Vijay Kumar Gaba

Thursday, May 14, 2015

The morning after

Thought for the day

"Moral excellence comes about as a result of habit. We become just by doing just acts, temperate by doing temperate acts, brave by doing brave acts."

- Aristotle (Greek, 384-322BC)

Word for the day

Hidebound (n)

Narrow and rigid in opinion; inflexible.

(Source: Dictionary.com)

Malice towards none

Luxemburg PM comes out and marries his gay partner. The country celebrates.

Wonder, will someday we also accept that the politicians too have a right to personal life and politics has nothing to do with it!

The morning after

A sense of unease has been palpable amongst large investors since past few weeks. This is a typical case of hangover after a spell of ecstasy and overindulgence. It shall pass over soon and normal market order will be restored, in my view.

In the interim, shooting pain, nausea, wooziness accompanied by sense of despondency and rejection are natural occurrences.

In one such example, the global investment bank HSBC has downgraded Indian equities to underweight, citing "slowing earnings growth, little room for rate cuts and potential negative impact from an unusual weather due to El Nino".

I see more such downgrades over next 3-6months.

The primary reason for this pessimism, in my view, is the Newton's law of motion. The more an investor got excited in post election euphoria, the larger are the chances of his swinging to the other extreme.

I believe, for taking a holistic call on Indian equities, we need to first eliminate the impact of election results from the market statistics. The macroeconomic data and corporate fundamentals are not impacted materially by the political changes.

By assimilating the market statistics to macroeconomic trends we may discover that contrary to popular perception, the market fundamentals might have actually improved over past one year, inasmuch as that (a) the process of bottoming in most macro indicators has progressed well; (b) most frontline companies have achieved sustainable cost efficiencies; and (c) many relevant companies have restructured their balance sheets by selling assets and raising fresh capital.

This improvement in market fundamentals will look relevant and substantial once the stock prices shed the flab accumulated during post election euphoria.

The morning after, I am excited and waiting to catch the pendulum at the other end.

Hangover - I : Political sloganeering giving way to economic reality

...macroeconomic indicators bottoming out gradually

Cleansing in financial system to kick start the economy

The extreme stress in the financial system is hindering the economic recovery in India. Unless the banks and financial institutions take the bitter pill and clean up their accounts, the fresh credit cycle cannot begin in the right earnest.

The recent management commentary of two largest public sector banks PNB and BoB, indicates that the process might just have started and should be largely completed within this fiscal year.

This effort duly supplemented by re-capitalization of PSU banks (the process begins with SBI) should see normalcy returning to the credit market.

Agreed that it is much easier said than done, but inevitability of the process should enforce execution, in my view.

In the meantime however, the investors in PSU Banks and stressed companies will continue to suffer pain. The industry leaders with stronger balance sheet should see good days with decent assets available at bargain prices.

Better fuel availability (Coal, LNG and nuclear fuel) should resurrect the troubled power sector in next 12-18 months.

Commencement of mining operations later this year should also help road traffic and CV sales.

Technically speaking - not worried as yet

The Indian benchmark indices have corrected 10% from the all time high level recorded last month.

Nifty peaked on closing basis at 8834 (13 April 2015), 2% below its all time closing high of 8996 (03 March 2015). However, the fall being broad based, sharp and normal (upto 10%) is not worrying from midterm perspective. It would still be normal if it corrects couple of percentage points further down. I see this as the likely scenario.

However, a close below 7860 on Nifty would rattle a lot of nerves, as it would open the probability of full 20% correction and end of bull cycle that commenced on 30 May 2014 from 7230 level. I see this as least likely scenario.

The benchmark indices however should move in a downward sloping channel making a lower top - lower bottom formation over next four months.

The large cap will materially outperform the mid and small cap in this phase.

The probability of a full 20% correction that would end the current bull market looks remote at this point in time. But may need some allowance to be made, should Nifty closes below 7860 in next 5 trading sessions.

Wednesday, May 13, 2015

Love me or hate me, you can't ignore me

Thought for the day

"It is Homer who has chiefly taught other poets the art of telling lies skillfully."

- Aristotle (Greek, 384-322BC)

Word for the day

Moppet (n)

A young child.

(Source: Dictionary.com)

Malice towards none

It is perhaps for the first time that PLA has not done any adventure before a Indo-China summit.

Love me or hate me, you can't ignore me

The incumbent government will complete first year in office in couple of weeks. Considering the high expectations it raised amongst all stakeholders, it is natural that assessment of its first year performance is evoking keen interest.

Media, political commentators, opponents, supporters, business, friends, etc. are all evaluating the performance on the parameters that suit them most. Unfortunately, many do not sound objective in their endeavor.

Media and opponents were elated to find ammunition against PM Modi in Arun Shourie's outburst against the government. English media in particular has been overtly critical of the Modi government.

Many businesspersons, e.g., Deepak Parekh and Adi Godrej, have expressed dissatisfaction over government's conduct. Though some like Ratan Tata have advocated giving some more time before a meaningful could be assessment is made.

The opposition parties have alleged in the Parliament that PM Modi is focusing too much on image building through his much hyped overseas tours and ignoring important business.

A India TV-C Voter survey telecast on Monday, found that a majority of people believe that PM Modi today appears anti-poor and anti-farmer; his image has taken serious beating in past one year; and Sushma Swaraj is the best performing minister in his cabinet.

If we juxtapose this criticism from various quarters what we get is:

* The government has neither worked for poor not the rich. Poor find it pro-industry and industrialist find it too socialist.

