Vijay Kumar Gaba

Thursday, January 15, 2015

Is this a bear talking?

Thought for the day

"Beware lest you lose the substance by grasping at the shadow."

- Aesop (Greek, 620-560BC)

Word for the day

Zeitgeist (n)

The spirit of the time; the general intellectual and moral state or temper characteristic of any period of time.

(Source: Dictionary.com)

Teaser for the day

Heard on Rajpath last evening - In 2015 a dozen "famous" personalities will become" infamous"!

Could you name any five?

Is this a bear talking?

In past two days I have received record number of hate mail. After lot of quarrelling with some dear friends, I admit that I am being little too much perceptive & judgmental. And perhaps, as one dear friend and valuable critic suggested, losing the benefits of naiveté.

I could fully appreciate fans of Amir Khan castigating me for my profanity over "PK" (even though I did not make any comment about his acting skills). An apology is due for hurting their sentiments (no pun intended).

However, I sincerely believe that I do not deserve titles like "ultra bear", "anti-Modi", and "communist". I find these imputations rather uncharitable and in need for a due rebuttal.

I have consistently maintained that in my view the interests of stock market in India are incongruent to the interests of the real economy. Given that the wealth effect created by stock market is limited to less than 3% of the population and less than 200 companies have consistently created wealth for shareholders, focusing too much on stock market for policy making purpose is inappropriate; which unfortunately has been the case since 1991. Therefore, I want the focus of economic policies and reforms to move to the rest 97% people.

I am convinced, with 90% workforce earning, consuming, saving and investing, stock market can grow exponentially in no time. Whereas under the current status where less than 10% people are pushing the virtuous wheel of earning, consuming, saving and investing we can cover only as much distance.

I believe that 5% growth in which 90% population participate is much superior and sustainable as compared to 9% growth that benefits only a small section of the society. As per my understanding of economic theory, enabling larger section of people so that they can improve quality of their life without government subsidies and corporate alms is in no way "communist".

Being an eternal optimist and hardcore Bull, I believe that stock market do best when they follow the real economy. Any digression is only perversion.

So when I propagate radical shift in policy direction as against incremental changes being considered by the government, I am actually super bullish on potential of Indian economy and therefore financial market.

By reminding the PM Modi that his mandate is to improve the quality of life for 1.25bn Indians and not just 10% metro and smart city dwellers, I am being his true friend and anti him.

My regular readers know that since 2013, I have been maintaining that any bullishness if Indian equities will come due to domestic factors and most volatility and weakness will be caused by global factors.

Given that global financial markets are likely headed for a "perfect storm" this summer, I am expecting a deeper correction in Indian equities also. This to me will be an opportunity to stock up, even by leveraging. Is this a bear talking?

Wednesday, January 14, 2015

For once, let's go with the bulls

Thought for the day

"Never trust the advice of a man in difficulties."

- Aesop (Greek, 620-560BC)

Word for the day

Comity (n)

A state of mutual harmony, friendship, and respect, especially between or among nations or people; civility.

(Source: Dictionary.com)

Teaser for the day

Taxi, auto, airplane, train, truck, tempo - have you seen any impact of lower fuel prices in any fare/freight?

For once, let's go with the bulls

There is a popular Hindi saying "Jungle mein mor nacha, kisne dekha". It is normally used to convey either of two senses - (a) I do not believe in unverifiable claims; and (b) No achievement is meaningful if not demonstrated publicly.

The critics of the PM Modi have been using this adage in the first sense, to discredit his claims of outstanding and holistic development in Gujarat and achievements of the 8 month old NDA government at the centre. Whereas the PM and his machinery is using it in the second sense to press their claims.

I went to the jungle to see the peacock dancing, and found none. A 55% fall in global crude prices has not caused a penny fall in passenger fare or goods freight rate in any mode of the transport. In fact the fare/freight are little higher in many cases. Moreover, no one is talking about any reduction. For record, I learned that Jamnagar - Mumbai, Lucknow - Delhi, Kolkata - Delhi and Bhubaneswar - Delhi truck freights are now higher as compared to August.

It is widely reported and recognized that there is little improvement in crime rate and corruption. "Ease of doing business" is so far a peacock dancing in the jungle. May be an elite group of tourists on a government sponsored Safari have seen it. Yesterday, I checked with some traders, hawkers, rickshaw pullers, taxi drivers, financial intermediaries, travel agents, shop keepers in Delhi - no one has seen any sign of it yet.

