Vijay Kumar Gaba

Sunday, December 1, 2013

Green shoots seen…

Thought for the day

“It is great to be a blonde. With low expectations it's very easy to surprise people.”

-Pamela Anderson (American, 1967-)

Word of the day

Wight (adj)
Active, nimble, strong and brave

(Source: Dictionary.com)

Shri Nārada Uvāca

Is the current UP sugar crisis a Samajwadi Party conspiracy to create distress in the bastions of Ajit Singh (western UP); Gandhi family (eastern UP) and Mayawati (liquor lobby)?

The twitter is that having failed to gain support of cane farmers in Merrut, Muzzafar Nagar, Rae Bareilly, Shahjahanpur, Lakhimpur Khiri, Sultanpur and liquor producers through carrot, SP government is now trying sticks!

Green shoots seen…

While it is pertinent to keep a watch on the periodic macro data, these data points often do not always reflect a “trend”. Personal investment strategy therefore should look at the medium to long term growth trends to identify any need for change in direction and magnitude.

Also, given the exuberance in the equity market primarily on account of global economic stability, abundant liquidity and domestic political optimism, it is important to do some realty check.

People starved of good news for long may sense “party time” from 2QFY14 GDP growth. In our view, the data definitely has some positive signs which raise hopes of a macroeconomic bottoming over next few quarters. However, the data does not provide much evidence to suggest that the boom time is around the corner.

Core sector improves, external demand, weak INR leads 16% surge in exports

Industry growth picked up to 2.4% in Q2FY14 from a mere 0.2% in the previous quarter. The revival in industry was led by an improvement in the core sectors – mining and utilities and construction. Electricity sector grew at 7.7% – its fastest pace in last eight quarters. Compared to over 1% decline in Q1, manufacturing grew by 1% showing some signs of recovery, primarily boosted by strong exports. In Q2, exports grew by a 16.3%, led by improving global demand and a depreciated rupee.

Agriculture supports household consumption

Above-normal monsoons lifted agricultural growth to 4.6%. Hopefully, higher farm incomes will raise rural incomes and help drive a recovery in private consumption growth in the second half of the fiscal year.

Downsizing affects government spending, services growth at decade low

Sharp decline in government spending was visible in Q2. As slowing GDP growth adversely impacted tax revenues and a weak rupee raised the subsidy burden of the government, a 10% cut in non-plan expenditure has been announced. As a result, growth in community, social and personal services almost halved to 4.2% in the second quarter, dragging down growth in overall services to less than 6.0%, lowest in more than a decade.

Share of private consumption falls to lowest, investment recovers qoq

Private consumption had been one of the major factors in resilience of Indian economy during previous global crisis. At 59.8% of GDP, the private consumption has fallen to lowest level in decades. Investment at 29.4% continues to be dismal and even lower than 1QFY13 level of 29.9%.

No fiscal leverage left

The Centre’s fiscal deficit touched Rs 4,57,886 crore or 84.4% of its Budget estimate of Rs 5,42,499 crore between April and October, 2013 on the back of slowing tax revenue and non-debt capital receipts outpaced expenditure.

Given that the FM is committed to the fiscal deficit as budgeted, there is little fiscal leverage left with the government over next five months.

…to continue

Friday, November 29, 2013

How to play Modi rally?

Thought for the day

“It is greed to do all the talking but not to want to listen at all”

-Democritus (Greek, 460-370BC)

Word of the day

Gelt (n)
Money (slang)

(Source: Dictionary.com)

Shri Nārada Uvāca

With Tata withdrawing and Mahindras not too keen, will the new bank licenses be a non-starters?

How to play Modi rally?

The current market conditions present a classic dilemma before the investors in Indian equities. There are reasonable indications to suggest that the global equity rally may extend little further into the summer; and along with this Indian markets may also show strength notwithstanding the fact that the trends in macro fundamentals of Indian economy may not suggest any improvement in 1H2014. The actual corporate performance has been better than pessimistic expectation in September quarter, but still no one believes it to be sustainable over next couple of quarters.

Prospects of Narendra Modi forming a proactive and decisive government next summer is also a catalyst for the equity markets. An overwhelmingly large number of analysts and investment strategists are now pinning hopes on positive outcome of this political event.

From the market internals it is however evident that domestic investors are still not much enthusiastic about a huge rally in equities. The volumes in cash markets, poor market breadth, and flows to domestic funds indicate that these investors have yet not taken plunge.

