Tuesday, March 18, 2014

What the crystal ball says?

Thought for the day
“O wise man! Give your wealth only to the worthy and never to others. The water of the sea received by the clouds is always sweet.”
-          -Chanakya (Indian, 350-275BC)
Word for the day
Solipsism (n)
Extreme preoccupation with and indulgence of one's feelings, desires, etc.; egoistic self-absorption.
(Source: Dictionary.com)
Teaser for the day
Paid media! AK is absolutely right.
Ashutosh, Manish Sisodia, Shazia Ilmi, Ashish Khaitan…
AAP has rewarded all journalists who unduly propagated AK & associates with election tickets.

What the crystal ball says?

In 2HFY14 Indian equity markets have been generally buoyant. Benchmark indices have gained ~24% from lows of September 2013. I find four notable elements in this rally.
First, during this period foreign investors have been more bullish on Indian equities, whereas domestic investors have generally preferred fixed income.
Second, four notable events triggered this rally – (a) appointment of Mr. Raghuram Rajan as RBI governor and some aggressive measure successfully taken by him to stem the slide in INR; (b) announcement of Narendra Modi as PMship candidate of BJP for forthcoming election (and subsequent opinion polls showing he having an edge over opponents) which stemmed the slide in business confidence to some extent; (c) improvement in macro indicators especially fiscal deficit, current account deficit and inflation due to a variety of measure taken by the government; and (d) encouraging 3QFY14 aggregate corporate performance, primarily led by large companies having global operations.
Third, the rally was initially led by the global businesses like IT, pharma, and duly supported by domestic consumption stories. However, lately the action has moved to the hopes of economic recovery and hence credit and investment themes are leading the bull charge while defensives IT, pharma and consumers have taken a back seat. Stocks from infrastructure, realty, energy and capital goods are more in demand these days. Moreover, the early part of the rally was confined to a handful of large cap stocks while the latest surge is little broad based; though the volumes have continued to remain dismal and overall market breadth mostly negative. Market volatility has also remained confined to lower range.
Four, the rally has occurred despite (a) US Federal Reserve moderating the pace of bond buying program (tapering); (b) global energy prices ruling at elevated level; (c) Chinese economy moderating triggering fears of reversal of nascent global economic recovery; (d) RBI refusing to signal any easing plans in near term; (e) early indications of El Nino returning this year; and (f) no signs of financial stress in the system dissipating.
Keeping these elements in context, I would like to answer the following queries frequently raised by our readers.
(a)   Is it time to change asset allocation in favor of equities?
(b)   Are we at the threshold of a new bull market? Or this is just another bear market rally extended a little far, just like October 2007 – January 2008?
(c)   All new bull markets are usually led by a new leader. If we are entering a new bull market which sector(s) is/are going to lead the way?
(d)   What will change if Narendra Modi indeed moves to 7RCR in May 2014? What if he fails?
(e)   Is it possible for equity markets to rally hard from here even if interest rates do not fall materially, food inflation picks up again due to poor monsoon and global rate cycle begins to turn with Fed indicating a hike sometime in year 2015?
Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com
Follow @VIJAYGABA
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Friday, March 14, 2014

We stay put with our strategy

Thought for the day
“Markets don’t exist simply to enrich people.”
-          Seth Klarman (American, 1957 - )
Word for the day
Claptrap (n)
Any artifice or expedient for winning applause or impressing the public.
(Source: Dictionary.com)
Teaser for the day
Why dissent is always a “big deal” in India?
Are we more conformist, feudal or hypocrites?

