Do it yourself

Thursday, June 19, 2014

Blame it on Rio

Thought for the day

“Today was good. Today was fun. Tomorrow is another one.”

- Dr. Seuss (American, 1904-1991)

Word for the day

Transfigure (v)

To change in outward form or appearance; transform.

(Source: Dictionary.com)

Teaser for the day

Will FIFA cup 2014 travel to Europe this summer?

Blame it on Rio

I had a chance meeting with a small group of Rio bound Delhi realtors yesterday. The discussion expectedly was not quite enlightening or intellectually stimulating. Nonetheless, I found a few points worth chronicling.

Firstly, none of the group members had any interest in the game of football. They are visiting Brazil for indulging in cheap booze, legal betting and abundant sex!

Secondly, they are disappointed in Modi Sarkar. In past three weeks since the new government took over, they have not seen any improvement in business. Buyer enquiries continue to be scant and often just exploratory in nature. On the other hand potential sellers have decided to wait for markets to improve. The inventory in market has reduced. Therefore now they have much less scope to keep themselves engaged.

Thirdly, the liquidity condition in the informal market has tightened further in past few weeks for some inexplicable reasons. This group suspects that perhaps fearing stricter surveillance many “cash lenders” have slowed down their activities. Other doubts were that (a) there are huge defaults in election betting and (b) the losing non-BJP candidates are refusing to pay up the money borrowed for election related expenses. Usually, as per one inebriated group member, they would have paid up by way of an administrative favor.

The revelation to me in this whole one hour conversation was as follows:

(a) There may be many participants in the equity markets who have entered post election just for making few fast bucks. These are not serious investors or even traders. Historically, these lottery seekers have exited market with material losses and disappointment. A deeper correction might be needed to drive these non-serious players out.

(b) The business recovery might take little longer than presently anticipated. The “bitter pill” that Narendra Modi is frequently alluding to may actually cause lot of pain and dismay in certain segments of business community.

(c) Electoral reforms as envisaged in various speeches of BJP leaders, even if partially implemented, may dynamically alter the contours of business-politician relationship. Businesses surviving and thriving purely on the basis of administrative and political patronage could face serious existential threat under that circumstance.

(d) Tourism is a “big” development idea in the Modi government scheme of things. We have heard about promotion of thematic tourism, pilgrimage and cultural tourism.

I am not sure how BJP’s conventional ethos would be able to co-opt the Rio, Macau, Vegas and Bangkok type tourism their public promotion schemes.

Education tourism (parents visiting their wards studying abroad) and immigrant tourism (family members visiting the people living and working abroad) is a big drain on RBI’s dollar chest. The government may need to work on (a) how to bring student back for internship during their vacations and (b) how to bring young Indian living abroad to spend their vacations in India with their family members.

Wednesday, June 18, 2014

A crash not expected till it actually happens

Thought for the day

“Truth is so obscure in these times, and falsehood so established, that, unless we love the truth, we cannot know it.”

- Blaise Pascal (French, 1623-1662)

Word for the day

Cathexis (n)

The investment of emotional significance in an activity, object, or idea.

(Source: Dictionary.com)

Teaser for the day

“Compulsory Tweet and FB in Hindi” is not exactly language of compliance, inclusiveness and development.

I feel it’s my constitutional right to communicate in a language me and my audience are most comfortable with.

A crash not expected till it actually happens

The sharp market correction last week was as much a reminder to the unmindful bulls, as it was an opportunity for the investors sitting on fringes waiting for a correction to occur. Besides, invoking an element of fear, it certainly did revoke memories of 2008 market fall.

Greece, Syria, Iceland, Libya, Crude Oil, have all caused serious corrections in global markets in past six years. The latest instance of unrest in Iraq is therefore nothing new or unpredictable.

Perhaps, with US petroleum production at 44yrs high and crude exports at 15yr high, consumption growing at slowest pace in decades, the crude shock appears less likely. Moderate growth in China and other emerging markets may also be providing some comfort.

The world markets, under deluge of liquidity pumped in by major central banks therefore presently do not appear too concerned about the consequences at this point in time. This also is not completely unpredictable, given that most markets, including India, were scaling new highs every day when Sr. Bush invaded Iraq for the first time in summer of 1990 to protect its interest in Kuwait and gulf of Persia.

I am bringing this subject as many readers have raised doubts on the ability (or otherwise) of economists and market analysts to predict market crashes. Though many celebrated economists (including our own RBI governor Raghuram Rajan) are credited with foreseeing market crash at various times, no one has presented a definitive model that can forecast a crash. It had been more about epiphany rather than economic or technical forecasting.

In my view, the conventional method of trusting and respecting the collective wisdom of market to predict future course of asset prices is the only sound method available to us.

