Do it yourself

In a world where almost every central banker is struggling to contain inflation and tightening monetary policy, the People’s Bank of China (PoBC) seems to be facing a different set of problems and hence adopting a divergent policy approach. PoBC has actually cut the key loan prime rate (LPR) twice in 2022.

It is pertinent to note that the Chinese economic growth has been on the decline ever since the global financial crisis. The pandemic has slowed the growth even further. The latest growth data suggests that the Chinese economy is growing less than 5% this year, its lowest growth rate in at least three decades. Some part of the growth decline could be attributed to the zero tolerance policy towards Covid and stringent lockdown; but it is important to keep the declining trend since 2010 in mind.

Considering that China has been one of the key growth drivers of the global economy; declining Chinese economy is a matter of concern for all.

Besides, China has been one of the primary (i) financiers of the deficit budgets run profligately by many western economies; (ii) investor for the development projects undertaken by the Middle-East and Central Asian and African emerging economies; (iii) exporter of deflation through low rates, taxes and wages to the world; and (iv) absorber of the carbon emission for many developed and developing countries which chose to offshore their polluting manufacturing to the Chinese shores. Obviously, a weaker Chinese economy is a major concern for a large part of the world.

In the Evergrande episode (read here) we saw how much the global markets are sensitive to a financial crisis in China. In principle, the western democracies may not like the authoritative political regime of China, but the global investors’ confidence in the Chinese markets is mostly driven by this very regime; as it lends confidence to the investors that any crisis will be contained almost instantaneously. As President Xi Jinping gets ready to be elected for a record third term later this year, it would be important to see how he keeps alive the faith of global investors, who have not made money in Chinese markets for almost a decade now.

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) is scheduled to announce its latest assessment of the economy and its policy stance tomorrow. A large number of market participants are waiting to hear the Fed chairman, with bated breath. I expect a large number of traders in India to stay awake till midnight to hear Mr. Powell, even though they cannot initiate any trade until 9:15AM on Thursday, when the Indian markets open for trading. Therefore, literally speaking, losing sleep to hear the Fed statement is of little consequence.

The market consensus is for a 75bps hike in the policy bank rate and an unambiguous hawkish stance unlike the previous statement in July, when the Fed sounded little ambivalent about the future hikes. Some experts are expecting even a steeper 100bps hike and raise in the terminal bank rate target to 4.5% (from previously estimated 3.75-4%) by April 2023. This implies a total of 200bps expected hike between September 2022 and April 2023; the steepest hike in the past two decades.

Since March 2022, when the Fed started to hike rates to bring down the inflation, an interesting contest has been seen between markets and the Fed.

1.    The benchmark S&P500 has moved higher after hearing the Fed on 3 of the 4 occasions. Obviously, the messaging of the Fed to the market was lacking in clarity and intent.

 

2.    One of the reasons for defiance of stock prices despite sharp rate hikes is that the Fed has not been able to materially influence the long term yields so far. The US yield curve has inverted sharply in the past six months, indicating that the markets are assuming a sharper recession and a quick reversal in the rate hike cycle (as early as 2H2023).

3.    The commodity prices have not yet corrected in line with the stance of central bankers and forecasts of severe recession. Bloomberg Commodity Index is still higher than the level it was at the beginning of the rate hikes in March 2022; and so has been the inflation. Consequently, the US rates have become sharply negative severely hurting the savers.

 

Obviously, more than the action, the Fed perhaps needs to tighten its messaging to the markets. For example, a clear message that the inflation is not seen coming below the Fed’s upper tolerance band at least till the end of 2023 and it would not be prudent to expect a rate cut before 2Q2024, could make the market reactions more congruent to the Fed’s policy stance.

 Self-reliance in the defence sector has been one of the major investment themes in the past one year in particular. Besides dedicated public sector defence manufacturers, the stocks of a large number of equipment and service providers to the Indian defence establishments have seen a sharp up move. In the melee to own “defence stocks” many investors have ignored the basic principles of investment and buying stocks of these companies at any price. It seems a little has been learned from the recent unwinding in pharma API manufacturers and internet stocks which witnessed similar traders’ interest in 2019-2021.

An informal discussion with some randomly selected market participants indicated that many individual investors and traders may not have a clear idea about the opportunity in the Indian defence sector. The way people tried to associate companies with the defence sector opportunity, it appeared that almost every company listed in India may be a potential beneficiary of the growth in the defence sector.

Companies manufacturing FMCG, alcoholic beverage, automobiles, white goods textiles, steel, cement etc could all be associated with the defence sector in some manner or the other. But, that is not the idea behind ‘defence self-reliance’ as an investment theme. This theme should focus on the indigenization of defence technology; material increase in local manufacturing of defence equipment and consumables; and export opportunities for defence equipment and arms.

For the existing dedicated defence suppliers (like defence PSUs) the opportunity may not be transformative as higher defence budget may result only in incremental growth for these companies. However, for some of the private sector service providers and manufacturers which have also been supplying to the defence establishments, the opportunity could be transformative.

To further elaborate my point, I would like to highlight a few points from the FY22 annual reports of some private sector “defence companies” that have been popular with the traders’.

NELCO Limited

No mention of the word ‘defence’ in the annual report. The management however emphasized on the new opportunities for the Satcom industry in the Indian space sector. The report reads, “Indian Space sector has been identified as an important sector for growth by the Indian Govt. Many new business models and collaborations are emerging, which are likely to provide new opportunities for the Satcom industry. Some of the next-gen technologies are also likely to move into the mainstream.”

(For a Sales CAGR of 7% over the past 10yrs, an RoE of 19%, and 10yr PAT CAGR of 11% the stock of the company trades at 132x PE for TTM earnings.)

