Vijay Kumar Gaba

Wednesday, May 14, 2014

“Lord, make me chaste, but not just yet”

Thought for the day

“Most people do not really want freedom, because freedom involves responsibility, and most people are frightened of responsibility.”

- Sigmund Freud (Austrian, 1856-1939)

Word for the day

Schmaltz (n)

Exaggerated sentimentalism, as in music or soap operas.

(Source: Dictionary.com)

Teaser for the day

Many senior Congress leaders are rumored to be on their way to long holidays for rejuvenating themselves.

If true, Modi ji can say that he has achieved Congress Mukt Bharat for few weeks at least.

“Lord, make me chaste, but not just yet”

Some media reports in past couple of weeks have suggested that BJP leadership may not be comfortable with Raghuram Rajan continuing as RBI governor. Though there no explicit confirmation or denial from BJP side, the tenor of media reports and subsequent comments by the incumbent FM, comments of the governor himself and utterances of some senior BJP leaders suggest that the smoke is not without fire.

Though not a great admirer of the suave governor myself, I believe he is apolitical, unlike some great global economists who have openly taken sides during the recently concluded elections. As such, the new government may not want to disturb a critical organ of economy in haste. In my view, the credit policy due in June first week should give ample indication how well the government and the governor are likely to get along.

In my view, there could be three potential points of disagreement between BJP and the governor, viz., (a) INR exchange rate, (b) benchmark rates and (c) restriction on gold imports.

During the election campaign BJP has likened the INR weakness to instability of Indian economy and failure of UPA government. As such it may want INR to strengthen so that it could score some political points. BJP would also like to return favor to its core business and trader constituencies by easing rates and lifting restriction on gold import.

Through stronger INR it may be able to bring down fuel prices in short term. Also, a sense of industrial revival could be created through lower rates and easier credit. A lower inflation statistic and improved employment environment could help it sail through the budget session of the Parliament.

These are however at best some first aid solutions. The economy would need much more fundamental measures to get on a sustainable 6-7% growth path. So far I have not heard anything to this end.

Insofar as linking INR exchange rate to national pride is concerned, the following excerpts from my favorite BoB McTeer’s blog are pertinent to note.

“When the Federal Reserve adopted a super easy monetary policy in response to the financial crisis and recession, many analysts, along with their predictions of hyper-inflation, predicted a collapse of the dollar. Furthermore, many advocated measures to strengthen the dollar in foreign exchange markets. It was widely believed that what we needed was not a weak dollar, but a strong dollar. Larry Kudlow and many of his guests pined for ‘King Dollar.’

My position back then was that we need a strong dollar in normal times to support a high standard of living, but, during a steep recession and anemic recovery, a strong or stronger dollar would inhibit the recovery. My line was that a strong dollar is desirable eventually, but not during a recession or weak recovery. I compared my position on a strong dollar to St. Augustine’s position on chastity. “Lord, make me chaste, but not just yet.”

Tuesday, May 13, 2014

The party to continue as some parties face extinction

Thought for the day

“The jury consist of twelve persons chosen to decide who has the better lawyer.”

- Robert Frost (American, 1874-1963)

Word for the day

Matrifocal (adj)

Focused or centered on the mother.

(Source: Dictionary.com)

Teaser for the day

Sensex climbed 17% on 18-19^th May 2009 when MMS was re-elected as PM.

Sensex has climbed 18% since 12^th September 2013 when Modi was announced BJP’s PM candidate.

So what’s the big deal?

The party to continue as some parties face extinction

India successfully concluded the largest and longest running general elections in world, much to the comfort of all, except perhaps UPA allies and some traditional socialists like JDU and SP.

The Exit poll done by various agencies have confirmed our February assessment that NDA will likely get a “working majority” and Congress party may be decimated in terms of number of seats at least if not vote share.

To my mind, if we accept the exit polls as correct, there are three key take away from these elections:

(a) Congress has been virtually eliminated from the northern, central and eastern part of the country. It has dissipated to become a marginal force in large states like UP, Bihar, Jharkhand, West Bengal, Tamil Nadu representing 40% of the Indian population. It is in serious danger of losing the tag of the only truly national party.

The point to watch would be how Congress reinvents itself to regain its lost glory. In 1998 Sonia reenergized the ailing Congress. This time, she herself is not well and Rahul Gandhi has repeatedly failed to inspire. The keen political observers would also tell you that Priyanka Gandhi, the hitherto unused trump has turned out be a bigger disappointment.

Under the circumstances, in the absence of any recognized national level leader outside Gandhi family, we may see more secession on lines of Sharad Pawar, Mamata Banerjee, Jagan Reddy, et al. This could be especially true in the case of states where Congress enjoys reasonably higher vote share but is doing consistently poorly in terms of electoral wins, e.g., UP, Madhya Pradesh and Gujarat.