It is true “that financial markets process new information faster than any one individual, government or institution could, and so for most people they may seem to behave unpredictably”. The economists cannot be expected to understand these sudden movements better than anyone else, so expecting them to foresee market crashes is absurd.”

Remember, the information that would cause excessive market volatility and eventually lead to crash is usually not new. For example, information about sub-prime loans was available with all market participants, investors, regulators and government authorities much before 2007. In fact many bankers and investors had gained tremendously from such instruments. Many had also taken contrarian bets on these instruments well before July 2007, when it started dominating the headlines. These investors and bankers also gained from these hugely post crash. What happened in 2008 was perhaps everyone suddenly wanting to exit these instruments for one reason or the other.

Similarly, the precariousness of the geo-political situation in Middle East Asia, and North Africa is well documented and known to all. Recent escalation is also not a surprise occurrence. Therefore, the battle in Iraq on its own cannot cause crash. For that a majority of market participant need to simultaneously believe that it can cause markets to crash.

Tuesday, June 17, 2014

Means are equally important

Thought for the day

“Men should be either treated generously or destroyed, because they take revenge for slight injuries - for heavy ones they cannot.”

- Niccolo Machiavelli (Italian, 1429-1527)

Word for the day

Beget (v)

(especially of a male parent) to procreate or generate (offspring).

(Source: Dictionary.com)

Teaser for the day

If someone can be insulted by ordinary people like me, let me assure you such person was never reputable.

Means are equally important

Swami Jagadatmananda in his famous work “Learn to Live” extolled the readers - the sincerity and honesty of the means to achieve a goal is equally important as the goal itself.

More popularly, in blockbuster Hindi movie DDLJ the hero Shahrukh Khan articulated this thought in a conversation with the mother of his beloved. When for the fear of her husband’s retribution, the mother advises the two lovers to elope – the hero tells her that the path suggested by her appears easy but it would lead to nowhere. He would rather prefer the path of courage, honesty and integrity which though arduous definitely leads to the desired goal.

I am reminded of these instances by the latest discussion regarding likely economic and fiscal policy stance of the new government.

Both PM and FM have indicated, on more than one occasion, that some tough measures would be needed to bring the economy back on the sustainable growth path. The media speculations suggest that the government might consider tighter fiscal discipline by way lower non-plan expenditure, lesser subsidies, and somewhat higher taxes.

However, I am yet to hear from any non-government stakeholder that they are willing to cooperate and cooperate. To the contrary almost all stakeholders have presented their lists of SoS concessions.

This presents the government with classic dilemma – whether to expediently yield to popular pressure for ad hoc relief or institute structural reforms that would afford the economy fiscal & financial stability and capability to grow sustainably faster.

In my view, two tasks need to be accomplish expeditiously –

(a) Bridging the multitude of deficits prevalent in the country, especially trust deficit, governance deficit, compliance deficit, skill deficit, social and physical infrastructure deficit, and capital deficit.

(b) Bringing India into a state of equilibrium by removing social, and regional, economic imbalances.

To this end, it is imperative that all of us contribute to the endeavors of the government. In particular, industries and businesses who have thrived historical on government largesse and not necessarily on the enterprising abilities of promoters would be willing to give back to society by way higher taxes, higher voluntary CSR spending, technology upgrade for better resource utilization, etc.

On household citizens’ part the minimum we could do is to commit ourselves to (a) most efficient use of energy; (b) totally avoiding food wastage, and (c) high standard of quality & conduct in our respective professions, social and civil life.

Saturday, June 14, 2014

Bulls’ resolve tested

Thought for the day

“You have to take risks. We will only understand the miracle of life fully when we allow the unexpected to happen.”

- Paulo Coelho (Brazilian, 1947 - )

Word for the day

Ambulant (adj)

Moving from place to place. Itinerant.

(Source: Dictionary.com)

Teaser for the day

With US assiduously avoiding any direct intervention in international conflicts in past couple of years, and Russia gaining tremendously from spike in energy prices – who will lead the joint action in Iraq, should a need arise?

Bulls’ resolve tested

The raging bulls in Indian equity and currency markets faced their first serious test last week. Various local and global events tested the resolve of bulls who are having a free run for past one month.

Globally, strife in Iraq sent energy prices soaring, as global leadership continued to dither over a clear stance on military intervention. The situation in Ukraine remained fragile.

Back home, IMD forecasted a 7% deficient monsoon. Heat wave across north and northwest India led to serious power crisis. Reports suggest that the crisis may worsen as coal inventory at many plants is below critical level. Unusual rains and hailstorm damaged the onion crop in Maharashtra again, threatening the consumer price inflation. Mumbai coast was deluged by a high tide making people nostalgic about July 2005 flash floods.