Astra Microwave Products Limited

Performance: The Company has been able to create a solid diversified order book on the back of our deep domain expertise. With our proven track record, we are well placed to capture a bigger pie of the Indian defence sector market which is growing at a fast pace on the back of various government initiatives like IDDM, MAKE-II. Our order book as on 31st March, 2022 stood at Rs. 1,551 crores which is executable in the next 12 to 30 months period. Our current order book is 2 times of our FY22 revenue, which gives considerable visibility for next few years revenues. During FY22, we have received orders worth Rs. 760 Crores.

Opportunity: We see opportunities coming in from various programs planned by the Government through Defense Research labs (DRDO) and from the Make-II opportunities from the Ministry of Defence (MoD). Many of these are, especially in radar and electronic warfare systems where we have proven expertise. We believe going forward, our revenue mix will increase in the domestic area as compared to the last three previous years which should give an improved bottom line. We have clear opportunities of about Rs. 3,000 crores for next three years out of a market potential of about Rs. 14,500 crores upto year 2028.

(For a Sales CAGR of 14% over the past 10yrs, an RoE of 7%, and 10yr PAT CAGR of 2% the stock of the company trades at 70x PE for TTM earnings.)

Data Patterns (India) Limited

The latest annual report of the company discusses the recent developments in Indian defence sector, including policy changes and targets, in detail.

The report also presents a SWOT analysis of the company in defence related production. The Company inter alia, listed (i) Robust domain capability in Radars, Electronic Warfare, Communication systems, Avionics & Satellite Systems; (ii) All product development competencies under one roof; (iii) 100% in-house design and manufacturing capability; and (iv) Scalable business; potential to build complete systems as its core strengths. It also mentioned the growing size of defence sector opportunity for the private sector and improving export potential.

(For a Sales CAGR of 44% over the past 5yrs, an RoE of 24%, and 5yr PAT CAGR of 163% the stock of the company trades at 64x PE for TTM earnings.)

Paras Defence and Space Technologies Limited

Performance: The Company is engaged in designing, developing, manufacturing and testing of broad categories of defence and space engineering products and solutions. It is the sole Indian supplier of critical imaging components such as large size optics and diffractive gratings for space applications in India. Our revenue from operations increased by 27.37% to Rs182.56cr for Fiscal Year 2022 compared to Rs. 143.33cr for Fiscal Year 2021.

Opportunity: The Ministry of Defence has implemented a major reform for export promotion. Defence exports from India have expanded to more than 75 countries in the world. Due to the shifting geopolitical landscape, small nations are concerned about their safety and security and are considering India as a strategic partner for procuring affordable and high-quality defence equipment. The market for defence equipment is, therefore, anticipated to grow further. The government is also continually laying emphasis on the indigenisation of the defence sector.

(For a Sales CAGR of 30% over the past 5yrs, an RoE of 13%, and 5yr PAT CAGR of 68% the stock of the company trades at 89x PE for TTM earnings.)

Ashok Leyland Limited

Performance: In FY22, your Company supplied all time high 1,125 units of completely built-up units (CBUs) including bullet proof vehicles and 600 kits. Your Company is proud to complete the execution of 711 Ambulances in record time under emergency procurement of Indian Army. Further, your Company is expanding its portfolio in Light Vehicles, new applications on Super Stallion platform and products specific to export markets.

Opportunity: No mention

Tata Motors Limited

No separate mention of Defence business or growth opportunity in defence sector.

The company sold certain assets related to defence business to Tata Advanced Systems Limited (TASL) for sale consideration of Rs234.09cr.

 In a recent research report, Goldman Sachs estimated that “energy bills will peak early next year at c.€500/month for a typical European family, implying a c.200% increase vs. 2021. For Europe as a whole, this implies a c.€2 tn surge in bills, or c.15% of GDP.” The bank believes that repercussions of this “will be even deeper than the 1970s oil crisis.” Obviously, a problem of the magnitude would require an impactful policy intervention that could have wider and deeper implications for decades to come.

The policy interventions could involve partial suspension of free market mechanism; rationing of energy consumption; fiscal subsidies; deferment of climate goals and increased use of coal and/or accelerated shift to renewable sources of energy etc. Besides, there could be serious geopolitical implications also.

In another interesting paper, McKinsey & Co, outlines how inflation may be flipping the global economic script. In the paper McKinsey’s experts have examined many of the strategic implications of inflation. The key points highlighted in the paper could be summarized as follows:

·         In the past six months, inflation has far exceeded December 2021 expectations. In many countries, actual rates have doubled projections. European countries are particularly affected. Asia is seeing a less severe change: Indian inflation is about 7 percent, only a bit above projections; and South Korea is at 5 percent. In China and Japan, inflation remains muted.

·         In response to inflation’s alarming rise, central banks worldwide are raising their core bank lending rates. So far, however, rate raises in most countries have not matched the pace of inflation. The rising rates are expected to ease demand and lower prices for two critical components of headline inflation: housing and commodities such as energy and metals.

·         The lift-off in fertilizer prices, supply chain snags, drought, along with other fallout from the war in Ukraine, has pushed prices for basic foods much higher. Since 2021, food prices have risen to their highest level since the United Nations’ Food & Agriculture Office began its index. Prices today are considerably higher than in past surges in 2008 and 2011.

·         As economies stabilized and reflated post Covid, real wages began to creep higher again. But rampant inflation checked that growth, rising so fast that it has diminished the purchasing power of people’s take-home pay. For example, workers in the United Kingdom today have seen their real compensation fall by roughly 8 percent year-on-year.

·         As prices soar, and show few signs of abating, the risk is that inflation becomes entrenched and central banks will have to raise rates more assertively to slow demand. The growth may slow down much more than previously estimated.