We stay put with our strategy

The sound of an angry text message on my hand phone woke me up little early this morning. I knew it was angry because it was unusually long (split in 5 SMS’) and untimely. It was serious reprimand from a dear friend who is apparently feeling “left out”. The text shouted “while you were busy dreaming your Utopia markets have run up sharply to new all time high level”.
At first I found it particularly provocative and hence worthy of an immediate reply. An hour later, however, I am feeling empathetic and concerned. I feel my friend may not be alone in his restlessness. Traversing through some blogs, I find the feeling is all pervasive. Though thankfully, not many investors seems to have taken the plunge this time.
While, I do not deny that benchmark indices are ruling at their all time high levels in nominal terms, in real terms these are substantially lower. In real terms Sensex at 21K in 2007 (1yr forward EPS ~850) was much higher than Sensex at 22K in 2014 (1yr forward EPS~1500).
I believe that the de-rating of Indian equities is real and will likely sustain for couple of more years at the least. That is precisely the argument in support of InvesTrekk strategy of constructing a forward looking portfolio rather than trading short rallies.
Insofar as immediate skepticism is concerned, I would like to make just three small points.
(a)   YTD gold has gained 14% and copper has lost 14%. Historically, in past four decades this kind of divergence has been invariably followed by serious correction in equity prices. For record, InvesTrekk strategy of accumulating gold at lower prices has returned more than equities since November. Our negative call on duration products and focus on accrual products has also served well.
(b)   The primary function of capital market is to help businesses raise capital for implementing their business ideas and growth plans. I do not find an iota of evidence that would suggest that market is ready for IPOs as yet. In fact most attractively priced government IPOs have completely flopped in past few months. PE activity is focused mostly on e-commerce, part of a global trend. Some aggressively priced e-tailing IPOs would mark the end of current enthusiasm in market, in my view.
(c)   I visited Delhi and NCR region early this week, searching for a home. I met a number of real estate developers, traders, investors and brokers. The only sense I got was that they all, without exception, are in deep distress. The situation in fact appears to be much worse than late 1990s’. Payment defaults are wide spread and deals elusive.
Thus, notwithstanding annoying messages that make me work harder early in the morning – I remain committed to my strategy of high quality, low beta, gradual construction of portfolio, no leverage and underweight investment and credit. Exception could be made for an L&T and HDFC Bank.
I also feel like sharing a recent blog post of my favorite central banker Bob McTeer a former member of US Fed, which I find quite relevant and soothing in the current context.
“The Federal Reserve recently reported that the net worth of American households grew by $9.8 trillion, or 14 percent, last year. $5.6 trillion of this increase came from the stock market and $2.3 trillion came from rising home prices. The increase in household net worth is also called an increase in household wealth.
This increase is a good thing. Individual households, on average, have a higher net worth or wealth, which, by spending it, can be realized in the form of more goods and services consumed. However, households as a group cannot realize more consumption of goods and services since the quantity of goods and services available does not rise with stock or house prices. The fallacy of composition is at work.
The most familiar example of the fallacy of composition is that you can see better at a football game if you stand up. However, it doesn’t work if everybody stands up. The advantage is real only if most people don’t try to realize it.
The fallacy of composition is fairly obvious in monetary economics. Give individuals more money and they are wealthier. They can buy more stuff. However, giving the economy more money doesn’t, per se, make an economy (all of us) wealthier. There is not immediately more stuff to be bought. More money involves money illusion, except for those that win the race to the store. The same is true of wealth that can easily be converted into money for spending.
Does counterfeiting, which creates more money, albeit fake, create wealth? Yes for the counterfeiters who get away with it. They can exchange their fake money for real goods and services. However, since there are not more goods and serves to be had, their benefit is at the expense of the rest of us, who have the same amount of money and other wealth, but fewer goods and services available to us.
There is a fundamental difference between income and wealth and between wealth created by higher real incomes and saving and wealth created by rising housing and equity prices. Higher income increases wealth both in money terms and in real terms. The additions to wealth through income are matched by an equal value of additional goods and/or services being produced.
I started by saying that the reported increase in household net worth or wealth was a good thing. By making us feel better about our finances, a “wealth effect” can increase our willingness to spend and thus create real wealth if we have sufficient slack in the economy. But, if you want to cash in some of that money wealth, you’d better beat your neighbors to the mall.”
For records, for the first time, I agree with Mr. Murthy. It would indeed be difficult for Infosys to regain the lost leadership status.
I wish all our readers a very Happy Holi. Shall be back with you coming Tuesday.
 
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Thursday, March 13, 2014

Utopia: The economic solution-IV

Thought for the day
“Fame has also this great drawback, that if we pursue it, we must direct our lives so as to please the fancy of men.”
-          Baruch Spinoza (Dutch, 1632-1677)
Word for the day
Fervent (adj)
Having or showing great warmth or intensity of spirit, feeling, enthusiasm, etc.; ardent.
(Source: Dictionary.com)
Teaser for the day
Disappearance of Malaysian aircraft highlights at least three things – (a) There are still many things that are not under US NSA watch; (b) possibilities of another 9/11 are not dead despite Osama’s elimination and (c) St. Google does not answer all your questions.