On supporting side, IIP data for April brought some cheers to the market. Morale of the bulls was also supported by the government’s effort to accelerate the decision making process by removing many redundancies. The vision statement of the government as articulated in the President’s address to the joint session of the Parliament and subsequent very assuring reply of the Prime Minister to the debate on that address were largely accepted as harbingers of the good times.

The first round has apparently gone to the bulls, as the sharp falls in prices has largely been lapped as opportunity. So far there are no signs of panic in bull camps. Over weekend, the Finance Secretary Arvind Mayaram has also attempted to reassure markets that as yet there is no need to panic over Iraq. The markets ended the week with about half a percent loss over past week; though the losses were about 2percent from intraweek highs.

I also believe that Iraq situation has the potential to evolve into a larger conflict in the region, if the militant forces are not curbed immediately. The success of Islamic militia in Iraq could encourage the defeated militant groups in the Middle East Asia, South Asia and North Africa region.

The attitude of US administration and many western European nations towards the events in Syria, Ukraine and Iraq, in my view, has exposed the weakest part of the global economy, viz., lack of credible strategic leadership that has been the hallmark of global economy in past 150years. Britain and US have invariably taken lead in resolution of most global conflicts since later half of the 19^th century. This assumption of strategic leadership has made their economic and financial acceptable to the other relevant forces in the world.

Britain has been losing their leadership status since Tony Blair era. The economic decline of UK has coincided with it. London has lost substantial share in global financial business to new centers like Dubai and Singapore. The argument that only favorable taxation regime is responsible for this shift is not acceptable to me. I would give first priority to the perceived safety when it comes to my wealth.

I would watch keenly for next decade how US losses or retains its strategic leadership over the world. For now, Barack Obama is not making much effort.

Thursday, June 12, 2014

Morning dream

Thought for the day

“Reality is wrong. Dreams are for real.”

- Tupac Shakur (American, 1971-1996)

Word for the day

Schmaltz (n)

Informal, exaggerated sentimentalism, as in music or soap operas.

(Source: Dictionary.com)

Teaser for the day

Pride of triumphant is fine, but it should not cross the line of hauteur.

Morning dream

In order to diminish deflationary pressures and weaken the common currency Euro and thereby stimulate economic growth, ECB announced some measures a few days ago. The most discussed of these was reducing the interest on ECB deposit facility to below zero percent.

Though at face value 1/10^th of a percent is not much below zero percent and should not be a matter of additional concern for savers who are now used to earning negative return on their savings, the signals are worth taking note of.

It is conspicuous that like Fed, ECB is also past the trauma of financial crisis that repeatedly threatened the global financial system since 2008. The regulators now want participants to take risk. They want banks to lend more, businesses and household to borrow & spend more and save less.

The sharp decline in long term yields, despite US Fed tightening the policy stance, across Europe, USA and Japan is contrary to popular expectations. It could be a matter of concern for markets.

Conventionally, compression in yields is a negative growth signal. However, there is little evidence to suggest that economy is the USA, Japanese or European economies are likely to fare poorly in next couple of years at the least.

The lower yields therefore could be logically defined by shift in demand-supply curve of government bonds. With many governments simultaneously endeavoring to put their fiscal conditions in order, the supply of bonds is falling at a time when crisis struck households’ propensity to save is rising at fastest pace in recent decades. Consequently, the demand is outstripping the supply at much faster clip.

ECB might therefore be right in signaling its support for risk taking, lest the economy slips again into recession, this time led by higher savings and risk averseness, unlike 2008-10 a period which saw unsustainably high leverage and excessive risk taking materially damaging the financial markets.

There are many who believe that it is not long when Fed may also follow ECB below the ground Zero on deposit rates, despite continuing with moderation in bond buying program. This may be necessary to keep US exporters competitive against sharp decline in Euro.

Back home, we have heard some voices pleading the regulators and government to stimulate risk appetite of investors through a series of measure, including tax concessions, lower interest rates etc.

It would be interesting to see how RBI reacts to likely deluge of FII flows due to higher risk appetite fueled by fall in global yields and weaker USD and EUR.

In my view, a dramatic cut in rates to keep INR around 60/USD level would be in order. It is with this premonition I suggest a duration play on long bonds, after spending almost 4years exclusively in accrual products.

Gold may also warrant a re-look if my suspicion comes true.

Wednesday, June 11, 2014

Make a beginning

Thought for the day

“We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time.”

- T. S. Eliot (American, 1888-1965)

Word for the day

Prevaricator (n)

A person who speaks falsely; liar.

(Source: Dictionary.com)

Teaser for the day

The government need to choose between 6,50,000 smart villages and 100 smart cities.