(b) BJP appears consolidating its position materially in the so called BIMARU states (Bihar, Jharkhand, MP, Chhattisgarh, Rajasthan UP, Uttrakhand) and western part of the country (Gujarat, Maharashtra and Goa). A stable performing government for five year will likely place BJP in pre 1989 Congress shoes, thereby rendering southern states less relevant in national government formation. The process of federalization of the country and decentralization of power could move a few step back.

(c) The so called religious and caste based vote banks appear to have dissolved. This is a reflection of changing demography. The youth of the country is certainly more interested in substantive issues like employment and socio-economic development.

Consequently, the parties solely dependent on caste and religion arithmetic face the threat of extinction; whereas neo-socialist like TMC, are gaining strength. AAP also registers its presence at the national scene.

Insofar as markets are concerned, with favorable exit polls, the party will continue till 16^th at the least.

Sunday, May 11, 2014

Still no hurry

Thought for the day

“Experience has shown, and a true philosophy will always show, that a vast, perhaps the larger portion of the truth arises from the seemingly irrelevant.”

- Edgar Allan Poe (American, 1809-1849)

Word for the day

Caprine (adj)

Of or pertaining to goats.

(Source: Dictionary.com)

Teaser for the day

Why institutions like Army, and EC should be beyond criticism?

Why a traffic constable who weathers extreme heat, cold, and pollution in performance of his duties, often without any facilities, is lesser patriot than an army officer?

Still no hurry

The long drawn electoral battle will finally come to a close this week and we will hopefully get a new government by the end of this month. For many it may be a matter of comfort and closure. But to me it would mark beginning of a long, somewhat painful, process of bringing the ailing Indian economy on the path of faster growth and sustainable development.

The popular opinion (or I should say wish!) is that the Narendra Modi leads a stable development oriented government. For records, I too wish the same.

However, I will not be dismayed or frustrated if the next government is not led by Mr. Modi since I strongly believe that the core strength of Indian economy is private enterprise and prudent populace governed largely by righteous ethics. Politicians at best are supporting actors in a movie. Some of them get to kidnap and molest the heroine; while the others get a chance to save her. The roles keep switching with the director and the script.

Last weekend, I got a chance to meet some enthusiastic BJP workers in Delhi. Many of them were fully ready with list of reward they would be seeking from Mr. Modi’s government. The wishes ranged from school admissions to appointments at key public posts. None, yes no one, wanted anything good for the country.

I am sure most businessmen, students, housewives, farmers – all of them will have a wish list. And almost all of these wishes will be selfish and parochial.

Mr. Modi, assuming he occupies 7RCR by the end of this month, is certainly going to have tough time managing these stratospheric expectations.

On the side lines, Mr. Modi shedding his electoral façade, hinted that his government may actually honor the UPA’s decision to allow foreign direct investment (FDI) in supermarkets (multi-brand retail).

This should bring relief to foreign retailers, many of whom feared the worst after the BJP unambiguously stated in its manifesto that it was opposed to the decision of the Congress-led United Progressive Alliance allowing foreign investment in supermarkets.

Ignoring Mr. Modi’s pragmatic discourse and indications of a progressive policy regime, some enthusiast within BJP asserted that if voted to power, it will clamp down on beef exports. These people need to be reminded that India is poised to become the No.1 beef exporting nation globally. It is no small consumer either. I feel sooner they get out of election mode, better it would be for everyone.

I am not celebrating Friday’s 3% up move in Indian equities. The move was intrinsically weak and unconvincing. Volumes were much below even 3months average. India VIX jumped over 9%. The market breadth was only marginally positive at 3 stocks gaining for every 2 losers.

As I said on Friday, I have a good positive feeling about the market over next couple of years. So, I am in no hurry to make some quick bucks. I will watch the drama from fringes entertaining myself watching studio experts trying to decipher election results.

Friday, May 9, 2014

No hurry and no worry!

Thought for the day

“People deal too much with the negative, with what is wrong. Why not try and see positive things, to just touch those things and make them bloom?”

- Nhat Hanh (Vietnamese, 1926 - )

Word for the day

Wanderlust (n)

A strong, innate desire to rove or travel about.

(Source: Dictionary.com)

Teaser for the day

Is Gujarat less secular than Maharashtra? Or MP less secular than Bihar?

If yes, is that a breakdown of constitutional machinery that calls for President’s rule?

If not, what is this commotion about?

No hurry and no worry!

While I do not expect 18 May 2009 like dramatic move in the market, the next week is likely to be eventful. The good part is that most investors appear fully prepared for higher volatility, disappointment and exuberance. Abysmally low volumes in past many days indicate that most traders have pruned their trading positions and moved to fringes.