Regardless of all this, I decided to go with the bulls for once. I assume -

(a) Despite strong global and local headwinds the government will achieve its goal of attaining 8% real GDP growth by FY19 when it faces the next election.

(b) Despite serious deflationary pressures globally and consequent financial crisis, Indian corporates will manage a 18% CAGR earnings growth during FY16-FY19.

(c) Despite higher USD and Fed rates, and consequent unwinding of USD carry trade, Foreign flows will remain consistently positive for Indian equities and historical market PE multiple will re-rate by 10% from current 18x to 20x.

With all these assumptions, which certainly look highly optimistic and less likely to materialize, I assess that:

(a) The long term trend economic growth (5% CAGR) in FY19 will still be under 7%, much less than 9% required to generate adequate employment to sustain current savings and consumption rate.

(b) Nifty at ~15K would have returned 12% CAGR during the four year period 2015--2018 almost 70% lower than 2007 5yr CAGR of 41%; though with materially higher risk.

(c) Equities will still be the best asset class, meaning fixed income, real estate and gold which constitute over 85% of household assets, will return less than 10% CAGR, so no visible wealth effect.

In short, by running ahead of Modi government, the market might have already realized much of the gains that would have come through economic recovery during FY16-FY19. Even most optimistic bullish assumption do not show the kind of return seen in 2006-2007.

I am therefore working with expectation of lower return, higher volatility and much higher risk over next four years.

Will talk about near term strategy tomorrow.

Tuesday, January 13, 2015

Whatsapp GIMMs

Thought for the day

"Every truth has two sides; it is as well to look at both, before we commit ourselves to either."

- Aesop (Greek, 620-560BC)

Word for the day

Fritter (v)

To squander or disperse piecemeal; waste little by little (usually followed by away)

(Source: Dictionary.com)

Teaser for the day

Reports suggest Congress party has told Delhi assembly candidates to manage their election expenses from personal resources.

The logical next step would be auctioning of tickets in Bihar, WB and UP assembly elections!

Whatsapp GIMMs

Since announcement of general elections early last year there has been overwhelming media coverage of the random utterances of some leaders who are mostly irrelevant in national picture and often derided as religious fundamentalist in media.

The coverage has become more intense and frivolous in equal measure since the Narendra Modi led NDA government has assumed office.

Without delving into myriad of conspiracy theories discussed with brilliant alacrity at prime time TV and social media, I must admit that it has certainly added another wrinkle on the already tense brows of investors.

To ascertain how much this trend should concern investors I decided to use my Christmas vacation for visiting some key pilgrimages and centers of learning in the states of Madhya Pradesh, Uttar Pradesh and Uttrakhand.

Despite excruciating weather conditions, I was relieved to discover that all hoopla is confined to customary Indian discussion over tea (Chai pe Charcha) and no one is really losing sleep over it. Trust me it has no socio-economic relevance at all.

In my view, the media discussion over the issue of India being in danger of dissipating into a sanctimonious state is nothing more than an extension of guilt inducing morning messages (GIMMs) we receive on our social media accounts, more so on Whatsapp. These messages mock us for not caring enough for our families, elders, friends, society, soldiers, poor, sick, environment, country, et. al., ignoring our health, and falling prey to the hideous designs of MNCs poisoning our food plates etc.

Most of these messages also contain a standard solution for overriding the guilt induced by the message - "make everyone you know also feel guilty by forwarding the message"! We are therefore redeemed of our guilt almost as quickly as we finish reading the message. Of late, of course many users have started ignoring GIMMs altogether.

So I assure the investors and businesses not to worry a bit about this. This changes nothing.

More specifically, I would like to share the following:

(a) The people like Sakshi Maharaj and Sadhavi Niranjan Jyoti have been saying these things since eternity. There is nothing new there. The only thing that has changed is that they are getting national media coverage now because of change in their political status.

In fact, I discovered that both of them have done commendable work for upliftment of the most unprivileged and neglected section of the society. They have worked hard and selflessly for their empowerment and elevation with reasonable degree of success.

The problem as I perceive is the communication and perception gap.

