Do it yourself

Wednesday, August 28, 2019

Stay the course

At the beginning of the year 2019, a large number of experts had forecast that:

(a) USD may weaken as trade war begins to hurt;

(b) Global growth may slow down as Central Banks (with the exception of BoJ) tighten the monetary policy. Fed was expected to hike 3-4times in 2019. ECB was expected to begin tighten from last quarter of 2019.

(c) Inflation to pick up as US inches towards full employment and China eases. Commodities were therefore expected to do well.

(d) The "bubble" called Bitcoin may burst completely.

(e) Emerging markets may do well in view of the weaker USD and Crude forecasts.

The opinion was divided on US treasury bonds, but a majority expected the benchmark yields to either rise or at least stay above 3% mark. Gold and silver did not find mention in most strategy reports and were advised to be avoidable assets. The Chinese Yuan (CNY) above 7CNY/USD was widely anticipated to be a disaster for global trade.

A thumping victory for BJP led NDA in Indian general election was widely expected to be a major stimulus for Indian economy and hence Indian equities and currency. Some enthusiastic forecasters envisioned USDINR at 65-66 and Nifty at 13000 by the end of 2019.

The reality is however turning out to quite different.

(i) The Chinese Yuan (CNY) is sustaining above 7CNY/USD for three weeks now.

(ii) INRUSD is flirting with 72 mark and forecasters are now more inclined towards 75 rather than 65.

(iii) US 10yr benchmark yields (1.51%) are comfortable around the lowest level since 2008 crisis. No major central bank in the world is talking about a possibility of a rate hike in near term

(iv) Bitcoins are firmly above $10k mark and receiving due respect from many quarters.

(v) Gold and silver turning out to be best performing assets amidst aggressive calls for buying from gurus.

The short point is that the global economy, markets and geo-politics are too complex to assimilate and forecast at this point in time. Forecasting a trend under these circumstances is mostly shooting in the dark. Wildly swinging between greed and fear; despair and hope, dismay and enthusiasm will only make the going tougher.

The best strategy under these circumstances is to follow a straight path - set attainable goals; define the strategy; make a plan and execute it religiously, without fear or ebullition.

My investment goals and strategy for next 12months are as follows:

Tuesday, August 27, 2019

Junk Yards filling fast

A video of Ranu Mondal singing an old classic song of legendary Lata Mangeshkar on a railway platform in Ranaghat (West Bengal) went viral on social media last month. Suddenly, the woman henceforth living a nondescript life became a popular figure overnight. So much so that a Bollywood music composer and singer, famously known for his concern for underprivileged, decided to record a song in her voice for his upcoming film. The video of her recording was released instantly on social media and attracted many hits.

I saw the viral song from railway platform and the recording video many times over. In my view, Ranu is good at imitation but unfortunately she may not be a talented singer per se.

Nonetheless, sudden popularity has changed her life dramatically. She is attending TV shows and public functions and getting lots of media coverage. But this popularity might not be sustainable.

There are hundreds of example where people lacking talent gained sudden stardom and faded to oblivion in no time. Many of them could not handle this sudden boom and bust cycle and ended as disaster. Some regressed to the path of crimes like drug peddling, trafficking, etc. Some other suffered from depression and even committed suicide. Few have accepted the reality and settled back in their groove comfortably.

The phenomenon is not limited to the field of arts and sports only. Numerous businessmen and entrepreneurs lacking talent and sustainable ideas are also ending as disaster after tasting their share of success.

As I mentioned last week (see here) a lot of new age businesses and start ups in India are mere imitations of the successful global business models. They completely lack innovation and sustainability. In fact the palpable idea behind most of these businesses also appears imitation of global practice of "create and sell".

I would refrain from commenting on appropriateness, or otherwise, of this practice of cloning. My only fear is that a large majority of these imitated ventures are most likely to fail, making life miserable for the employees, the entrepreneur and in some cases the financiers also. It is only a matter of time when there will be no place left in the junk yard and sale of anti depressants would have risen exponentially.

It is unfortunate to note that our policymakers are mostly indifferent to this problem. They urgently need to recognize that a resource starved economy like ours can hardly afford the "start up" failure rates of developed countries. Each failed business not only losses its own capital, it blocks the path for some other genuine ideas also.

The worst part is that that the reset initiated by the global financial crisis and pushed further by demonetization, GST, IBC etc, is bringing the hordes of traditional businesses to the junk yard every month. New businesses joining this race will only compound the problem manifold.