The global economy is therefore entering a prolonged phase of correction and realignment. For many these corrections may be extremely painful, while for some it could provide an opportunity to enhance their position in the global order. India, being one of the least impacted countries in this global turmoil, hopefully would fall in the latter group. Amen!

 In the current year 2022, inflation in India has consistently remained above the RBI tolerance band of 2-6%. For the month of August Consumer Price Inflation (CPI) was 7%, led primarily by the food inflation of 7.6%. Both rural and urban inflation recorded a MoM rise in August. Unfavourable weather conditions apparently led to sharp rise in the prices of vegetables, fruits, spices etc. However, the core inflation (CPI ex food and fuel) has also persisted over 6% since the past many months; emphasizing the persistent pricing pressures. The IIP growth in July also moderated to 2.4% led primarily by consumer non-durables – indicating pressure on household finances. The sharp rise in household debt, especially the expensive credit card rolling credits, also corroborates the rising stress on household finances.

In view of the elevated price pressures, the Monetary Policy Committee (MPC) of RBI is expected to keep raising rates in line with the global peers. The market consensus is expecting the policy repo rate to rise to 6% (currently 5.40%) by the end of 2022. In his latest statement, the RBI governor stated that he does not expect moderate hikes in policy rates and elevated prices to hurt the growth materially and the economy may still retain the momentum to grow 7% in FY23.

The RBI estimate of growth may be optimistic in view of the poor Kharif crop estimates; challenges to exports; rising interest cost and poor consumption growth outlook. The risk of a global energy crisis in winter is also looming large and could have some negative implications for our inflation and growth outlook.

Inarguably, the claim of the finance minister that India faces zero chance of a recession is tenable. But a growth of 5-6% on a low base would be nothing to celebrate in our circumstances.

Obviously, the financial markets are disregarding the macroeconomic conditions and focusing on micro opportunities, especially the ones driven by policy impetus. In particular the following are some identifiable drivers of the stock markets in the recent up move.

1.    Strong emphasis on enhancing local defence procurement, especially in view of the global sanctions on our largest supplier (Russia) and elevated Chinese threat. The global sanctions on Russia have also presented an opportunity to Indian manufacturers to gain some foothold in global defence equipment and missiles markets; where the efforts of Indian entities, made in the past many decades, have started yielding results. The stocks of the companies that could be potential gainers from higher local defence procurement are favourites of investors as well as traders.

2.    Realignment of global supply chains in the post Covid world is expected to trigger a new capex cycle in Indian manufacturing sector. The potential beneficiaries of this capex cycle like capital goods manufacturers are also gaining traction with market participants.

3.    The most favourite sector in Indian markets is the financial sector. The cleaned up balance sheets after years of efforts and increased margins as the rate cycle turns up are attracting massive investor interest to the sector.

4.    The energy crisis in Europe and the US is also creating opportunities in Indian markets. For example, prohibitively higher energy cost has rendered significant industrial capacities (especially in high energy consuming sectors like chemicals) unviable. Closure of these capacities is allowing some Indian manufacturers to gain market share as well as better pricing power.

5.    The trends in energy security and climate control (green energy, electric mobility etc.) are also leading greater investor interest in the related businesses.

6.    Given the poor growth outlook in Europe and China, the FPI flows have turned towards emerging markets like India. Significant positive flows over the past couple of months have also helped Indian equities to outperform its global peers.

It seems the divergence between the equity market performance and macroeconomic conditions may continue or even widen in the short term. However, over a longer period, say 12-15 months, both invariably converge. Till then its happy times for the investors and traders.

 One of the most famous dialogues delivered by legendary Shahrukh Khan goes like this – “Agar kisi cheez ko dil se chaaho to puri kayanat usey tumse milane ki koshish mein lag jaati hai” (If you desire something from the depth of your heart, the entire universe would conspire to fulfil your desire.)

Recently, the Global CEO of McKinsey & Co, Bob Sternfels forecasted that. The factors like a large working population, multinational companies reimagining global supply chains, and a country leapfrogging at digital scale-to achieve something special not just for the Indian economy, but potentially for the world, are aligning well to to make 21^st century – the Century of India. (Read here)

It appears that the universe is conspiring to make 21^st century - the century of India; but the question is whether we Indians are indeed aiming for this goal with full honesty and intensity.

Historically, the Indian entrepreneurs were constricted by the culturally strong agriculture mind-set dominated by contentment and complacency. The hard working and intelligent people missed the entire industrial revolution as a consequence. To some extent colonial rule could be held responsible. But largely it was the mind-set that was responsible.

Post-independence, most entrepreneurs could not think long term, hence did not invest much in R&D activities. They would rather import technology and pay royalty for it. Furthermore, most entrepreneurs were easily satiated. Complacency would easily meander through their enterprise. Mostly, a few which had widely travelled, worked or studied abroad did only think big.

The governments also preferred less consumption over more production. Rationing of everything was the policy for more than three decades. You needed to pay an annual license fee for owning a radio set and bi-cycle. Long queues for cement, sugar, scooters, telephone, cars, kerosene, diesel, passport, were the order of the day. The people accepted this as a way of life and entrepreneurs mostly focused on manoeuvring around the rules to garner whatever resources and market share they could.

However, the generation born post 1991 is not constricted by the traditional agriculture mind-set. This generation has not experienced long queues for basic necessities of life. These people were born with colour televisions beaming many channels through satellite in their homes; a variety of cars & motorcycles, telephones, gas connections, available on demand.