Utopia: The economic solution-IV

Focus on strengths
At the risk of sounding irritatingly repetitive, I would like reiterate that in past 6 decades we have focused too much on our weaknesses and tried hard to overcome by importing technology, energy, intellectual property, capital and consumption patterns. The root cause of many economic problems, e.g., current account deficit, fiscal deficit, energy deficiency, excessive dependence on external IPR & capital flows, etc. could be traced to this misplaced focus.
In my view, just by focusing on our intrinsic strengths, we can not only conveniently reverse the flow of trade to pre British era but also be successful in achieving our secular goals of sustainable and faster economic growth.
I have been suggesting that, for example, by implementing the following programs could improve the balance of payment substantially and structurally by 2025 by focusing on our intrinsic strengths like abundant sun shine, large number of middle class youth, amazing landscape, strong and rich tradition & culture:
(a)   Energy deficiency had been one of the primary reasons for India’s fiscal and trade deficits. Failure in implementing an integrated energy policy has been a major failure of policy making. It is widely recognized that “roof top solar panel” has the potential greater than the one seen in mobile telephoney in past one decade. Reducing energy intensity of water and developing a world class public transport infrastructure on priority basis, especially in tier II and III cities, and strict legal enforcement of energy efficiency should be considered.
(b)   Indians spend approx USD25bn annually on education and related overseas travel. Creating 5 Special Education Zones (SEZ) with liberal VISA, forex, taxation and real estate ownership rules, and allowing foreign institutions to freely set up campuses could reverse this flow. Students from India, far-east, middle-east and Africa who find it difficult to get VISA for US/UK etc. or find that expensive could also benefit from this. Our politicians have spoken about recreating Nalanda and Takshila. This in my view is the easiest way to do that.
(c)   India holds tremendous potential for tourism. However lack of proper infrastructure had traditionally constricted the growth of this sector. On the other hand Indian outbound tourists flow is rising. Developing some world class self contained international tourism centers, e.g., on lines of Macau, Disney, Las Vegas, etc. with liberal VISA, Forex, taxation and real estate ownership rules could reverse these flows.
(d)   Vindavan, Tirupati, Varanasi, Gaya, etc. all have potential to be as desirable, venerable and popular destinations as Mecca, Vatican and Jerusalem. Converting these centers of Indian religion and culture into self contained special zones with international airport and annual event calendar could get substantial forex revenue.
These projects also have the potential to generate large scale productive employment opportunity for local talent, besides contributing to economic growth and true globalization of Indian economy.
Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com
Earlier in this series:
The state of the Union
The political problem
The political solution
The economic problem-I
The economic problem-II
The economic problem-III
The Economic Solution
The Economic Solution - II
The Economic Solution - III

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Wednesday, March 12, 2014

Utopia: The economic solution-III

Thought for the day
“The duty of youth is to challenge corruption.”
-          Kurt Cobain (American, 1967-1994)
Word for the day
Fallacy (n)
A deceptive, misleading, or false notion, belief, etc.
(Source: Dictionary.com)
Teaser for the day
Salim - Javed seem to be official dialogue writers for AAP leadership.
The most often used dialogue by AAP – Pehle Uska sign lekar aao … phir main bhi sign karoonga. (First tell other parties to refrain from wrong doing, then we will also do the things right way.)

Utopia: The economic solution-III

Enable the youth
The young demography is famously the biggest strength of Indian economy at this point in time. However, if not managed properly this may as well prove to be the nemesis of the fabled India story, in our view.
The pertinent fact is that Indian growth in past decade or so has miserably failed in creation of adequate productive jobs for the burgeoning workforce of the country. MNREGA has helped to some extent, but it is bound by fiscal constraints, leakages and lower productivity. Disguised/ underemployment also continue to impact the productivity and earnings potential.
We have been highlighting that the vast reservoir of youth energy on which Indian economy is sitting presently, could potentially explode if not channelized appropriately. It is therefore extremely critical to evolve an integrated youth policy that include mission scale programs to educate and skill the youth, inculcate enterprise skills in them from early stages, enable them to engage in productive self employment, deal empathetically with their concerns, anguish, frustration and disillusionment.
In our view, the following is the minimum that needs to be urgently implemented:
(a)   Overhaul education system to make it job oriented. Inculcate enterprising skills in students from primary level. It is high time that we do some zero base planning regarding our education rather than just incremental tinkering. Post middle (8th standard) job oriented education, training and skilling programs should be made more popular with active participation of industry. RTE should be amended to provide for a uniform and standard education to all the children. Bringing social changes like “respect for work” and inclusion of “workers” in main stream would be quintessential to this.
(b)   The trained and skilled youth should be adequately supported and enabled to engage in productive self employment. The present model of MSME promotion may not be adequate to create massive employment needed. This model may not be totally competitive in the emerging scenario where the Indian industry will have to increasingly compete with large global players. Co-operation movement in industry on the lines of AMUL where a large number of trained youth can create, own and profitably manage large globally competitive enterprise should be promoted and encouraged. Giving equity in natural resources to local population could be a great starting point.
(c)   Agriculture and allied activities are still at the core of Indian socio-economic structure. Promoting collective and commercial farming may add significant employment opportunity with increased earnings potential.
(d)   Success of IPL has suggested that sports can potentially generate large scale employment opportunity if managed in industry like manner.
(e)   Last but not the least police reforms are absolutely necessary to manage the agitated & disillusioned youth compassionately and ensuring that they do not stray into prohibited territory of violence and sedition.
(f)     Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com
Earlier in this series:
The state of the Union
The political problem
The political solution
The economic problem-I
The economic problem-II
The economic problem-III
The Economic Solution
The Economic Solution - II
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Tuesday, March 11, 2014