In the meantime, it would be interesting to see how Ranu Mondal handles her life when this sudden tide of popularity recedes. The sympathizers and admirers in the cyberspace are ruthless people always in a hurry. They would have moved many miles forward by the time her cows return home. Expecting any help or attention from them would be totally unreasonable.

I wish there were specialized therapy centers dealing with cases of sudden unsustainable rise & fall in popularity and fortune. This is a sustainable business idea that I am throwing in for free in the wider public interest.

Friday, August 23, 2019

Cloning is not innovation

As per the latest list released by The Forbes, unsurprisingly 8 out of top 10 most innovative companies in the World in 2018 were American companies. ServiceNow has been termed as the most innovative company of 2018, while Facebook is positioned at number 10.

The two non American companies in the top 10 occupy 8th and 9th place in the league table. One of these two non American companies is Naver Corporation, which runs an online platform in South Korea.

The most surprising entry however is at number 8, which is Hindustan Unilever Limited - an Indian fast moving consumer good (FMCG) company. I say surprising because it is the only company in the top league not running a technology driven business or in simple words an old school company.

The other surprising part was that no company from Germany, Japan, and China figured in the list of top innovators.

If this list is valid then there are sufficient reasons to believe that —

(i) Demographic decline might be hurting Japan and Europe more than the popular estimates;

(ii) China might have many more miles to cover before it can catch up with USA on the innovation scale;

(iii) Notwithstanding all the political rhetoric regarding VISA restrictions and local jobs, US Corporations may continue to employ the best talent available anywhere in the world. A tougher local VISA regime may further accelerate the off shoring trend in new age digital companies.

(iv) There are numerous examples of Indian enterpreneurs cloning successful innovative US business models like Uber (OLA); PayPal (PayTM), Amzon (FlipKart etc.), WalMart (Big Bazzar etc.), StarBucks (Cafe Coffee Day), Monster. Com (Naukri.Com) Match.com (Shaadi.com etc.), Netflix (ZEE5, JIoTV, Airtel Xtreme etc).

However, innovation that is scalable to global reach is still missing. The companies with foreign lineage, like Hindustan Unilever, Nestle, Maruti, etc are predominantly leading the innovation initiatives.

The policy makers need to take note of this and escalate the efforts to promote innovation rather than dissipating scarce resources on some jugaad ideas that sound good but are not scalable and discourage the cloning business.

Investors also need to build in these considerations in their investment strategies.

Thursday, August 22, 2019

1QFY20 Earnings - pain aggravating

1QFY20 Earnings - pain aggravating

The latest earning season has been disappointing on most counts. If we can avoid getting into the nitty-gritty of the performance relative to corresponding quarter of last year or immediately preceding quarter, we shall find the reported earnings much below par across most sectors. The earnings totally belie the high hopes, the street had from FY20 earnings.

There is a stampede amongst analysts to downgrade earnings estimates to bring these in line with the market conditions. The unfortunate part is that the revised earnings estimates also mostly appear driven by the prevailing stock prices and not by the earnings potential and prospects of businesses; and hence may not be reflecting the true state of the anticipated corporate performance.

A significant majority of corporate managements guided caution in terms of near term growth, indicating that the 2QFY20 earnings may also not be encouraging. 2HFY20 outlook is generally optimistic, though no concrete basis has been presented for the optimism.

The key highlights of earnings estimates could be listed as follows:

As per Motilal Securities' Research the Nifty Sales (6.4%), EBIDTA (2.8%) and PAT (5.1%) growth was below estimates. Sales growth was lowest in past 8qtrs. Pertinent to note that EBIDTA was pushed up by change in Accounting Standard for Leases (AS-116).
Highest earnings growth was witnessed in airlines, financials and cement, while metals, auto & auto ancillaries and chemicals reported the highest decline. Cement was the only sector that surprised the analysts with strong numbers as the realization remained strong across regions and costs were under check.
Pharma sector earnings stabilized after declining for many quarters.
As per JM Financial Research, 11/50 Nifty companies cut capex guidance for FY20.
Post earnings, various brokerages have downgraded Nifty earnings by ~5 to 6% for FY20 and by ~3.5-4% for FY21. However, ~18-20% Nifty EPS growth estimates for FY20 and FY21 still look rather optimistic and may see further rationalization post 2QFY20 results. As per Elara Capital Research, Among Nifty 50, 23 stocks saw an earnings beat (actual results exceed estimates by >5%) while 18 saw an earnings miss. The beat ratio (net earnings surprise divided by the total number of stocks) improved from -10% to 10%, largely due to earnings beat in metals, energy and IT. However we consider the broader markets, the companies missing the estimates were much more than the companies beating the estimates.