This post 1991 generation is now out of the business schools and helming the business affairs. These young men are hungry; not afflicted by the traditional agriculture mind-set; are global in their vision; possess strong technical & managerial skills; and have resources to take risks. They do not stutter while talking about billion dollar deals. Their role models are the likes of Jeff Bezos, Steve Job, Larry Page and Mark Zukerberg.

Governments post 1991 have also been supportive of businesses. They have made efforts to add global scale capacities in numerous sectors and policies have been oriented towards globalization of the Indian economy encouraging businesses to grow in scale and reach.

Anyone could see the change not only through numerous technology enabled start-ups, but through traditional businesses like Haldiram and Bikanerwala. I can now easily get my favourite Chaubey ji spices from Agra and pickles and chutneys from Prakash Namkeen Indore in less than a week.

This side of the picture appears all geared to define the economic history of India in 21 century. However, there is another side of this picture that does not appear as promising.

For one, a much larger section of youth is disillusioned. They are not only distracted from the core issues of development, growth and global competitiveness; but may be unintentionally working as a counter force to these goals. Unfortunately, a section of politicians is actively manipulating these disillusioned youth to promote their ulterior motives.

Secondly, a much larger section of the population is getting left behind in India’s race to become a global force. Since these left behind people form a significantly large majority; the politics of the country shall remain focused on their survival. The policy making function shall therefore always remain at risk of slithering back to ultra-socialist tendencies, impacting growth of businesses; besides the spectre of disruptive civil unrest will always keep lurking.

It is therefore utmost important that the development and growth ecosystems are tuned to the imperatives of inclusiveness and sustainability. “Sabka Saath and Sabka Vikas” needs to become the core of all growth & development effort; else the risk of failure, like Brazil, Mexico, Argentina, Russia, et. al. shall keep looming large, impairing the chances of India ushering the world into 22^nd century.

 1.   Bengaluru inundation

In the first seven days of September 2022, Bangalore Urban District of Karnataka received 171mm of rain, which is 388% more than the long term average (35mm) of the rains it receives during this period. Obviously, the city infrastructure is not prepared to manage so much water; hence some areas of the city have been inundated with rain water. The spectacle of houses, vehicles and roads under deluge has been enthusiastically celebrated in the media – mainstream, social, local, national and global. The residents also marked the occasion by riding on tractors, excavators, and boats etc.

Prima facie, there is nothing unusual in this. Almost every city in the country gets inundated at every instance of excess rain. From large metropolises like Mumbai, Delhi, Chennai, Kolkata, Hyderabad, to major cities like Lucknow, Bhopal, Ahmedabad, Jodhpur, Gurgaon, Patna, Varanasi, Ranchi, Bhubaneswar etc. have all experienced similar situations in the past few years.

We all discuss the inadequate infrastructure; poor planning; corrupt administration; blatant encroachments on public land; and sustainability issues for a couple of weeks and automatically shift to the other topics enjoying higher TRP on media as soon as the dark clouds wither away and flood waters recede. In recent times, people have also found issues of nationalism, regional pride, and immigrants’ apathy to local issues, in the flood waters. For example, people of Bengaluru have been told to tolerate the inconvenience in the interest of nation building and weaken the government on such trivial issues; and immigrants have been told to leave the city if they do not like it rather than demeaning the city by highlighting their problems.

Perhaps the Almighty has made us human like that only. It is our natural tendency to keep moving on – from the good and from the bad. Those who stop to fight the wrong or get attached to the good are usually demeaned and sidelined.

PS: One issue that never becomes part of the popular narrative is the accountability and responsibility of “We the people of India”. The people who bought houses built on the lands stolen from lakes; the people who ignored the conduct of their neighbors in encroachment of the public lands; the people who were indifferent to the potholes and blocked drains when it was not raining and people who got away with bribing the civic administration.

2.   Rishi Sunak loses UK PM bid

The ‘Son of India’ Rishi Sunak lost the bid for prime ministership of the United Kingdom. While in the United Kingdom the contest was mostly between policies and personal reputation; in India it was mostly between Imperialist Britain and its former Indian subjects. Millions of eulogies were prepared to celebrate Sunak’s elevation to 10 Downing Street. The patriots were already celebrating it as the revenge of India by conquering the throne of England. The public debate in India has ended with lamenting of Sunak’s loss as victory of racist whites over a colored suitable boy. Some of the staunch supporters have preserved a glimmer of hope safely for the next general election in the UK.

Incidentally, the popular narrative in India missed a small point that Sunak was born and brought up in England, by African Hindu (Kenyan Father and Tanzanian Mother) parents. His grandfather migrated to Africa from Gujranwala (now in Pakistan) before independence. There is no pertinent evidence available to show that he has favored India or Indians in his capacity as British parliamentarian or senior cabinet minister.

Unfortunately, a large proportion of people desperately wanting to see Sunak as UK prime minister and calling the UK politics racist, are those who found the idea of Sonia Gandhi becoming India’ prime minister devastating and nauseating.

Some of these may have even castigated the young brilliant cricketer Arshdeep Singh as anti-national and secessionists (Khalistani) for just dropping a catch in a recent India Pakistan match.

3.   Cyrus Mistry dies in a car crash

A renowned businessman and former chairman of Tata Sons, Cyrus Mistry, died in a car accident last Sunday. The car was being driven by a highly reputable gynecologist and also had two of her close family members travelling in it. Two passengers, including Mistry, died immediately, and the other two are seriously injured.

The shocking event has been mourned by the top politicians and business people of the country. However, Ratan Tata, the Chairman Emeritus of Tata Sons and Tata group was rather conspicuous in not making any public obituary. It is pertinent to note here that Tata and Mistry were engaged in a bitter battle of control over Tata Sons a few years ago, which Mistry lost in the Supreme Court.