The national media that mostly works from the confines of plush studios in Delhi and Mumbai, perhaps does not fully appreciate the local context and language or does not find it exciting enough for their audience. On the other hand, these parochial leaders who are firmly rooted in their constituencies may not be articulate enough to put their views across to the national audience in a secular manner.

The best and happy part is that leaders' constituency is fully in sync with them. The media's audience is also intelligent enough not to take its frivolities much seriously. The guilt inducing prime time TV discussions are relevant only till the time viewer decides to flip the channel.

(b) Since May 2014 verdict, the competition to get entry into mainstream BJP has intensified multifold. Not only the leaders from the affiliated organizations are now more eager to join mainstream politics, many local leaders of opposition parties are showing interest; and some religious leaders are also keen to gain proximity with the seat of power.

This intensity of competition is prompting a lot of local leaders to use radical means to gain immediate recognition & acceptance with national leadership. I suspect that most miscellaneous agitations, like the one against movie "PK", are strategic moves towards this goal.

Fortunately, scholars and politically indifferent religious leaders (who form 99.9% of the total) do not see issues like "love -Jihad", "PK", "ghar vapsi" etc. as a serious threat to the religion or the State.

(c) In Varanasi, Allahabad, Ujjain, Haridwar & Rishikesh, I could find no buyer amongst youth, children and their parents for Sanskrit as a compulsory subject. The fan club is limited to some elite and mostly redundant. Even Pandas of Haridwar want their children to study English & computers.

I would also like to misuse this opportunity to express my views about the movie "PK", since I was forced to watch it (against my wish), to understand the agitation against the film.

I found the movie a poor work of art. To me it appeared a incoherent collage of Whatsapp GIMMs and jokes with no story. The social message which the makers of the film ostensibly intend to convey is totally uninspiring and cliché.

If the previous film of Mr. Hirani "3 Idiots" was most overrated, "PK" beats that hands down, regardless of the money it collects. The fact that it has earned record money is in itself a justification of the phenomenon this film seeks to denounce, i.e., gullibility of common Indian citizenry. Otherwise, Nirmal Baba, Asaram, Satpal Maharaj et. al. and Indo-Pak love stories have already been filmed and discussed at length in all media. This films brings out nothing new.

Surprisingly, No One protested against Amir Khan (brand ambassador for India Tourism) defacing the wall of historic Red Fort and urinating on it or mocking Bhojpuri language.

I could not understand what the filmmaker wants to convey by suggesting that it is innocuous to steal from people who "dance" in their vehicles.

Insofar as the controversial Lord Shiva depiction is concerned, I would suggest Mr. Hirani to watch the Mahabharat parody in Jane Bhi Do Yarron.

Monday, January 12, 2015

Reflective but not shakin'

Thought for the day

"Our insignificance is often the cause of our safety."

- Aesop (Greek, 620-560BC)

Word for the day

Expatiate (v)

To write at length or in considerable detail.

(Source: Dictionary.com)

Teaser for the day

So much hoopla for Delhi assembly elections!!!

Will someone try examining the viability and profitability of carving out NDMC area as national capital and merging the rest of Delhi into Haryana and giving Chandigarh to Punjab?

Would it help in solving the problems of water, electricity, congestion, and of course cost of governance?

Reflective but not shakin'

"Early in the morning time
Late in the middle of the night
Whenever this chill comes over me
I wanna hug you with all of my might
That's right and I'm sweatin'
Oh, yeah you got me shakin'
Mmm, you got me sweatin'
Ohh, yeah you got me shakin' girl."

-Jack White

It's a nice warm feeling to be back on my writing desk after a hiatus' of little over two weeks.

I note that since Christmas not much has changed in terms of benchmark equity indices; crude and EUR have though broken down. There is a perceptible change in the market context. Investors are certainly much more circumspect today as compared to three weeks ago.

I had expected this to occur in my last note of 2014, but not that soon.

Besides the deterioration in global economy due to factor like deflationary pressures; failure of ECB, BoJ and PoBC in reviving growth through monetary stimuli, and renewed Eurozone integrity concerns, ostensibly some domestic concerns are also bothering investors. In my assessment two major domestic factors are making investors' little jittery.

Firstly, despite successfully projecting a big picture, the incumbent government has so far been rather parsimonious on specifics that would spur the domestic growth especially in a challenging global environment.

