Vijay Kumar Gaba

Tuesday, May 14, 2013

Market comfortable with politics

Conventionally one would have expected higher volatility, jitteriness and weakness in the market given the political impropriety leading to legislative impasse and administrative inaction. However, the market has brushed aside most concerns and moved on.

We are however not surprised by the market’s reaction to the political events. We firmly believe that market is not indifferent to the political event and the collective wisdom has assimilated the political environment well. We believe that market is finding the political events constructive and medium to long term positive.

Insofar as the up move is concerned, it has two major drivers – (a) global positive sentiment towards risk assets, especially equity, and consequent larger FII participation and (b) bottoming of macroeconomic fundamentals, in particular inflation, rates and investment demand.

Domestic politics has little influence on global markets and flows. Macro fundamentals do get impacted by the efficacy or otherwise of the political establishment; and here in our view the market is deriving comfort from the recent events. In our view, the Congress party has strengthened its position in past few months and market is comfortable with that. For example consider the following:

(a) We had highlighted in one of our earlier reports that in our view the Congress party has well defined strategy and it is executing it well (see margin note). The recent instance of two ministers resigning on impropriety charges is yet another instance of impeccable execution of this strategy. The Congress party has emerged stronger after each such episode in past one year.

The Congress Party strategy, in our view:

(1) Divert the popular debate away from corruption and non-governance to economic (price rise) and social (food and women security) issues.

(2) Weakening NDA and work on reconstitution of UPA.

(3) Present a transformed youth looking party image to people.

(4) Distance itself from the current government and all the impropriety charges it is facing.

(5) Keep the government alive till May 2014, and demonstrate Congress’s ability to run governments in adverse conditions and wait for the economic conditions to improve a little.

(b) By electing Karnataka CM through secret ballot, the party has given a strong message of its readiness to accept greater intra party democracy, thus debunking a key plank of opposition.

(c) The party has successfully created a projection in media that incumbent FM Chidambaram is a likely PM candidate, thus diverting the focus from Rahul Gandhi. Our discussion with many businessmen and industrialist suggest that at this point in time many would prefer PC over Modi since they believe PC will try to improve the current system and hence execution will improve faster; whereas Modi would like to first change the system and that might adversely impact the execution part in the short term.

In view of this we suggest the following strategy:

(i) Avoid shorting the market. Though continue reducing/rationalizing equity positions at every rise. Global liquidity will likely remain comfortable, and PC will do better things to strengthen his position – do not position for a collapse in market.

(ii) The deterrent to corruption has also risen. Post Coalgate bashing, CBI would certainly try to redeem its pride. In our view, we might see many Bansal/Singla like episodes in next six months. That might create large bouts of volatility and provide better entry points – buy on days when sky appears falling apart.

Monday, May 13, 2013

No pain, relief or regret?

The cold response of household investors to the ~8% rally in Indian equities in past six weeks has apparently intrigued many pundits. The rally is characterized by persistently low volumes, poor market breadth, low volatility, implying total lack of greed or fear.

On the positive side, it implies that this rally may continue much further than most of us anticipate as so called weaker hands are not participating. On the negative side, it lacks any foundation and is always susceptible to a sudden crash like January 2008.

In traditional sense, we may neither call it “Pain Rally” – since no one was interested in investing even at lower level; nor it is a relief rally – since the mid and small cap stocks or laggard mutual funds with which household investors are still saddled have not participated much in the rally. Our discussion with some investors suggests that it is not even a regret rally – for those who sold stocks or redeemed their MF investments a few weeks earlier.

The so called retail investors have obdurately refused to participate in publically traded equities’ market in past few years. In particular, post 2010 the household participation in listed equities has declined sharply.

We had highlighted in our four part series on household investors’(see I, II, III, IV) the reason for participation of household investors (or lack of it) in stock markets. We do still not see them coming back in a hurry.

The surprising part is that this is not true only for a emerging market like India with all its imperfections and scams. Only 52% of American households now have money invested in the stock market, down from 53% a year ago and 62% five years ago. This is historically quite low.