As Chairman of the group, Mistry had questioned many decisions of his predecessor Ratan Tata that destroyed significant shareholders’ value over the past decade. He argued that flamboyant management style and a spate of errors of judgment were seriously prejudicial to the interest of companies in which non-Tata shareholding was material. Only a handful of industry people and politicians supported Mistry at that time. It is also interesting to note that Mistry was not the first Tata Sons heavyweight to be ousted unceremoniously. Same was the case when the likes of Russi Modi, Darbari Seth and Ajit Kerker had spoken against Ratan Tata and were ousted from the group.

Post the accident, the highways minister has announced that wearing of seatbelts will be made compulsory for the back seat passengers also. Non-compliance shall be subject to a fine of Rs1000.

Without any doubts whatsoever, the accident is unfortunate and loss is tremendous. But it does need a few straight questions to be answered.

About 1.55 lac people died in road accidents in India in 2021. The number is rising almost every year. Why did the government wait for so many years and so many deaths to announce this basic safety measure?

The site of the accident is apparently a death trap. Many accidents have taken place at that point and many lives have been lost. Still there is no proper signage there. Who is taking responsibility for that? The government and the Supreme Court need to fix the accountability for all poor roads, especially the roads where toll is being charged. The concessionaire, contractor, NHAI, the municipal/PWD engineers, local representatives (corporator, panchayat member etc.) – someone needs to be held accountable for all accidents caused due to poor road maintenance.

 As per the news agency Bloomberg’s calculations using IMF database and historical exchange rates, the size of the Indian economy in ‘nominal’ cash terms at the end of March 2022 quarter was US$854.7bn vs US$816bn for the UK economy. By this standard, India was the 5^th largest economy of the world as on 31 March 2022, behind the USA, China, Japan and Germany.

This apparently innocuous, and mostly inconsequential, statistical data point has been subject of an intense discussion in India media – both mainstream and social.

The pro establishment groups have celebrated this data point as an important milestone in the resurrection of the Indian economy, especially under the stewardship of Prime Minister Narendra Modi. They have forcefully argued that the Indian economy surpassing the UK’s economy highlights the rising status of India in the global economy; and symbolizes the undoing of 200years of British slavery.

The groups opposing the establishment claims highlighted that the absolute number of GDP is meaningless. On the relevant parameters like per capita GDP, human development index, extreme poverty & hunger, etc., India lags far behind the UK. They argue that in fact, the position of India in most of these parameters has slipped lower in the past few years.

I see merit in both the arguments. The Indian economy growing despite all adversities and limitations over the past 75years ought to be a matter of pride for all the citizens. We are entitled to celebrate the achievements of our farmers, professionals, and entrepreneurs. At the same time it is also true that the pace and direction of growth is not adequate; and there is a scope to do much better. We need to address the quality and sustainability of the growth. The rising regional, social and individual disparities; inadequacies of growth in terms of human development and quality of life; and poor employment intensity of growth ought to be a matter of concern for the policy makers as well citizens.

Insofar as the statistics is concerned, in my view, the more appropriate benchmark would be China. Both Indi and China embarked on the journey of rebuilding the nation in late 1940s. In fact China started two years after us in 1949 when the civil war ended. Both started the process of accelerated economic reforms in the early 1990s. At that time both the countries had similar GDP and other economic conditions. Both the countries have similar demographics. However, the Chinese economy is now six times bigger than us.

One could argue that India and China are incomparable because of the vastly different political structure in these two countries. China has an authoritative regime and a significantly less transparent governance structure; whereas India is a reputable democracy with a more transparent and accountable governance structure. This is a fair point but certainly not incontestable.

The economy of the UK has been stagnating for over a decade now. The current GDP is almost the same as it was in 2014. The demographics have been worsening. Brexit has further slowed down the growth. It was a natural trend that India will surpass a stagnating UK, like it did with Italy, Australia and Canada in the past one decade, in due course. It may be a cause of celebration due to our colonial past, but there is little to celebrate in real economic terms.

It may be pertinent to note that the UK economy has been stagnating for almost a decade now. The latest GDP of the UK is almost similar to what it was in 2014. Brexit has also impacted the UK growth adversely. On the other hand, the GDP of India has been consistently growing, albeit at a much lower rate that what all of us would desire. India’s GDP would have overtaken the UK in 2017, if demonetarization had not slowed the pace of growth of India’s GDP. In the past one decade India’s GDP has overtaken the GDP of countries like Italy, Canada and Australia. It has meant little for India and Indians. The queue of Indians seeking to migrate to these countries has only become longer in this period.

At the current pace, it will take at least two decades for India to become a middle income country (per capita GDP at US$12000 from the present US$1961). Becoming a developed country like the UK, Canada and Australia will take much longer.

Celebrating every milestone in the journey is good; provided we do not lose sight of the destination. Celebrations that distract us from our goals are best avoided.

 In the past one week, I discussed the current situation in the Indian financial markets with some seasoned investors and experienced market participants. It was after almost three months that I got an opportunity to discuss the markets with such an enlightened group of people. Mood of markets definitely appears to have changed remarkably since June 2022.

After my interaction with some senior market participants (bankers and investors) I had noted that the mood was rather despondent. The consensus in June appeared strongly in favor of a slow grind over the next 6-9months. The reference point of discussion was mostly the 2008 market crash. The market participants sounded cautious about rising cost of funds and drying liquidity; and feared major defaults that could trigger a global contagion. (see here).

Reactions of the market participants this time were diametrically opposite. Most of them were in fact trying more to convince themselves about “all is well” rather than discussing the market conditions objectively. They refused to acknowledge that the global macro conditions have deteriorated materially in the past three months, led primarily by Europe and China. They argued forcefully in favor of a “decoupled India” and “TINA”. Despite no visible improvement in Indian macro conditions; below par corporate performance in 1QFY23 and dark clouds over export growth that have sustained the 1.4% CAGR for India’s GDP in the past three years.