A disappointing election result may therefore not lead to a panic attack in the market; whereas a result seen positive for the economy may drive the fence sitters into market. If forced, I will bet on an up move rather than a down move in the market in coming three weeks. Though left alone, I would also prefer to sit out and see the volatility through.

Bottoming process on, but no bull market in sight

The bottoming of stock markets is usually confused with the lowest point of indices in a cycle. In my view, it is a complicated and often long drawn out process through which the factors supporting a positive environment for “risk investments”, e.g., equities, fall in place. The following pieces, in particular, should fall in place before we could call the market bottom.

• Psychological bottom should occur, i.e., greed should conquer the fear.

• Macro environment should be supportive of corporate initiatives for growth.

• Valuations should be fairly cheap to entice investors into taking higher risk.

• Earnings upgrade momentum should be positive.

• Technical bottom should be achieved.

• The alternatives to equity (debt, bank deposits, gold, real estate) should sound less attractive on risk-reward basis.

• Moderate to low volatility.

There are some signs of market bottoming process progressing well. However, in my view, we are still some distance from a sustainable bull market.

The investors are not fearful but they are not willing to take risk either. The macroeconomic environment is stable but not encouraging enough to induce risk taking. Bank deposits are earning over 9%pa. Earnings upgrades have started to trickle in but are still sporadic and confined to top end of the market. Technically market is nowhere close to a bottom. Volatility has shot up.

It would take at least 4-6 quarters of sustainable effort on part of the new government to put the missing pieces in place for a new bull market to take shape.

I am happy to use this interim period for structuring and building my portfolio for the next bull market. For now “no hurry and no worry”.

Thursday, May 8, 2014

Look before you cross the road

Thought for the day

“I have noticed even people who claim everything is predestined, and that we can do nothing to change it, look before they cross the road.”

—Stephen Hawking (English, 1942 - )

Word for the day

Flit (v)

To move lightly and swiftly; fly, dart, or skim along.

(Source: Dictionary.com)

Teaser for the day

Imagine how PM Modi will respond to the attempts of disrupting parliament proceedings!

MMS always sat quietly with a sad looking face and gestures of helplessness.

Look before you cross the road

In past three years, an overwhelming large number of financial market participants, entrepreneurs, business analysts and commentators have expressed their dissatisfaction with the incumbent UPA regime.

The government has been criticized, rather severely, especially for - its inaction in terms of economic policy and reforms; fiscal imprudence in pursuing profligate social policies and programs; incoherent foreign policy; failure of monetary policy in controlling consumer prices; impeding critical infrastructure projects; incongruent taxation policies; and corruption in high public offices.

Most of these critiques have called for a change in government. Co-incidentally almost all of them have favored Narendra Modi to lead the change. All other alternatives have either been ignored or termed potentially disastrous.

The opinions are divided amongst the people from the fields of social service, politics, art & literature, and media. The support for Narendra Modi in this arena is rather underwhelming. Most of those opposed to Narendra Modi’s leadership believe that Modi’s socio-economic model is exclusive, favors crony capitalism, ignores sustainability concerns and therefore is irrelevant in pan Indian context. Stronger personality of Modi has also been a matter of concern with many critiques.

In my view, this election is not just about economic development. Though substantive economic issues like unemployment and high consumer prices are a matter of prime concern for the populace at large, but the popular debate is focused more on social issues and personalities.

In my view, the first group is rather unfair to the UPA government. An independent historical account of UPA regime will discover that the government did a lot to help the industry and markets. For example, it provided industry with cheap natural resources; protected domestic industry from global competition; let the state owned banks fund sub-standard projects and businesses; provided huge amount of liquidity in the hands of consumers to create demand; and avoided any fiscal tightening for first 9years of its rule.

Still domestic businesses did not do well and markets suffered; because industry (except a handful of businesses) has failed to change with the time and technology. No reasonable government can help them. They are clamoring for Modi in the belief that he will continue to promote crony capitalism and crony socialism but little more aggressively, extensively, and vigorously.

The second group is rather unfair to Modi. They are naïve in their belief that any one person, political party, sect or group of people can divide India and her people. And if someone seriously believes that Modi can rule India by discriminating on the basis of religion for long they need to take some lessons in political science.

Wednesday, May 7, 2014

Inflation will hurt more, 20yrs later

Thought for the day

“There are some ideas so wrong that only a very intelligent person could believe in them.”

—George Orwell (British, 1903-1950)

Word for the day

Coterie (n)

A group of people who associate closely.

(Source: Dictionary.com)

Teaser for the day

What if NDA gets 255 and all non-NDA parties get together and plead with Sonia Gandhi to become PM?

Inflation will hurt more, 20yrs later

In past few years both the major drivers of economic growth, viz., investment and consumption, have suffered in India.