(Source: Zero Hedge)

Read our special four part series on household investors “Retail Conundrum”

Friday, May 10, 2013

Enjoy your dinner, but don’t get too late

The feel good factor in global equity markets is going strong since past few months. India has also joined the party in past few weeks. Obviously no one would like to see a party pooper at this point in time. Nonetheless, there are some and investors would ignore them only at their risk.

The perennial party pooper Nouriel Roubini said on Tuesday that Stocks aren't in bubble territory as yet, but a "huge rally in risk assets" over the next two years puts markets in danger of a big crash.

But more notable is Michael Snyder of The Economic Collapse Blog, who is flashing the following dozen warning signals:

1. The price of copper has traditionally been one of the very best indicators of the future performance of the U.S. economy. It is down nearly 20 percent so far this year.

2. Home renovation spending has fallen back to depressingly-low 2010 levels.

3. U.S. retail spending is repeating a pattern that we have not seen since the last recession.

4. Manufacturing activity all over the country is showing signs of slowing down. In fact, Chicago PMI has dipped below 50 (indicating contraction) for the first time since the last recession.

5. In April, consumer confidence unexpectedly fell to a nine-month low.

6. NYSE margin debt peaked right before the recession that began in 2002, it peaked right before the financial crisis of 2008, and it is peaking again.

7. The S&P 500 usually mirrors the performance of Chinese stocks very closely. That is why it is so alarming that Chinese stocks peaked months ago. Will the S&P 500 soon follow?

8. The economic data coming out of the Chinese economy lately has been mostly terrible.

9. Things just continue to get even worse over in Europe. Unemployment in both Greece and Spain is now about 27 percent, and the unemployment rate in the eurozone as a whole has just set a brand new all-time record high.

10. Crude inventories have soared to a record high as demand for energy continues to decline. As I have written about previously, this is a clear sign that economic activity is slowing down.

11. Casino spending is usually a strong indicator of the overall health of the U.S. economy. That is why it is so noteworthy that casino spending is now back to levels that we have not seen since the last recession.

12. The impact of the sequester cuts is starting to kick in. According to the Congressional Budget Office, the sequester cuts will cost the U.S. economy about 750,000 jobs this year.

In our view, investors may enjoy their dinner, listen to party poopers and decide when to return home. Make sure it’s not too late.

Read our special series Mandate 2014

Anxiously Indifferent

Karnataka & Delhi

Goa, Punjab and Haryana

Corruption Matters, Alas! Not the way it should

Reforms ain’t mean the same for Delhi and Sangli

Gujarat

20 Program: Agenda for 2014 election

Modi Vs. Rahul

Thursday, May 9, 2013

A Wednesday

Thi khabar garm ke Ghalib ke urenge purze, Dekhne hum bhi gaye the per tamasha na hua. – Mirza Ghalib

(The buzz was that I will be publically thrashed today; I also went to see the drama; but nothing happened.)

Wednesday 08^th May 2013 was widely touted by media as super Wednesday. Karnataka assembly poll results and Supreme Court’s hearing on CBI’s affidavit in Coal Block allotment case were widely seen as critical for the political establishment of the country.

However, as it turned out, nothing happened. Karnataka poll results were exactly on the lines we expected. BJP lost. Congress did not make it big. B. S. Yeddyurappa made ignominious exit. Supreme Court censured CBI but spared the political bosses.

Stock markets ignored both the events and moved on. Companies with good results (e.g., HDFC, Lupin) gained; and those giving bad numbers (e.g., Ranbaxy) were punished. A normal day, prima facie.

At least five disturbing trends continued unabated, namely-

(a) As we highlighted in our earlier report, corruption was absolutely a non-issue in the Karnataka election. Despite serious allegation on Law and Rail ministers just days before the elections, Congress won comfortably; especially the urban voters backed the party. Kumaraswamy of JDS who was ousted last time on serious corruption charges gained the most in terms of seats. BSY got sufficient votes to ensure BJP’s rout.