The platitudes like “Decade and century of India”; 5^th largest economy ahead of the UK” were advanced with impunity; as if they are trying to justify change in their stance from “extreme bearishness” to “cautious optimism” and “uber-bullishness”. Some of them even claimed that they did never advise underweight on Indian equities.

 Chasing multibaggers

Identifying and investing in “multibagger” stocks has always been a popular topic of discussion in the context of equity investments. The annals of stock markets are replete with folklore about how famous investors successfully identified and invested in “multibagger” stocks and made extraordinary returns.

The marketing pitches made by several financial service providers often include the claims of identifying multiple “multibagger” stocks at the “right time” and riding on these till the end.

Drawing inspiration from these folklores and claims, many investors strive to find “multibagger” stocks for investing. However, as the anecdotal evidence would suggest, very few of them are actually able to identify and invest in such stocks.

It is also common to find investors lamenting that they did actually identify a potential “multibagger” at the right time, but either did not invest in it; or invested an insignificant amount in it ; or the worst, exited their position too early with some gains (or losses).

Nonetheless, this fascination with “multibagger” continues to grow and has almost acquired the character of a cult. Thousands of investors are constantly losing money, chasing this mirage. Some of them even get addicted to buying stocks like they would buy a lottery ticket, hoping to overnight multiply their money several times. Piquantly driven by the fantasy of becoming rich overnight, they are not deterred by multiple failures and keep persisting.

If you are not a member of this cult, but still desire to own stocks that would go on to become multibaggers, it is important to understand a few basic things.

What is a “multibagger” stock?

“Multibagger” is not a standard term in relation to the investment jargon. Apparently, the investment Guru, Peter Lynch first used it in his book One Up on Wall Street (1988) to describe the stocks that have given more than 100% return to an investor. A stock giving 100% return is called two-bagger; a stock giving 1000% return is termed ten-bagger, so on and so forth.

The key points to note here are:

1.    There is no fixed timeframe for a stock to qualify as a “multibagger”. A stock that yields 500% return in five years (43% CAGR) and a stock that yields 500% return in 15years (12.7% CAGR), both would qualify to be called multibaggers.

2.    A stock could be a multibagger and a loser for different investors; depending upon the holding tenure of the respective investors. A stock that traded at Rs27 in 2020; rose to Rs135 in early 2022; and is now trading at Rs80. For the investors who bought this in 2020, it is still a multibagger; whereas the investors who bought this in early 2022 are facing loss of one third of their capital.

Thus, it is not the stock alone that is multibagger; it is the combination of stock, entry price and holding period – that give multibagger return.

3.    Two investors bought a stock at Rs50 each in 2007. Investor A bought 50 shares, representing a mere 0.002% of his total equity allocation of rupees one crore. Investors B however invested 5% of his total equity allocation of rupees one crore and bought 10000 shares. Both the investors are holding the stock in their portfolio till date and the current price is Rs12000. For both the investors the stock is a multibagger, but for the investor A it is cause of constant agony and regret; and for the investor B it is the primary source of his financial security.

Just to simplify our discussion, we may define a “multibagger” as a stock that has outperformed the benchmark index consistently for more than five years at least.

Could you plan a multibagger?

The odds of winning the first prize in the Kerala State Lottery are generally 1 in 9,000,000. The odds of winning any prize, which could even be less than the cost of the ticket (Rs40), are 1 in 119. Obviously, it is almost impossible to identify the ticket that will win a meaningful prize and buy that.

There are close to 2000 stocks traded on the National Stock Exchange. Of course, the odds of buying a stock that will sharply outperform the rest of the stocks are much better than a lottery ticket, if you choose a stock randomly. The odds would become much better if you pick a stock through a careful and in-depth analysis; rather than picking any stock randomly.

Definitely, investing in equities is not akin to buying a lottery ticket. Nonetheless, planning a “multibagger” (e.g., a stock that would consistently outperform the benchmark returns for more than five years) is an extremely difficult task.

An investor could identify a sector of the economy that is likely to the next up cycle. He/she could even identify the companies that are likely to perform very well in that economic upcycle. But availing that opportunity would need (a) surplus funds that could be invested for 5-10years; (b) control over the sentiments of greed and fear to prevent early exit in case of a sharp fall or rise; and (c) adequate financial backup to preempt a situation where the investment would need to be liquidated under duress.

Note: I am a tiny unknown investor and claim no expertise in identifying multibaggers. I strongly believe that investing in equities is equally about financial and mental strength. I have none and therefore I do not own any multibagger.

The National Statistical Office (NSO) released the estimates of National Income for the first quarter (April-June) of the current fiscal year (2022-2023) on Wednesday evening. A lot has already been written, said and debated about the reported GDP/GVA numbers. Apparently, the reported yoy GDP growth of 13.5% for 1QFY23 is slightly short of what the market consensus was expecting.

In my view, the economic growth of India has been grossly inadequate and unbalanced, especially in the past 5yrs. The worst part is that the manufacturing and construction sectors that are traditionally considered having material employment generation potential are growing the least. It is primarily the exports that have helped the Indian economy to grow at the rate of 1.4% CAGR in the past 3years. Given that the global economy has perhaps entered a phase of protracted slowdown or sub-optimal growth, the exports may not sustain the Indian economy for too long.

The markets must take cognizance of this. Especially the excitement in construction and capex space is not getting much support from the economic data sustain. Moreover, the piling inventories across supply chains globally and in India at a time when demand is getting crushed and inventory carrying costs are rising, also call for additional caution.