Strategy update

We spoke to some farmers, farm produce traders, and agri scientists in Delhi, UP, Bihar and MP in past three days.
The feedback is as follows:
 
(a)    The reported loss of crop due to freak weather is understated. Potato, Mustard, Channa, Moong, Wheat and green vegetable crops in particular have suffered substantial losses.
(b)   Potato crop that is being warehoused suffers from disease and excess moisture. At least half of this stored quantity is expected to rot before it comes out. Expect sharp rise in potato prices in summer months.
(c)    El Nino fears are real. Good storage levels in reservoirs should help the irrigated parts. The late rains should leave good moisture in land for early sowing of Kharif. But areas that have not received late rains and depend on monsoon should suffer.
(d)   The expected boost to economy due to higher farm income from Rabi may not materialize.
(e)   Edible oil seed crop should be poor. The rise in palm oil prices due to crop failure in Malaysia should keep the pressure high.
We expect the food inflation to resurface again in 3Q2014.
We expect the fiscal pressure to exacerbate post election as the new government tries to revive the public spending.
We also do not expect Ukraine controversy to subside in a hurry. The crude price therefore may not fall substantially from the current levels despite lower demand. Lower Chinese demand though will continue to push coal, Iron ore and other industrial metals down.
We do not see much probability of rates easing in next 12months. Talk of Fed’s next step (rate hike) in 2015 should further provide support to higher rates. It is therefore advisable to invest in accrual products only. Duration play at this stage could be very risky.
Stock markets appear to be running much ahead of fundamentals. The margin of error at this stage is close to NIL. Any material disappointment on macro factors, political front or reversal in global flows could cause substantial correction.
Technically, momentum has risen sharply in past one week. The market is in similar condition as it was in October 2007 or October 1999. Though this time retail participation is negligible hence panic reaction less likely; nevertheless a sharp correction in next couple of months cannot be ruled out. We advise (a) No leverage; (b) Low beta; (c) high quality; (d) 15-20% tactical cash.
Sector wise, we suggest overweight on reasonably valued companies with low financial leverage and high operating leverage. Cement, auto and select engineering companies will fall in this category. Maintain positive stance on exporters (IT and Pharma) and defensive large consumers. The current correction in these sectors could be an opportunity to buy.
We maintain our negative stance on commodities and PSUs.
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Monday, March 10, 2014

Utopia: The economic solution-II


Thought for the day

“We are what our thoughts have made us; so take care about what you think. Words are secondary. Thoughts live; they travel far.”

-          Swami Vivekananda (India, 1863-1902)

Word for the day

Cognizant (adj)

Aware (usually followed by of).

(Source: Dictionary.com)

Teaser for the day

Smearing ink and hurling shoes - are these methods of registering protest (a) violent; (b) non-violent or (c) neo Gandhian?

Note that giving a ride on donkey - face smeared with black paint and garland of footwear is still the most popular method of social castigation in Indian folklore.

Utopia: The economic solution-II


Trust your people

In my view, the most valuable resource for India is her people. In not implementing the recommendation of Balwant Rai Mehta committee (1957) on local self governance, our political system has been unable to develop an environment of mutual trust and transparency and thus failed the people of India. Despite, Narasimha Rao government ensuring 73rd constitutional amendment in 1992, the political establishment has obdurately refused to share power with the local bodies and common people.

As per NCAER 2008 Devolution of Power Index – only a handful of States have done meaningful devolution of power to Panchayati Raj Institutions - Madhya Pradesh, West Bengal, Tamil Nadu and Kerala being the notable one.