(b) Media vigorously debated the SC order the whole day with many “intellectuals” generously contributing their wisdom to the debate. No one, yes no one, not even once mentioned the name of Anna Hazare, who in his Jan Lokpal Bill had suggested an effective solution for the malaise SC is trying to fix in Coalgate.

(c) SC did come down heavily on CBI in the extant case. But this situation could have been avoided if it had taken suo moto cognizance of the allegations made publically (in and outside the Parliament) by the SP and BSP leaders about misuse of CBI to pressurize these parties to support the UPA II government.

(d) The government showed total disdain for people; refusing to react to the SC observations and concluding the Lok Sabha session ahead of schedule.

(e) The opposition has no plan to request a special session of the Parliament to bring “no-confidence vote” or “impeachment” motion against the government/PM/Law minister.

In our view, the market would be happy if early elections are called, as this government would not be able to transact any legislative business in remaining term and bureaucracy will not cooperate in carrying out the administrative business also.

As for today, expect the market to largely remain unaffected by what happens in Delhi.

Read our special series Mandate 2014

Anxiously Indifferent

Karnataka & Delhi

Goa, Punjab and Haryana

Corruption Matters, Alas! Not the way it should

Reforms ain’t mean the same for Delhi and Sangli

Gujarat

20 Program: Agenda for 2014 election

Modi Vs. Rahul

Wednesday, May 8, 2013

Mandate 2014 – Gujarat: Alcohol, Indebtedness and an Avatar

We started the second phase of our “India Journey” from Gujarat. Our team travelled to 11 districts across South, Central and Saurashtra regions of Gujarat.

In our numerous interactions with people in past year or so, we found that mere mention of word “Gujarat” is enough to instigate a debate. Not surprisingly, most urbanites across the country have strong views on Gujarat. Though the opinion is divided on the candidature of Narendra Modi for PMship, majority of people outside Gujarat have a positive perception about the Gujarat growth model. We therefore kept our focus on the socio-economic conditions of Gujarat and what that could mean for India in coming years. Politics inevitably intruded in discussions.

The key findings of our Gujarat trip were as follows:

(a) The most striking observation was the huge socio-economic disparities especially in semi-urban and rural areas.

People suggested that a large part of prosperity in past two decades has come primarily from two sources

(a) economic boom and bust in developed world that has seen substantial rise in remittances from prosperous overseas Gujarati community; and (b) Narmada water that has resulted in higher agriculture growth and astronomical rise in land prices.

Consequently, it has not led to commensurate employment growth and therefore a large part of the population has not participated in the growth.

(b) However, the real surprise was that the rising disparities in Gujarat are motivating the underprivileged people to do well, unlike Karnataka and Maharashtra where it is resulting in disillusionment and unrest. The key difference in our view is the leadership.

(c) Due to enterprising spirit, the household leverage, especially amongst middle and lower middle class is high in Gujarat. “Cash lending” market is vibrant and exploitive.

(d) Most in Rural areas, believed that their Chief Minister is blessed. More than two third believed that the change in weather pattern (more rains, less dust storms) is due to CM only. So much so for the “Gujarat Economic Model”! Exit of Modi from Gujarat may not be seen favorably by rural voters.

(e) We discovered that alcohol business in the state is managed by one of the best supply chains in the country. Global universities which found Mumbai Dabba wala model interesting would be surprised by this, perhaps one of the largest undercover supply chains in the world. RBI trying to curb gold import may also take a lesson from this.

(f) The communal divide is deep in almost all areas. Contrary to popular perception, people believe that but for Modi, the state would have had seen many more riots.

Next week we shall travel to Rajasthan and UP.