The moot question is should they be taking the plunge or continue to sit on the sidelines?

In our view, they should participate in the rally by –

(a) investing in select stocks that may benefit from the tangible recovery in global economy (mainly US and Japan); and

(b) trading in high quality stocks that may benefit from sentimental improvement in local business confidence.

In our view, investors should stop bothering about Nifty level. By over focusing on Nifty level, they risk missing some good opportunities. Nifty is a tool for traders and is enslaved to movement in 5-7 stocks – why bother about that?

While investing or trading, one needs to believe that no matter what happens to the headline macro numbers – GDP, inflation, rates etc. Indian equity markets are not shutting down. Only remember, the more poor the number, the higher would be the concentration in “expensive quality”.

In strict technical sense, a big round of rotation from high PE/PBV to low PE/PBV is beginning to show. This may accelerate in two ways – 1. The same money gets out of IT/FMCG and goes into Infra/financial or 2. The new money goes only to infra/financial etc.

In first case Nifty will not go anywhere (5700-6300 range with occasional violation on either side). In second case however, Nifty could go to 6700-6800 or even beyond. In our view, the odds are 3:2 in favor of second probability. Modi will play a big catalyst in this rotation that may occur post 8^th December.

It is however pertinent to note that technically probability of Nifty testing 4700 before March 2015 still exists. But as we said earlier, why bother about this if it is going to be a ‘V’ kind of move.

We shall discuss some of our preferred local and global themes next week.

Also read:

Letter to Mr. Narendra Modi

Whatever goes around comes around

Ganpati is son of Shiva

Follow the leader

Great Hopes – Part I

Great Hopes – Part II

Great Hopes – Part III

Thursday, November 28, 2013

Great hopes - III

Thought for the day

“Truth reveals itself, though often belatedly. This admirably suits the politician in power.

The interregnum between truth and its revelation is generally a period of manipulation.

In this interregnum alibis and half-truths rule. Finally, unless someone is alert, truth gets confined to the archives. Result: alibis masquerade as truth”

-S. Gurumurthy, as quoted in ‘Polyester Prince’.

Word of the day

Wroth (adj)
Stormy; violent; turbulent

(Source: Dictionary.com)

Shri Nārada Uvāca

Why Tarun Tejpal is so important?

Great hopes - III

We have been highlighting for past many months that there is a decent probability that we may have a equity rally as part of a highly charged global “risk on” mood. This rally would be akin to the surge seen 1998-1999 and 2006-2007 and therefore lead the valuations to bubble territory. The current market momentum indicates that the probability of such rally is rising.

In Indian context the local catalyst seems to be the likelihood of Narendra Modi becoming prime minister and replicating the success of Gujarat Model of development at the national level. In 1998-1999 the unprecedented wealth effect created by Y2K opportunity and global ITeS boom and in 2005-2007 unprecedented investment in infrastructure projects had catalyzed the massive equity rallies. Both the times, equities had given up almost all the gains made during the rallies within a short span of time, with the leaders of the rally losing massively.

It is therefore important, in our view, to understand the risks the expected 2014 market rally would carry.

2M vs. M: The most potent risk to the Modi becoming prime minister may come from the trio of Mayawati and Mamata Banrjee.

On our recent trip to UP we found that Mulayam’s Samajwadi party (SP) is losing considerable support amongst people. Congress’s local unit is completely demoralized and BJP is not aggressive enough. So, the SP and Congress loss could be gain of BSP, unless BJP consolidates substantially in next 4months. If Mayawati, who carries a strong national ambition gets 35 seats, Narendra Modi becoming PM would become a tough task.

Similarly, Mamata Banerjee has indicated that she would rather support a non-Congress non-BJP government at the center. The recent municipality polls suggest that her popularity is still strong in West Bengal.

Failure of BJP to get 190-200 seats on its own could therefore spoil Modi’s chances of becoming PM.

Global economic instability returning: Despite stratospherical rise in liquidity and near zero rates over past few years, the global economic has failed to grow at desired pace. This highlights the fragility of the current economic optimism. Any Greece or Lehman like event could again threat the surreal optimism over economic stability.

Global liquidity tightening: Though we do not believe that global liquidity would be tightened in any substantive proportion over 2014, but general view seems to be contrary to this. A QE taper and consequent rise in cost of capital could be a threat for debtor economies like India.