Some steps that have been taken, e.g., Land Acquisition & Coal Ordinance and spectrum auction plans do not appear very coherent and therefore have been subject to severe criticism. The encouraging points are very few, the most notable one being progress on PMJDY and GST implementation. The adverse market conditions have also clouded the program to raise resources through PUS equity sales. To make the matter worse, a stronger USD, along with fiscal pressure, is keeping the rate cut outlook slightly clouded.

People who had pinned hopes for material reforms in union budget for FY16 have been earnestly prompted to have a re-think.

Secondly, some voices from government and allied quarters which sound incongruous to the inclusive development agenda of the government have also definitely impacted the investors' sentiments.

Though the government has so far done almost nothing that should raise suspicion of deviation from the committed agenda for faster, sustainable and inclusive economic development, the sundry public utterances and unmindful media bytes are being used to project that the PM Narendra Modi may not be in full control of his government's agenda. Frivolous controversies like the one relating to movie "PK" have perhaps soured the taste a little bit.

I have been often expressing my views on the first factor and it is widely known that I am not sanguine about the prospects of economic growth in near term. Insofar as the second factor is concerned, to me presently it appears a purely political phenomenon with no economic implications.

I actually spent large part of my Christmas vacation visiting some major centers of pilgrimage and religious learning to understand the phenomenon. Tomorrow I would share some interesting learning from this trip. Later this week I would deal with more mundane issues like market directions and trading strategy in the near term.

Wednesday, December 24, 2014

Season's Greetings

Wish all the readers a Merry Christmas and a Happy New Year.

I will be back with next page of my Diary on 12th January 2015.

2015: Market outlook...the battle continues

Thought for the day

"To succeed in life, you need two things: ignorance and confidence."

- Mark Twain (American, 1835-1910)

Word for the day

Rubricate (adj)

To mark or color with red.

(Source: Dictionary.com)

Teaser for the day

By VHP definition all Pakistani and Bangladeshi Muslims are converted Hindus.

Then why Bangladeshi Muslims are illegal in India?

2015: Market outlook...the battle continues

On December 16, 2013 when I sat to write my outlook for the year 2014, the conditions were mostly reverse of what we have on our hand today.

In the eternal war between the forces of Fear and Greed, the forces of fear then had exhausted most of their ammunition, e.g., EU disintegration, Grexit, PIGS default, hyper-inflation resulting from the Mints printing money incessantly, Iran reneging, Currency war erupting and endangering emerging economies, hard landing of Chinese economy, etc. Whereas the forces of Greed had just got fresh batch of ammunition – stable job market in US, housing boom in UK and US, stable financial markets in EU, stronger USD, Chinese growth crawling up, moderate or no inflation, US financials back in business, lower commodity prices, US energy revolution, and mostly stable & peaceful conditions in hot beds like Pakistan, Afghanistan, Iraq, Iran, Libya, Yemen, Sri Lanka (except smaller pockets like Syria).

Filled by hope, the outlook for 2014 therefore was mostly optimistic.

Sadly it is not the today. In a reversal, the forces of Greed appear exhausted this time. The global scene has turned windy, wet and depressing and narrative has turned scary.

Moreover, the domestic scenario which was filled with hope a strong government that will be able to deliver very fast on economic agenda, is also circumspect. The PM, Narendra Modi, appears struggling to bring all his supporters on the same page insofar as the priorities of the government is concerned. At least in public discourse Feudalistic idea of Nationalism seems to be dominating the socio-economic concerns.

Lack of ideas to implement the PM's vision of economic reforms & development, poor innovation skills, and extreme risk aversion amongst Team Modi is not lending any credible support to the forces of Greed either.

The forces of Fear are likely to get fresh ammunition during 2015 when further – the disinflationary impact of stronger USD gains strengthens its roots, US Fed begins to raise policy rates, EU and Japan slither deeper into recession, commodity universe continue to sink and the impact of fall in commodity prices begins to reflect on global financial system.

Like before, many battles of this ongoing global war will be fought in India too. Indian politicians continue to side with the Fearful, providing them with enough ammunition and food to survive.

Inarguably, the investors’ sentiment at present is positive about the cyclical recovery. But never in history the cyclical recoveries have began with benchmark indices ruling close to their all time high levels and bond yields also at such high levels. The current cycle could therefore be short, shallow and volatile. Investor positioning and market internals are clearly pointing towards that. The market implied volatility, volumes and breadth continues to remain low. The volume concentration in top 15 traded stocks is close to all time high.