If you say we need both – tell me what should happen first?

If you say both should happen together – show me the money.

Make a beginning

The political events in couple of weeks and subsequent up move in equity stock prices have reignited interest of many savers. Many people who drastically reduced weight of listed equities in their wealth portfolio are also showing keen interest in rebalancing of their risk profile by increasing weight of listed equities. I have received many requests for suggestions as to what should be the approach for rebalancing the portfolios.

While I have been replying to individual queries, I find it appropriate to present a general approach for the benefit of broader readership of this column.

The most common question I get is “What would you do if you have to invest fresh Rs___ in equity market?”

To this, my answer is usually as follows.

Make a diversified portfolio, which captures the current environment and likely trend in economic hence business cycle. The portfolio should be focused and not too diversified. It should largely contain leaders in terms of market, product, technology, and pricing power. It would however not be completely inappropriate to include couple of new kids on the block who are clearly demonstrating the potential to become leaders in their respective spheres.

The basis of diversification could be as follows:

Basket 1 - Broader economic growth (25%): This will be a basket of leading corporates of India which would lead and equally participate in the revival of economic growth in India and than elsewhere. A focused large cap fund that picks up from top 100-150 stocks will be optimal for this purpose. A passive index fund can also serve the purpose, but I would prefer an actively managed fund at this stage, given that the economy is still not likely to get out of woods in next 2-3 quarters at the least and currency could be a major play impacting the performance of a large number of Nifty constituents.

Basket 2 - Cycle leaders (25%): As the economy revives, some sectors will do better than the others. Companies in sectors will obviously give more return than benchmark indices. In my view, early cycle plays (large operating leverage, faster demand pick up) with market leadership should be considered for this. A sectoral fund (banking and power for domestic and IT and Pharma for global) could be a good way to participate in this segment.

Basket 3 - Growth vs. value (20%): Being convinced that we are embarking on a long journey of faster and sustainable growth we need to identify and invest in few high growth potential companies that have demonstrated strong potential to become market leaders in future. We could consider a basket (specialized funds) or not more than 5 direct stocks.

Basket 4 - Secular growth (30%): About two fifth of our portfolio must be secured in secular non-cyclical growth stories like consumption and generic pharma. Assuming that other three buckets will capture some exposure in this segment, I suggest 30% direct exposure to this segment through quality stocks.

Based on the latest socio-economic vision statement of the government, as enunciated in the President’s address to the Parliament on Monday, I find the following investment themes that may be relevant in the next few years.

Investment themes

Professionalization of PSU. Select PSU’s that are doing well and are least affected by policy decisions. Nevertheless, the current positive policy cycle may favor energy and banking.

Railways could be to 2015-2020 what roads were to 2003-2007. Focus on technology leaders rather than generic stock (wagons and wheels) suppliers.

Agri productivity as an economic activity will likely enjoy highest priority for the incumbent administration. Focus should again be on technology innovators and market leaders rather than generic fertilizer producers.

Cyclicals. Buy cyclicals and industrials with god balance sheet and decent operating leverage (cement, capital goods, auto and construction).

Commodities: Buy global commodities which are on the cusp of reversing demand-supply cycle (Aluminum, Zinc and Lead).

Global businesses (IT, pharma, auto ancillaries) as INR completes its correction over next 2-3months

Consumers (FMCG, 2wheelers, telecom, pharma, textile, finance, media) for demand pick up on fiscal and monetary stimulus.

Illustrative list of stocks (Not be considered as recommendations)

1. Bharat Forge (Undisputed global leadership, strong B/S, operating leverage, CV cycle upturn, higher railway and defence demand)

2. Bosch (Technology leadership, operating leverage, CV cycle upturn)

3. HCL Tech (Cheaper valuation, better margins, new business traction, management transition to high degree of professionalism, large size)

4. HDFC Bank (Undisputed market leadership in retail banking)

5. HUL (Undisputed leadership, strong product profile, margin bottoming)

6. Idea (Strong growth in data business, best cost management)

7. Kaveri Seeds (Strong market leadership in hybrid seeds, strong B/S)

8. L&T (Undisputed market leadership, operating leverage, cyclical upturn)

9. Mahindra and Mahindra (Cyclical upturn, diversified)

10. Motherson Sumi (Technology & product leadership, operating leverage)

11. PVR (Strong market and brand leadership, high growth, operating leverage, top play on consumer discretionary, early stage business)

12. Reliance Industries (Cyclical upturn, strong product leadership and B/S)

13. Sun Pharma (Strong leadership, consistent premium valuation, high growth and margins)

14. Tata Motors (Cyclical upturn, Global leadership (JLR)

15. Ultra Tech Cement (Market leadership, cyclical upturn, operating leverage )