Read impressions of Phase I of the tour:

Anxiously Indifferent

Karnataka & Delhi

Goa, Punjab and Haryana

Corruption Matters, Alas! Not the way it should

Reforms ain’t mean the same for Delhi and Sangli

Also See

20 Program: Agenda for 2014 election

Modi Vs. Rahul

Tuesday, May 7, 2013

Mr. Governor you are not worried about CAD

As per the latest policy statement issued by RBI “By far the biggest risk to the economy stems from the CAD”. The central bank believes that “A large CAD, appreciably above the sustainable level year after year, will put pressure on servicing of external liabilities.” RBI finds that the large CAD is a risk by itself and “its financing exposes the economy to the risk of sudden stop and reversal of capital flows”.

Although the CAD could be financed last year because of easy liquidity conditions in the global system, RBI believes that the global liquidity situation could quickly alter for emerging and developing economies (EDEs), including India, for two reasons. First, the outlook for advanced economies (AE) remains uncertain, and even if there may be no event shocks, there could well be process shocks which could result in capital outflows from EDEs. Second, with quantitative easing (QE), AE central banks are in uncharted territory with considerable uncertainty about the trajectory of recovery and the calibration of QE. Should global liquidity conditions rapidly tighten, India could potentially face a problem of sudden stop and reversal of capital flows jeopardising our macro-financial stability”.

In our view, RBI might be wrong on all counts here.

(a) CAD arising from trade deficit is never a risk in itself. The excess of imports over exports essentially means that our economy is doing better than the other economies who import from us.

In fact, in the present instance RBI itself could be largely responsible for higher CAD. Higher imports theoretically suggest higher demand for goods and services and hence make a strong case for investment demand so that supply side could be augmented. RBI himself has admitted in the policy statement that the economy faces serious bottlenecks on supply side, resulting in sticky high inflation.

RBI by persisting with its “inflation over growth” policy has maintained interest rates at high levels – resulting in collapse of investment cycle and rise in demand for gold.

(b) The uncertainty in advanced economies is an argument for the easy liquidity conditions and continuation of QE and not against it. Whereas return of growth to these economies will lead to higher export demand.

Instead of bothering about one or two quarters, RBI should, in our view, focus on exploiting the easy liquidity conditions and let the Indian corporates and banks borrow more at cheaper rates to augment supply.

(c) The government has repeatedly increased the FII debt limit in past couple of years. These inflows, though not huge, could cause severe damage in case of a shock event, as panic selling inevitably would lead to sharp rise in spreads and yields.

A sharp cut in rates (100-150bps) and buying of US$100bn by RBI may help the economy more at this juncture than worrying about CAD and constricting investment initiatives. Inflation should come down with rise in supply and not by curtailing demand. After all we are not a communist country of 1970s. (Also read Why this kolaveri over current account deficit)

Monday, May 6, 2013

Fill the bucket before tap dries

Last week we highlighted some global trends (see here) that could have substantial impact the Indian economy and markets in short to midterm.

One of the top global trends of present times is the “easy money”. It is widely believed that the liquidity conditions are likely to remain comfortable at least till end of 2014. Besides, the central bankers have effectively ensured that a systemic collapse like the one happened post Lehman in 2008 does not recur. Episodes of uncertainty and instability in Greece (2010-11), Italy, Spain (2012) and Cyprus recently have demonstrated that financial markets are much more stable and sanguine now, as compared to 2008-09.

Unilever Plc. has taken advantage of easy and cheap money to increase stake in its high yielding Indian subsidiary. US large corporations that had been sitting on hoards of cash are now aggressively looking for opportunities. U.S. deal activity surged 62 percent during the first quarter of 2013, bolstered by a series of deals valued at over $5 billion (see).

The Indian government, banks and corporates need to take cognizance of this stability and take some risk to benefit from the easy money. In our view, the political environment is holding back lots of initiatives. We might see “cash liquidation” and “leveraging” process accelerating post next general election.

The beneficiaries from the trend may include – (a) large cash owners; (b) good asset owners with stretched balance sheets and (c) strong balance sheets that can be leveraged further and (d) mid and small sized strong businesses which are scalable – especially where the promoters’’ stake is too high or too low.

