)

In past five months we have seen some glimpses of the likely implications for the market, should the shift from passive investing to active investing sustains over a longer period. Since the market bottom in March 2020, the small cap stocks (+73%) have outperformed the benchmark (+51%) and Midcap (+57%) significantly. The sharp small cap outperformance in June and July has coincided with the net outflows in equity mutual funds since middle of June 2020.

This outperformance has come on the back of massive rise in market volumes in value terms; number of daily trades; quantity of shares traded daily; and positive market breadth. It is also important to note that this has happened with no major change in implied volatility, much stricter margining norms and no significant rise in leverage.

I find that the following factors behind these trends-

(a)   Dismal performance of asset managers (mutual funds as well as PMS). Most fund managers have disappointed the investors who were given high hopes through aggressive "Mutual Fund Sahi Hai" campaign. There have been many instances of impropriety and unethical practices, especially in case of PMS. This might have led the investors to take the things in their own hand.

(b)   The socio-economic lock down due to outbreak of COVID-19 has rendered many people jobless. Besides many businesses have been working at zero or sub optimal capacity reducing the working capital requirement materially. Many of the jobless individuals and idle businessmen with cash may have started trading in equities in order to generate some income.

(c)    Many young professionals who have been told to work from home, may have found spare time, which they are utilizing in trading in stocks. (For more details see "Rise of Retail Investor")

My primary view has been that this trend of "Robinhood investing" may not sustain as it prevails presently. Nonetheless, we may see the following corrections in the markets over next one year or so:

(a)   The top heavy indices may inspire changes in the methodology of stock market index construction. Till then-

(i)    The diversified funds may take precedence over ETFs based on benchmark indices.

(ii)   Index heavyweights may either stagnate or see correction in prices and broader markets may remain more active.

(b)   The compensation and performance evaluation rules for professional asset managers may see material changes to make them more accountable

(c)    As the economic activity picks up from 2021, the part time investors and traders may return to their jobs. Also, the spare working capital of partially operative businesses may also flow back to routine business. This should mark the beginning of the decline of Robinhood investing.

Tomorrow I shall share my technical view on the Indian equity markets.