My outlook for the Indian equity markets for 2015 is as follows:

(a) The marketplace will witness an intense battle between the forces of Fear and Greed and in my view, forces of the Fear will have an upper hand.

(b) 1H2015 may be more volatile whereas 2H2015 will mostly be calm and cold.

(c) The market will have more opportunities for traders than investors. The quality stocks may continue to trade at exorbitant premium and therefore may not offer much in terms of investment opportunity. The cyclical will continue to be confronted by the prospects of weak recovery in at least1H2015 and hence continue to move in a trading range with much higher volatility.

(d) There is little chance of any material re-rating of Indian equities, so the return expectations will remain muted in the range of 10-13%.

(e) The bond yields may not correct much from the current level, as the fiscal pressure may remain intact and global cost of capital rises.

(f) Save for a drastic global event like Lehman collapse (not improbable), Nifty may move in a larger range of 7420 - 9400. Strong trading buying and leveraging opportunities will therefore emerge in to 7850-8000 Nifty range.

My strategy for 2015 will therefore be as follows:

Strategy: More trading needed to meet return target

· Retain equity allocation to overweight.

· Increase allocation to trading from present 10% of equity allocation to 25%.

· Target 15% absolute return in the risk portfolio over next five years.

· Normalize overweight on global pharma and IT.

· Continue NIL weight to underweight on global commodities.

· Increase exposure to domestic Cyclicals, excluding minerals and metals, in 2H2015.

· Maintain overweight on domestic consumers including consumer staples and healthcare.

· Stay invested in longer duration debt.

· Plan for lower tax benefits on financial investments.

· Avoid PSU in general. Selective policy neutral companies could however be considered on case to case basis.

Tuesday, December 23, 2014

2015: Earnings picture still hazy, valuations not crazy

Thought for the day

"Apparently there is nothing that cannot happen today."

- Mark Twain (American, 1835-1910)

Word for the day

Beatific (adj)

Giving joy, blessing or making exceedingly happy

(Source: Dictionary.com)

Teaser for the day

Could VHP set the clock back insofar as economic deterioration of India since 19th century is concerned?

2015: Earnings picture still hazy, valuations not crazy

"In economics things take longer to happen than you think they will, and then they happen faster than you thought they could." Rudiger Dornbusch

The dictum of Rudi Dornbusch has proved itself time and again. It is true for the present state of Indian economy and therefore corporate earnings also.

The current consensus estimates for FY16 and FY17 corporate earnings are running at 17-18%. Most of these estimates appear to be discounting a sharper economic recovery in FY15-FY17 than what the actual trends so far are showing.

To the credit of analysts, we have seen some serious downgrades in past three months, the forecasts however still appear more optimistic. In my view, it is a clear case of hope rather than data driving the analysis.

As per Credit Suisse research, so far, industrials and materials have driven the downgrades. In fact, over the last two years, seven out of ten sectors have seen net downgrades to their FY16 earnings.

On disaggregate basis, of late there have been suggestions that while the commodity producers may see even sharper downgrade post 3QFY15 results, we may see upgrade returning to the commodity consumers, especially consumers and automobile. The data for November 2014 has shown some promise especially in core sectors. However, the recent commentaries of the managements of sector leaders like HUL, Hero Honda, and Maruti is not very encouraging suggesting a disconnect.

In my view, expecting any dramatic turnaround in at least 1H2015 may cause disappointment. Given the low level of capacity utilization and high operating leverage, the outlook for revival of capex and therefore industrial sector remains little hazy.

The financial sector has shown strong earnings growth in recent quarters. However, doubts over asset quality cloud the earnings' profile of most state owned banks and NBFCs.

In absence of a material growth in the demand, most of the earnings growth appear to be coming from cost rationalization, lower finance cost and expected better utilization.

The comforting part so far is that the aggregate valuations have not entered the helm of unfairness; though it could not be said about individual sectors.

In my view, we are not likely to see any major surprise on earnings front during 2015. It will mostly be the continuation of existing trend - marginal deterioration in 1H2015 and a gradual improvement in 2H2015.

I also do not see much probability of re-rating of PE multiples. Though, the de-rating is possible, should the global risk aversion accelerate.