Inflation and rates remaining high: Sharp rise in global commodity prices due to US and China recovery, persistently high food prices and consequent higher domestic rates could not only delay the domestic economic recovery, but also snatch lot of political leverage away from Modi.

Continued policy logjam: The biggest risk to Modi Rally would come from the failure to put the new government’s act together in quick time. The margin for error here is almost NIL.

Also read:

Letter to Mr. Narendra Modi

Whatever goes around comes around

Ganpati is son of Shiva

Follow the leader

Great Hopes – Part I

Great Hopes – Part II

Wednesday, November 27, 2013

Great Hopes - II

Thought for the day

“Continuous effort - not strength or intelligence - is the key to unlocking our potential.”

-Winston Churchill(English, 1874-1965)

Word of the day

Ashen (adj)
Extremely pale; drained of color;

(Source: Dictionary.com)

Shri Nārada Uvāca

What are the top concerns of the country today? Rank these on the basis of media coverage:

1. Gutthi

2. Tarun Tejpal

3. Talwar couple

4. Snooping in Gujarat

5. Asaram and his son

6. Shruti Hasan’s stalking

7. Vegetable prices

8. 5 State elections

9. Corruption

10. Unemployment

Great hopes - II

Based on our intense discussion with some investors, fund managers, businessmen, farmers, bureaucrats, and young students we found that the people may in general be expecting the following from Modi, should he become the next prime minister of India. Surprisingly, the expectations from Rahul Gandhi are no different, but few believed that he could become prime minister.

(a) Modi will provide a clean, responsive and business/investment friendly administration.

(b) Modi will provide a proactive administration.

(d) Modi will provide an accountable and responsible administration and protect bureaucracy for their bona fide actions.

(e) Modi will help eliminating corruption from public life.

Unfortunately, no one could produce an iota of substantive evidence that would suggest that Modi is competent enough to meet their expectations. The only argument in the support of Modi is the media coverage mostly fed by BJP itself. We got further confirmation to our earlier finding that the traditional Indian belief of divine intervention at the time of crisis is playing in his favor. Modi is being seen as divine intervention that will get India rid of the current social, political, and economic crisis.

In our view, Modi does appear assertive and has shown tendency to take quick decisions in economic administration matters. A few quick decisions could boost the sagging business sentiment and help kick start the stalled investment cycle. Fortunately, many other things are already falling in place and would work in his favor.

In our view, the following positives could emerge if Narendra Modi gets to lead the next government with a clear mandate:

(a) Business and investor confidence may recover on the hopes that policy making will be proactive, business friendly, consistent and faster.

(b) Important economic and financial legislations like GST, DTC, Insurance and Pension Bills etc. may get cleared in FY15 itself.

(c) Important administrative reforms are implemented to uplift the morale of bureaucracy. This is expected to expedite the project execution.

Besides, the macroeconomic environment may also begin to improve on its own as core inflation and therefore rates bottom out, and consumer demand recover post good Rabi harvest.

This best case scenario is however not free from risks. In fact there are significant risks to this view.

…to continue

Also read:

Letter to Mr. Narendra Modi

Whatever goes around comes around

Ganpati is son of Shiva

Follow the leader

Great Hopes – Part I

Tuesday, November 26, 2013

Great hopes!

Thought for the day

“Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning.”

- Albert Einstein (German, 1879-1955)

Word of the day

Decant (v)

To pour (a liquid) from one container to another.

(Source: Dictionary.com)

Shri Nārada Uvāca

After Helen, now Lehar threatens the Andhra coast.

Is nature warning about something seriously wrong in Andhra Pradesh?

Great hopes!

It is evident from the reports issued by various brokerages & other agencies, and opinion publicly expressed by many corporate leaders that a lot of hopes are being pinned on Narendra Modi’s electoral success.

The performance of the Indian stock markets post announcement of Modi’s PMship candidature also indicates that investors are probably front-running a Modi government post May 2014 election results. A recent discussion with some fund managers and large corporate investors suggests that the two day 17% jump post May 2009 election results could be a driving force behind their actions.

In our assessment most of the hopes are emanating from the perception of a good track record of the Modi led government of Gujarat state; and therefore leave a lot of scope for disappointment.

While little specific are available as to Narendra Modi’s economic philosophy and orientation, from the popular discourse Modi seems to be an advocate of Laissez-faire or free market which entails minimal state intervention even during crisis. He has implemented the model in Gujarat with limited success. But it is pertinent to note that unlike many other states, Gujarat has a history of 200years of industrialization and 60mn people who are globally recognized for their enterprising skills.