Technically markets are showing some strength and may move a little higher from the current levels. However, this would be a rally to sell into rather than getting infected with FOMO.

 ·         The European continent is facing its worst drought in 500yrs, leading to crop devastation, loss of livestock, wildfire, water shortages and accelerated glacier melting. The situation in about half of the continent is alarming – soil is losing moisture and vegetation is under stress. (read more)

·         Western states of the United States have witnessed persistent drought conditions in the past couple of decades. It is the longest and driest stretch in the past 1400yrs. A study published earlier this year suggested that “there’s a very strong chance the drought will continue through 2030.” The soil moisture in the affected states is at historic low. Studies have indicated that a couple of good years of rain are highly unlikely to change the drought situation materially. (read more)

·         Many provinces of China are witnessing the worst drought on record. River levels have diminished resulting in closure of hydroelectric projects and severe electricity shortages. Forest fires and grassland fires are common and severe. China's largest freshwater lake, Poyang Lake in Jiangxi province, has shrunk by about 75%. Thousands of farmers who relied on lake water or river waters have lost their crops. Drinking water is being rationed. (read more)

·         Brazil, Argentina and Paraguay, the three major agricultural producers in South America, experienced a prolonged period of drought and low water levels in their main rivers in the 2021-2022 crop season. The dry and hot weather  severely impacted harvests. The river transport of important summer crops, with maize and soybeans was amongst the main casualties. Various agencies estimated a 20 million tonne of shortfall in food production in these three countries alone. (read more)

·         Many parts of Australia are also witnessing significant deficiency in rainfall. For Tasmania and South Australia, area-average rainfall for July was among the lowest on record compared to all years since 1900. Serious rainfall deficiencies (totals in the lowest 10% of historical observations since 1900) continue to affect western Tasmania, the Roper-McArthur district of the Northern Territory and south-west of Western Australia for the period starting December 2021. Crop yields have been poor and wildfires rampant. (Read more)

·         Neighboring Pakistan is suffering from one of its worst floods in recent memory. The humanitarian situation in Pakistan has deteriorated further over the past two weeks as heavy rains continue to cause flooding, and landslides resulting in displacement and damage across the country. Extensive damage to crops and livestock has been reported. (read more)

·         Central and Eastern India is also witnessing a drought that has impacted the summer (Kharif) crop in the key states of UP, Bihar and West Bengal. (read more here , here and here)

·         To add to the climate pains, the war between Russia and Ukraine has further escalated the global food shortages.

It is obvious that “food scarcity” could be a major issue affecting the world population. Unfortunately, no central banker could help bring the food prices down under these conditions. The governments could help to a limited extent by rationing supplies, regulating wastages and rationalizing buffer stocks. However, they would also be helpless if the condition persists in 2023 also.

The question is how an investor could benefit from this situation. The traditional approach – investing in agro chemical, food commodities etc. may not work in this situation. The demand for agro chemicals could witness a sharp drop if the drought-like conditions persist. The food commodity trading and prices could be heavily regulated and controlled to discourage trading and profiteering. The farm equipment and irrigation infrastructure development businesses could also suffer from poor demand.

One of the obvious investment avenues in India could be cultivable land. However, a myriad of problems make this option less viable for most of the financial investors.

A recent tweet by Dr. A. Velumani, founder of Thyrocare Diagnostics, offers an interesting idea – investing in the goat farming business. However, in case of severe drought, fodder could be a serious problem for this business.

It is a basic human tendency to long for what they do not possess. It is common to find people who have struggled very hard to achieve certain goals; but almost instantly feel dissatisfied with (or indifferent to) the outcome. They either realize that it was not something they actually wanted in the first place; or they immediately shift the goal post and begin to struggle/strive for a different/higher goal. This basic human tendency, that often manifests in a constant need to move, evolve and grow, is at the core of all economic growth and development. And perhaps this is the key factor that undermines the issue of sustainability.

Metaverse is nothing but a realization that humans never wanted to globalize in the first place. They like to remain confined to their caves and tribes. It was perhaps the starvation and disease that would have forced the first tranche of immigration.

Of course since the end of the stone age, this realization has taken more than 5000 years; many rounds of polluting industrialization; chopping of billions of trees; extinction of many species; killing of millions of people in wars, to dawn upon the mankind. And it may actually not be the full circle and we may still want something more once we realize the goal of living in a predominantly virtual world.

If I may put this hypothesis in a more recent context-

·         The people of USSR were sick of the central command economy and wanted a democracy that facilitates their participation in the global growth and development; besides making the governance structure transparent, corruption free and progressive. Gorbachev gave them an opening to the world they were struggling to live in. In less than two decades, they chose to hand over the power to an authoritative leader who is not even committed to any socio-political ideology; aspires to restore Tsarist colonial ambitions and cares least for the global order, transparency and accountability.

·         China, which has consistently supported Pakistan’s demand of self determination by Kashmiri people at all global platforms, refuses the same rights to the people of Tibet and Taiwan. The Chinese authorities and businesses demand equal rights for their companies from the governments of foreign jurisdiction where such Chinese corporations have established operations. However it refuses to allow similar justice and freedom to its own corporations and entrepreneurs like Jack Ma.

·         We find that for almost a decade the central bankers of the developed world struggled to create inflation and full employment in their respective economies. When the inflation finally occurred, it is now their biggest problem.

·         The farmers, agriculture experts and politicians in India clamored for farm sector reforms for many decades. But when a significant part of these reforms were delivered, people launched a movement for reversal of these reforms.

·         The industrialists and financial market participants long for accelerated economic and fiscal (tax) reforms. However a mere mention of withdrawal of Income Tax exemptions and concessions (e.g., LTCG) makes them apprehensive.