A series of irregularities that have come to light in past two decades suggest that lack of transparency in government functioning and substantial discretionary powers enjoyed by elected representative in appointments, procurement, resource allocation etc. are the primary reasons for governance deficit.

In my Utopian (though not out of the realm of possibilities) view, the following should be done:

(a)   The ownership of public resources should be earnestly handed over to “the public”. Instead of few feudal ministers controlling the resources, the trusteeship of all the natural resources should be vested in the local council. The local people should determine how these resources should be exploited. Industry based on these resources should be developed on co-operative model with equitable ownership of local people.

(b)   Urbanization (provision of adequate civic amenities and connectivity) and industrialization should be managed at town/village level instead of further promoting India-Bharat divide. 7,00,000 urbanized villages would be much more productive than 700 cities with inadequate infrastructure.

(c)   Local councils should be empowered to decide appropriate taxation structure and incentive formulae to achieve the objective of social, economic and gender equalities, sustainability and development.

For example, each local council shall determine which are the minority communities, or socially and economically backward classes in that locality and extend reservation accordingly. Similarly, each local council shall determine the development priorities and allocate resources accordingly. Given the diversified demographic, ecological and socio-economic profile, efficient policies for energy, education, employment, industrial development, ecology conservation etc could be worked out only at the local level.

(d)   The role of the National Council should be restricted to managing national defence, foreign relations, Trans District Rivers, dispute resolution, and developing model rules and regulation that may be adopted by local and district councils with appropriate modifications.

…to continue

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

Earlier in this series:

The state of the Union

The political problem

The political solution

The economic problem-I

The economic problem-II

The economic problem-III

The Economic Solution
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Friday, March 7, 2014

Utopia: The economic solution

Thought for the day
“History shows that where ethics and economics come in conflict, victory is always with economics. Vested interests have never been known to have willingly divested themselves unless there was sufficient force to compel them.”
-          B. R. Ambedkar (Indian, 1891-1956)
Word for the day
Cockalorum (n)
A self-important little man.
(Source: Dictionary.com)
Teaser for the day
If we go by the opinion polls – presently Congress is the only party in “no loss” situation.
Should Rahul Gandhi use this “advantage” or “let it go”?


 Utopia: The economic solution

In my view, the sustainable solution for India’s economic problems could be found only by looking within. Borrowing from the thoughts of Mahatma Gandhi, economics needs to follow ethics and not the vice versa. The primary consideration needs to be “man” and not “money”.
To achieve this means Gandhi advocated trusteeship, decentralization of economic activities, labor intensive technology and priority to weaker sections. Many criticize Gandhian economic ideas based on altruism, self reliance, and non-violence as an impractical alternative to free market economics. I believe this criticism is unfair and suffers from parochialism.
I believe borrowing blindly from the western economic models would not work in Indian context. The Indian model will have to be quintessentially Indian. It has to effectively tackle the problems of class conflict, unemployment and poverty while attempting to preserve the lifestyle and values of rural Indians, which are eroding fast with unmindful urbanization, industrialisation and modernisation.
A self-reliant, free, just and progressive society is integral to the idea of Swaraj. Self-reliance in no way violates the need for technological advancement in the areas like healthcare, communication, etc. It just wants the scale to tilt in favor of ethics and ecology conservation if a conflict arises. Self-reliance also does infringe the idea of free market. It just promotes a non-violent and non-exploitive trade and commerce.
For those who find Gandhi completely irrelevant in the current context, it is pertinent to note that “the literature survey of Gandhian economic ideas gives similar conclusions. 258 thinkers, who have reviewed his economic ideas, have been taken into consideration. Among them, London group of Professionals and The Club of Rome are considered as individual thinkers. Even the opinion of 53 noble prize winners is also considered in this literature survey. 96% of these thinkers admire his economic thoughts. They consider his ideas practical, useful and relevant in the present world.
A growth model for economic development is shown on the basis of Gandhi economic thoughts. This model is applicable to developing economies and India. His ideas are helpful for backward and developing economies in the world. His ideas are also useful for solving problems in capitalist economies. This proves Gandhi as a unique and practical economist of the world”. (see here for more details)
In short, the economic model of India, in my opinion, should be based on the following three principles:
(a)   It should develop an environment of equality and mutual trust through decentralization.
(b)   It should focus on the strengths on Indian economy rather than overemphasizing the weaknesses.
(c)   It should focus on enable of population rather than merely providing for them.
…to continue next week
Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com
Earlier in this series:
The state of the Union
The political problem
The political solution
The economic problem-I
The economic problem-II
The economic problem-III
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