Thought for the day
"The duty of rhetoric is to deal with
such matters as we deliberate upon without arts or systems to guide us, in the
hearing of persons who cannot take in at a glance a complicated argument or
follow a long chain of reasoning."
-
Aristotle (Greek, 384-322BC)
Word for the day
Defenestrate (v)
To throw (a person or thing) out of a window.
(Source: Dictionary.com)
Malice towards none
Why all celebrity friends of Salman Khan chose to visit him unshaven
and disheveled.
Care for the big elephant sitting right to ya
The sharp corrections in equity prices accompanied with material
rise in implied volatility, as seen in past few trading sessions, is definitely
disconcerting for all market participants, especially short term traders.
It is easier, under the circumstances, for equity traders to get
overwhelmed and focused on daily price movements. Thus increasing the chances
of missing the big elephant present in the room and committing avoidable
mistakes many fold.
I strongly agree with the view that the happening in stock
market, domestic and global, developed and emerging, is only a side show. The
primary event is taking place in the bond markets.
The global markets might have derived some comfort from the
latest statement of the US Federal Reserve (Fed) in which reference to timeline
for raising policy rates was omitted altogether. But the fact remains that most
investors and analysts are apprehensive about imminent end to zero and sub-zero
yield regime. Bond investors, after years of rising prices and big returns, are
bracing for the return of 'normalcy' in debt market.
The sudden and sharp rise in commodity prices, despite
continuing poor economic data across the world, and rise in US bond yields
indicate that the long bond and short commodity trade has begun to unwind.
The process is slow and not unidirectional as the opinion on
direction of global rates is not yet unanimous.
The more prominent view is that the US rates are inevitably
headed higher. Hence, going forward the US yields and USD carry trade unwinding
will accelerate, and the long bond unwinding shall gain more momentum. Given
the exorbitant level of leverage in the bond markets, the unwinding will
obviously be torrential and extremely painful once some clarity on timeline of
the "Lift" emerges. Legendary Warren Buffet and Bill Gross subscribe
to this view.
The other view, certainly not a small minority, is that US
economic conditions are far from suitable for a "Lift" as yet. The
bond bull markets, in their view, has many more miles to go before it ends.
Good years ahead for Indian equities
The rise in global rates and bond yield may be a terrible news
for global financial markets in the near term.
A whole generation of dealers, traders and investors has now
been raised on low rates. The strategies and tactics these people have so far
used are completed untested for a bear market in bonds.
In an environment where half of world's outstanding bonds trade
at zero or negative yield, equity analysts and traders in their twenties and
early thirties are used to discounting future cash flows of companies at zero
or even negative rates. Their valuation models and investment strategies may
perhaps not account for 4-6-8% discounting rates.
In simpler terms, at near zero discounting rate you need low
earnings growth to be bullish about a company's stock and could accord higher
P/E. However, if you have to discount the future cash flows by higher
discounting factor, the required earnings growth for the same P/E multiple
would be much higher.
This could be good news for Indian equities in medium term.
The rising cost of capital in global market may have three
impact on Indian economy and markets.
(a) The cost of
capital may rise for Indian companies. But this could be offset by higher
availability as the savings rates go up in developed world with rise in yields.
(b) The INR may
weaken against USD, GBP and EUR as the higher rates push up these currencies.
(c) Indian equities
may look cheaper in relative terms, as higher discounting factors and lower
earnings growth (due to stronger currencies and lower demand due to higher
rates), push up valuation of equities in the developed world.
This translates into the following in investment strategy
terms:
1. The companies
which are inadequately capitalized or whose business model is highly capital
intensive but which have poor balance sheet/credit rating would face trouble
due to rising cost of capital. These businesses should be mostly avoided.
2. Exporters who
are competitive on product and technology front shall gain further strength and
remain preferred investments.
3. The companies
with strong balance sheets and higher RoEs would remain the most preferred
investments. The relatively higher valuations may become more reasonable in
medium term (3-5yrs).
More on this later.
Contempt of popular mandate
As expected, the finance minister seems to have virtually given
in to the pressure of FPIs over issue of MAT demands for previous periods. The
matter has been referred to an expert committee; which in Indian parlance is
nothing but an euphemism for avoiding a stand on any controversial issue. In
recent times we have seen this tactics used successfully to bury GAAR.
The moot point is what did prompt the government to kick the can
in the instant case. Was it the fear of collapse in financial markets due to
some mindless selling by the "concerned" FPIs? or the government is
truly doubtful about the legal validity of the tax demand raised on FPIs from
outside DTAA jurisdictions.
In case the former is true - it is unfortunate. The markets
which cannot sustain couple of billion dollars worth of selling by investors
who have pumped in US$9bn in just past four months, need some serious
restructuring.
However, if the latter is true, it is much more serious matter.
It raises questions over the credibility of the promises made by the government
both inside and outside the Parliament.
The conduct of various political parties in the Parliament has
already cast dark clouds over the entire legislative process. Given the
minority status of NDA in Rajya Sabha and adversarial attitude of opposition
parties over most government agenda, there is little certainty over any
legislative business.
As I write this today, the critical economic legislations like
GST Bill face uncertainty due to partisan brinkmanship. The prospects of laws relating
to land acquisition, real estate sector regulation, and black money regulation
also look poor.
While it is difficult to determine who is at fault (government
or opposition) for this legislative logjam - the economy and poor shall suffer,
and so would markets.
Politically speaking, both the Congress and BJP appear losing in
this internecine battle and the regional parties are gaining at their expense.
To me it is a contempt of the popular mandate.
Three decades of falling rates may be coming to an end
Warren Buffett is famous for his long-term bets on companies
that he thinks are cheap.
Conversely, he's not known for short positions.
But in an interview with CNBC's Becky Quick, Buffett revealed
one asset class he would short.
"If I had an easy way, and a non-risk way, of shorting a
whole lot of 20- or 30-year bonds, I'd do it," he said.
These long term bonds have effectively been a bull market for
three decades as falling rates translated to higher bond prices.
While he said he would short long-term bonds if he could, he
also said that he couldn't.
"But that not my game, and it can't be done in the kind of
quantity that would make sense for us. But I think that bonds are very
overvalued. I'll put it that way."
Trivia
Speaking in typical desi lingo, Mr. N. R. Narayana Murthy now
has high connection in British government.
Traditionally, such people are bracketed in a special category
within our society, so that we could exploit their high connections for
furtherance of our petty vested interests.
Remember Shahrukh Khan and Irrfan Khan starrer
"Billu".
Some interesting reads