The simple point is that the investors should not get passionately attached to a new trend or event. Most of these could be ephemeral; and could evaporate as soon as these go out of media headlines.

In the past one month the benchmark Nifty50 index has gained over 7%. With these gains Nifty returns are now positive YTD2022 as well on a one year basis. In fact, the August 2022 Nifty Future expiry was the highest since October 2021 Future expiry of 17857. Even for Bank Nifty, the August 2022 Future Expiry was highest ever; since October Future expiry of 39508. Indian equities are now outperforming most major global markets on a one year basis.

On one year bsis Nifty is now higher by ~6%.In this period, IT (-15%), Pharma (-8%) and Small Cap (-4%) are notable underperformers; while Energy (+39%), Media (+33%), Auto (+33%), PSU Banks (+30%), Realty (+21%) and Midcap (+14%) are notable outperformers.

The ~7% gain in the past one month has been led by Metals (+13.5%), Private Banks (+9.9%) and Energy (+9.8%). Pharma (+2.3%) and FMCG (3.3%) have been notable underperformers.

This strong market performance has occurred in spite of  – (i) below par 1QFY23 corporate performance; (ii) continued monetary tightening; (iii) elevated inflation; (iv) worsening current account and weakening currency; (v) weakening global growth impairing export growth outlook; (vi) erratic monsoon impacting kharif sowing and clouding rural demand outlook; and (vii) worsening geopolitical situation in China Sea as well as Ukraine. Obviously, there are doubts over the sustainability of the current market up move. The question thus arises “how does market look in the near term (next 6 months)?”

In my view-

(a)   The economic situation in Europe, US, and China may continue to worsen materially into summer as the energy crisis worsens; drought intensifies further; food inflation rises further; monetary tightening continues and global demand slithers further down.

(b)   Macro challenges in India may continue to remain intense in India as food inflation stays elevated in festival season; RBI tightens further in busy season; exports slowdown keeps CAD elevated; manufacturing growth continue to disappoint on poor export order flow; overall growth remains below the budget assumptions impacting the revenue collection estimates & public expenditure; election to some key states keeps reform agenda in check.

(c)    Relative stability and growth may keep the foreign flows positive. However, some of this could be neutralized by poor domestic institutional flows, as we have seen in the month of August.

(d)   The earnings downgrades may accelerate post 2QFY23, as even the current consensus on earnings growth (~15%/16.5% for FY23e/FY24e) looks slightly optimistic.

(d)   Technically, most Indian indices are in a neutral zone as of now – implying even risk reward in near term. The benchmark indices may rise or fall by 5-7% in the next 2-3months. However, in case Nifty does rise by 5% from the current level, the risk reward shall become very negative. For BankNifty though it may still remain neutral.

So in my view, Nifty may move in the 16250 – 18750 range, with occasional violation on either side, in the next 6 months. Most of the Nifty upside could be contributed by financials. BankNifty could therefore outperform materially. In technical terms the range for BankNifty could be 36800-44000, with occasional violation on either side.

 Some of the most popular video clips shared on social media in India in the recent past were of India’s External Affair Minister, Mr. S. Jaishankar, giving stern replies to the global media about India’s stand on Russia-Ukraine war. In these clips, the minister is seen ‘exposing’, the hypocrisy of European media and politicians in raising questions over India’s purchase of energy from Russia, despite sanctions imposed by US and EU, while the European countries continue to buy natural gas from Russia. Most social media constituents who shared these clips cited the confident and unabashed counteroffensive by the Indian minister as a harbinger of ‘rising India’ and ‘declining west’.

I personally have no disputes with the social media warriors on this issue. It does feel good to see a representative of the Indian government taking a firm stand against the developed nations on global platforms. However, the point I am presently more concerned about is ‘declining west’.

Worsening demography

With a total fertility rate of 1.6, the European Union’s population is on the decline. European Uinon, whose working population (aged 15 to 64) shrank for the first time in 2010 and is expected to decline every year to 2060. In contrast, the proportion of people aged 80 or over in the EU population is expected to more than double by 2050, reaching 11.4 %. In 2006 there were four people of working age (15-64) for each person aged 65 or over – by 2050 this ratio is projected to be just two people. Migration from other Eastern Europe is helping it to compensate for workers’ shortage to some extent, but it is far from adequate. Most European countries are therefore open to relax migration rules for the Asian immigrants. India’s demographic dividend may, to some extent, come from migration of young workers.

Climate change – Mother Nature showing no benevolence

Historians cite numerous reasons for the decline of the once Great Roman empire. Climate change and disease are also listed as prominent reasons from the Empire, once considered invincible (for example read here). European economy and strategic powers have been diminishing slowly in the post cold war era. The recent climatic disasters are threatening to acclerate this decline further.

As per a latest report by European Union Joint Research Center’s Global Drought Observatory (GDO) Analytical Report titled Drought in Europe – July 2022 – Europe Europe is experiencing its worst drought in at least 500 years. Hot and dry conditions are fueling wildfires and adversely impacting crop yields and electricity generation. About half part of the European continent is facing an alarming situation with a clear deficit of soil moisture. The summer temperature has risen to record levels disrupting transportation, displacing people and causing numerous deaths. Deficient rainfall has affected river flows across Europe – hitting the energy sector for hydropower generation and cooling systems of other power plants.

This climate catastrophe came soon after the Covid-19 pandemic severely crippled many European economies, besides causing numerous deaths and health complications.

Europe has already lost its technology leadership to the US and China. If the agriculture and energy dynamics change materially in the next one decade, the spectre of “the fall of Rome” might return to haunt Europe again. It is however too early to assess how this would  affect the rising Asian societies.