High consumer inflation has materially eroded the purchasing power and savings of household consumers. Consequently, demand growth for both discretionary items as well as staples has declined to lowest levels in a decade. Persistently negative real rates for savers (interest on term deposit less consumer inflation) have made life of retired miserable.

It may be argued that this is an immaterial segment of the population given the young demography of India. But this argument, to my mind, is seriously flawed. During my recent visit to some smaller town in north and central India I discovered that the cost of living at these places has risen substantially in past one decade primarily due to (a) inflation and (b) change in consumption patterns. Spend on education, mobility, communication, health and discretionary consumption has risen substantially leading to structural erosion in savings and rise in household debt.

Rising household expenditure & debt and falling savings is an ominous trend to my mind. Middle age people (a substantial number) who will retire in next two decades will find it extremely difficult to survive without adequate savings. I see a structural rise in dependency ratio in couple of decades. Therefore tremendous pressure on political establishment for higher subsidies will likely continue.

Mr. Rahul Gandhi should understand that at this point in time he can bring 700mn people in the “middle class” category by giving them just Rs1000 pm. But keeping them there is going to cost much more for much longer.

Given the serious supply-demand mismatch, the pressure on prices, especially consumer and energy is more structural in nature. To bridge this supply-demand gap India needs huge investments. But persistently negative real rates have widened the chasm between demand (investment) and supply (savings) of capital. To minimize this gap (a) interest rates have to be kept high (for domestic savings) and (b) INR exchange rates have to be kept favorable to foreign investors.

Both of these higher rates and weaker currency put further pressure on prices as higher cost of capital and imported inputs makes the cost of production higher. Higher inflation also pressurizes wages, further adding to the cost of production.

India imports more than it exports and therefore runs a trade deficit with most of the trade partners. Weaker currency therefore harms the domestic economy more than it benefits the exporters.

The new government will have to urgently and strongly focus on inflation that is widely acknowledged. But “how” could be a matter of debate. Printing money (QE) and cutting rates to bridge capital gap may unleash inflation and weaken INR thus structurally weaken the economy, at least in the short term. Fiscal tightening (higher taxes, lower subsidies and higher cost for state controlled natural resources) could cause tremendous pain to already struggling industry but may lead to more intrinsic strength for the economy.

Tuesday, May 6, 2014

There will be life beyond 16th May, no matter what

Thought for the day

“In every author let us distinguish the man from his works.”

—Voltaire (French, 1694-1778)

Word for the day

Wayfarer (n)

A traveler, especially on foot.

(Source: Dictionary.com)

Teaser for the day

For God sake, please do not believe “India is doomed without Modi”.

There will be life beyond 16th May, no matter what

After completion of poling on more than three fourth of the total Lok Sabha seats, the situation is as cloudy as it was couple of months back.

BJP and its PM candidate appear to have failed in winning over sizable minority votes, especially in the eastern parts of the country. Consequently, it appears that it might need support of more parties (inside or outside) to form a working government. A majority government purely on the basis of pre-poll alliance looks slightly difficult today; though not ruled out.

The Modi Euphoria in market is taking a breather, and correctly so. In my view, it was an undue credit to Mr. Modi. I feel the market rally in past few months is mostly a consequence of (a) global emerging market wave that lifted most risk assets globally including peripheral Europe bonds and not in demand commodities; and (b) some tough decisions taken by RBI and the incumbent government that make the fiscal and current account picture look pleasant. Hope of a stable government (sic. Modi led majority NDA government) has only alerted the fence sitters and checked the selling pressure from domestic investors.

Many market participants are trying to invoke the memories of crazy market move seen post election results in May 2009. I believe a similar result this time is unlikely for two reasons:

(a) In 2009 Indian market had underperformed the global emerging markets in four months preceding the elections and most investors were underweight India due to political uncertainty. The entire underperformance was erased in just one trading session. But in 2014 Indian markets are performing in line with the global emerging markets and there is not much underperformance to recoup and global investors are mostly overweight India; and

(b) In 2009 Indian government in coordination with global governments provided massive fiscal and monetary stimuli to support the economy adding almost 2% to GDP growth, whereas in 2014 we are witnessing a reverse trend – withdrawal of stimulus and fiscal tightening.

In my view therefore the best case post 16^th May is not as good as 2009. However, an outcome contrary to the expectation could lead to a material correction in near term as some fringe players stage a retreat and punters try to make some quick bucks.

I would reiterate that my strategy is completely independent of the poll outcome. I will be happy if we a majority government that can take some risk. However, I will not be disappointed if we get a working government that enjoys support of at least one of the key national party.

I strongly believe that our economy is at a stage where it cannot afford to stay dormant. Action has to start. And it will. The point is who we believe will be the driver. I firmly believe that it will be the Indian entrepreneurs with the help provided by better global demand environment. Many disagree. They feel it will be the new government. You decide for yourself.