It is therefore important to evaluate whether the Gujarat model could be replicated at the national level, or in other words whether Modi can deliver the same results as Prime Minister what he has delivered as Chief Minister of Gujarat.

Presently, India is struggling with the limitations of the Nehruvian model of economic development that we have followed since independence. Even BJP, when it came to power, decided to leave the alternative model “integrated humanism” proposed by its ideologue Mr. Deendayal Upadhyaya and followed a variant of Nehruvian model terming it “Gandhian Socialism”.

The current variant of the Nehruvian model is largely a distortion of the classical Keynesian model that advocates a larger role for the private enterprise with active state intervention during extremities of business cycle and argues against higher savings in both private and public sector. The Keynesian model has its genesis in the great depression and found useful during larger economic crisis.

In our view, considering the present state of socio-economic development of various parts of the country, it would be 10-15years too early to test the Laissez-faire model at the pan-India level. Hence, Modi’s Gujarat model may not be of much relevance at the national level.

But at the same time the Gujarat model should not become his limitation also. Modi has very successfully demonstrated his strategy skills in past one decade. It would be totally wrong to assume that he would not be able to adapt to the larger responsibility and formulate an appropriate strategy for integrated development of the country.

…to continue

Also read:

Letter to Mr. Narendra Modi

Whatever goes around comes around

Ganpati is son of Shiva

Follow the leader

Monday, November 25, 2013

Follow the leader

Thought for the day

“Gray hairs are signs of wisdom if you hold your tongue; speak and they are but hairs, as in the young.”

- Rabindranath Tagore (Indian, 1861-1941)

Word of the day

Snarky (n)

Nagging, irritable, testy

(Source: Dictionary.com)

Shri Nārada Uvāca

Does AAP truly represent the common Indian citizen – generally ethical, aspires Ram Rajya, vows high morals but not incorruptible.

Follow the leader

Dear Mr. Modi, BJP under your leadership has invoked the legacy of Sardar Vallabhbhai Patel, who is commonly projected as the symbol of national unity and integrity in post independence India. In past 66years there have been occasional academic debates as to who between Nehru and Gandhi would have made a better prime minister. However, in common people’s consciousness the matter has become totally redundant. It is evident from the fact that in most elections post 1950’s, no party has sought to use his name for political mileage (except BJP briefly in 1990’s during L. K. Aavani’s Rath Yatra).

In our view, Sardar Patel is an important figure in India’s political evolution and as such would continue to occupy a prominent place in the history of modern India. But invoking his name in current socio political and economic context may not yield intended results – neither for BJP which is highlighting his occasional communal bias and using his name to implicitly criticize Nehruvian socio-economic policies and Nehru’s family; nor for Congress which has tacitly deserted him long ago.

It would therefore be more advantageous to follow the legacy of most acceptable and marketable leader – the Father of the Nation – Mohandas Karamchand Gandhi.

We met a dozen of old Congressmen (all 80+ in age) in past four days to share our views on the relevance of Gandhian socio-economic model in current context. All of them fully subscribed to our view that Gandhian Socialism adapted to the current context could only offer a sustainable solution for India’s economic development conundrum.

“Salt and Khadi were the two most effective metaphors used by Gandhi to illustrate his socio-political and socio-economic philosophy”, suggested one octogenarian lady from a reputable industrial family.

“Salt is the best representation of inclusiveness – perhaps the only thing that touches the lives of the entire nation every day; besides salt has special place in all religions – generally implying commitment, incorruptibility, perpetuity, and purification”, she explained.

“Khadi on the other hand is an emblem of self-reliance, sustainability, self-enterprise, austerity and empowerment.”

BJP has experienced that politics of exclusion could take it only thus far and not beyond. Similarly, putting a fancy façade and selling it for Shining India has also not worked in past.

Most people today recognizes that a change in political administration is in order, as it might help breaking the negative feedback loop we are presenting finding ourselves trapped in.

But the change unfortunately would not come by merely changing the nameplates outside sprawling bungalows and plush offices in the Lutyens’ New Delhi. We perhaps need to change the socio-economic growth paradigm itself. The Father of the Nation could be of great help here. No need to carry any guilt here – the youth of the country has forgotten and forgiven Nathuram Godse. Just follow the “Leader”.

Also read:

Letter to Mr. Narendra Modi

Whatever goes around comes around

Ganpati is son of Shiva