The second trend that we need to watch closely is the re-emergence of Japan as an economic power. In our view, Indo-Japan ties should see substantial enhancement in coming years both at economic as well as strategic level. A revival of Japanese economy will most likely coincide with rise in geo-political tension especially with China and North Korea. Complete withdrawal of US forces from Afghanistan after Iraq would also mean higher instability at Indian borders. Indo-Japanese cooperation may become a key to stability in the region in coming decade.

We have seen some indicators of strengthening of ties in commitments from Daiichi, Toyota, Suzuki, Honda, Nomura, DoComo etc. We shall be watching closely for companies, sectors and businesses that may see higher Japanese interest in coming years.

A change in “austerity” mechanism in Europe might lead to a sudden spurt in export demand, which had been languishing since past five years. Watch out for some key exporters, especially in IT and pharma space.

A stronger Chinese Yuan would also create opportunities for some Indian competitors in export market.

Our suggested core portfolio for FY14 does recognize these trends; though we continue to maintain our view that the market may continue to selectively participate in global equity rally, while bothering about the domestic political conditions, we see a definite bottom being created in next 12months.

Friday, May 3, 2013

How market reacts to a rate cut?

In past there is virtually no trend as to how market reacts to a rate cut or hike.

However, the only time the rate cut happened after a 5% or more market rally in the preceding month was in January 2009. The market fell 3% in the month following the rate cut.

Date	Repo cut	1Day Return	1M before	1M After
30-Apr-01	-0.25	3%	-4%	6%
7-Jun-01	-0.25	0%	-3%	-4%
28-Mar-02	-0.5	0%	-3%	-3%
12-Nov-02	-0.5	0%	-2%	12%
7-Mar-03	-0.4	-1%	-2%	0%
19-Mar-03	-0.1	1%	-7%	-4%
31-Mar-04	-1	1%	-5%	1%
20-Oct-08	-1	2%	-29%	-14%
3-Nov-08	-0.5	6%	-17%	-15%
8-Dec-08	-1	2%	-15%	5%
5-Jan-09	-1	0%	5%	-3%
5-Mar-09	-0.5	-3%	-12%	26%
21-Apr-09	-0.25	-1%	17%	29%
17-Apr-12	-0.5	1%	-1%	-8%
29-Jan-13	-0.25	-1%	3%	-6%
19-Mar-13	-0.25	-1%	-2%	0%
3-May-13	?	?	5%	?

Date	Repo hike	1Day Return	1M before	1M After
26-Oct-05	0.25	0%	-6%	11%
24-Jan-06	0.25	1%	4%	7%
8-Jun-06	0.25	-5%	-22%	13%
25-Jul-06	0.25	2%	2%	11%
31-Oct-06	0.25	0%	5%	6%
31-Jan-07	0.25	-1%	2%	-8%
31-Mar-07	0.25	0%	1%	6%
12-Jun-08	0.25	0%	-9%	-12%
25-Jun-08	0.5	1%	-14%	4%
30-Jul-08	0.5	4%	6%	2%
19-Mar-10	0.25	0%	8%	0%
20-Apr-10	0.25	0%	0%	-6%
2-Jul-10	0.25	4%	-2%	4%
27-Jul-10	0.25	0%	1%	1%
16-Sep-10	0.25	0%	8%	4%
2-Nov-10	0.25	0%	-1%	-2%
25-Jan-11	0.25	-1%	-4%	-7%
17-Mar-11	0.25	-1%	1%	7%
3-May-11	0.5	-2%	-4%	0%
16-Jun-11	0.25	-1%	0%	3%
26-Jul-11	0.5	-2%	2%	-13%
16-Sep-11	0.25	0%	0%	1%
25-Oct-11	0.25	2%	6%	-8%

2013#GLOBALMARKETS

The sharp equity rally in developed markets, though not completely surprising has surpassed the expectations of many. Indian markets have also shown resilience, despite serious political and economic concerns.

The following top 10 global trends in particular have implications for Indian markets in next few months:

1. The central bankers’ “Put” is proving to be more effective than most thought previously. It passed the Cyprus test with commendable grades. As things stand today, we are likely to see more “easing” than “tightening” in next 12months.

2. Contrary to some forecast, the deluge of liquidity caused by unprecedented monetary easing in past five years has failed to create inflation in the global commodity. To the contrary, the decade old bull market in commodities, including energy, seems have ended. Most industrial metals have already slipped into bear market with sharp price corrections in past 4months.

3. The decade old bull market in precious metals has also ended. Though jury is still out on whether the gold has slipped into a secular bear market, the chances of a sharp up move beyond YTD 2013 highs appear slim.

4. The developed equity markets have run up led from front by the big two - US and Japan. Many emerging markets have also followed into their footsteps. At the same time bond markets also continue to remains strong. The appetite for gilt has not diminished despite all the fiscal and credit concerns. The “Great Rotation” appears to have terminated prematurely – much like the way “Decoupling” did in 2008-09.

5. Audacious “Abenomics” in Japan seems to be the defining trend for currency market for the year. A successful achievement of 2% inflation target may bring the global growth back to its pre Lehman trajectory.

6. Chinese economy is likely stabilizing in lower orbit of 7-8% growth for the moment. The surplus manufacturing capacities created in past decade would continue to feed the additional demand emanating from emerging world for next decade or so.

7. The argument against “Austerity” appears prevailing and all those anti-Keynesian voices appear to be fading.

8. Political stability is gradually returning to Europe, with a working Italian government in place.

9. Middle East continues to be the hot spot. Weaker oil economies may further frustrate the extremists. Complete US withdrawal from Afghanistan would be the first real test.

10. Pakistan elections are critical. Failure of democratic process at this stage may plunge the state and the region into deep trouble. Though the early omen are good.

On Monday, 6^th May we shall outline our views about the key trends in Indian markets with special reference to the aforesaid global trends.

Thursday, May 2, 2013

Four short stories

1. Follow the leader

The number of India skeptics has grown sharply in past one year. Numerous reports have been written to establish that the last pillar of support, viz., consumption, is likely falling rather sharply and the economy will fail to break the vicious cycle. The optimists were in minority and lacked conviction. Very few of them actually walked their bullish talk.

Unilever Plc has enlightened the path for everyone. We believe that the FMCG giant with over 100yrs’ experience of working across the globe certainly knows more than the analysts who cannot tell difference between a shampoo and hair conditioner.

We shall go by Unilever’s assessment of India’s consumption story and stay overweight for next decade at the least.

2. Do not follow the leader

The Supreme Court today indirectly hinted that the country’s leadership may be exercising undue influence on the national investigating agency CBI. It had been our consistent view that most of the problem currently afflicting the country may be stemming from a weaker leadership. SC’s censure today, in context of coal block allocation scam, confirms our belief.

Leadership is essentially about leading – assuming responsibility, showing the way. Leadership is not about making excuses. Following a weak leader will only hold you back and destroy your character.

3. Austerity is a spring phenomenon

Since past couple of week the global economist and banking communities are intensely debating the relevance of austerity in a declining economy.

The consensus that is emerging appears, and rightly so, to be favoring postponement of austerity program to better times.

In our view, austerity works best when going is good. You maintain a balance between your earnings and expenditure and save some for the bad periods. If you have not saved enough for bad period and a medical emergency befalls upon you, you do not become austere at that point in time. You beg, borrow and steal to save your life. Once back on your feet, you can repay the debt and practice austerity for future. If you die,

well….. you die.

Currently, the global economy is in ICU. Not a good time to save.

4. Crisis of confidence for Oracles

In past three weeks most global banks have issued reports suggesting sudden demise of gold bull market.

The enthusiasm of gold consumers seen across the world however suggests that these Oracles no longer enjoy the confidence they used to prior to 2009.

One of the big 4 was however quick to retract its bearish call. Others are still to follow. But who cares!