* Media finds that that PM Modi has undermined the authority of his ministers, especially Rajnath Singh (here) and Sushma Swaraj (here). But people find them most efficient ministers.

* Critic feels too much centralization in PMO is affecting execution. Ministers and bureaucrats feel too much federalization is undermining their authority.

Good, Bad and Ugly of Modi government

Not satisfied with the objectivity of the popular surveys on the assessment of one year performance of the incumbent government, I decided to conduct the one by myself.

Though, my sample is unscientific and tiny, I found the results consistent and plausible.

For records, I spoke to 74 people across 8 states. Profession wise, the sample included small farmers, traders, industrialist, politicians, bankers, students, home makers, government employees, unemployed and petty workers. The sample covered the lower and middle part of the economic strata. The higher echelon went unrepresented. Community wise, it covered six primary religions, and all four caste segments. 12 women participated in the survey. About 10 respondents were from villages.

There was no structured questionnaire. The survey was based on free discussions. Respondents were not prompted towards anything specific. They were requested to give their free and fair assessment.

The key highlights of the responses received are as follows:

The Good

April CPI Inflation at 4.87%; lowest in four months

* The global image of the country has improved materially. Though it may not mean immediate economic benefits, the country shall reap multiple benefits in the long term.

* The government has successfully managed the communal environment in the country. Though, the fringe elements within and outside the government have consistently raked up controversies, the government remarkably stayed secular and neutral.

* The government has initiated healthy debate on vital issues like corruption, freedom of expression, federalism, freedom of religion, etc.

* There is a healthy feeling of competition amongst opposition ruled states to compete with center on performance and governance issues.

* The government has tried to build upon the existing institutions, policies and programs. It has not tried to disrupt the status quo in most respects.

* It has successfully maintained a corruption free image.

* The disaster management capabilities have shown remarkable improvement.

* The government has taken some positive steps to improve center state relations.

* The government has seriously pursued key economic reforms like land acquisition, GST, financial inclusion, fiscal corrections and improvement in delivery system.

* PM Modi has successfully managed to keep the BJP at safe distance from the government.

The Bad

March IIP growth slows to 2.1%, the lowest level since Oct 2014;

IIP rose 2.8% in FY15

* The government is taking too long to finalize the structure of the executive. The confusion in the bureaucracy over the line of authority is impeding execution.

* The government has not made any credible effort to improve skill development.

* The corruption at lower level continues to be as rampant as before.

* The prices of essential commodities are not coming down, though rate of inflation may have come down.

* The government is focusing on big agenda, ignoring smaller issues that impact day to day life of people.

* The working conditions have worsened under the current government.

* The government is planning a shift from established subsidy provision system to enablement in a "knee-jerk" fashion. The transition management is poor and painful.

* The government is obsessed with image management. It reacts too much and too fast to criticism.

* The government has wasted too much time and resources on state elections, compromising on economic agenda.

* The government has nothing for women safety and gender equality, besides routine publicity and issuing appeals to people.

* The PM Modi has compromised on competence and experience to accommodate loyalty and clean image in construction of his team.

The Ugly

* The execution on key projects is poor and worsening.

* The government has virtually nothing to ease financial stress in the economy. The banking system is in similar dire strait as it was in mid 1990s. If not handled proactively, the situation will become unmanageable.

* The unemployment situation has worsened.

Trivia

Yet another set of tremors rocked north India yesterday.

Poseidon is really angry.

Who is bothering him most?

(a) Rahul Gandhi

(b) Narendra Modi

(d) Judiciary

(e) India Inc.

(f) ISIS

(g) ISI

(h) EU

(j) US

(I) Other, pl specify

Some interesting reads

Productivity Is Down: Are U.S. Workers Slacking Off?

Thought for the day

"It is Homer who has chiefly taught other poets the art of telling lies skillfully."

- Aristotle (Greek, 384-322BC)

Word for the day

Moppet (n)

A young child.

(Source: Dictionary.com)

Malice towards none

It is perhaps for the first time that PLA has not done any adventure before a Indo-China summit.

Tuesday, May 12, 2015

Your Bharat vs. My Bharat

Thought for the day

"The worst form of inequality is to try to make unequal things equal."

- Aristotle (Greek, 384-322BC)

Word for the day

Baleful (adj)

Full of menacing or malign influences; pernicious.

(Source: Dictionary.com)

Malice towards none

Where would you fit Sunny Leone in the "Idea of India"?

Trivia

Two individuals - Ms. J. Jayalalithaa and Mr. K. V. Kamath - dominated the headlines yesterday.

Ms. Jayalalithaa regained her right to Tamil Nadu CMship after Karnataka High Court exonerated her all charges of holding disproportionate assets. The verdict came two days after Mumbai High Court showed exemplary promptness in admitting Salman Khan's appeal against lower court order and granted him bail pending decision on his appeal.

Because of these decisions, a large section of society is raising question on the entire justice delivery system, blaming it to be squarely pro rich & powerful.

The appointment of Mr. K. V. Kamath as first chief of US$100bn BRIC Bank has also surprised some. The outburst of Deepak Parekh and Arun Shourie against the government (both were speculated to be front runner for the post) had made it clear that they are not in the reckoning.

The question that is bothering some at Raisina Hills is what made Kamath supersede Subba Rao, Bimal Jalan and Urjit Patel. Raghuram Rajan had already denied his interest or consideration.

Some interesting reads

Growth prompts many in FMCG to bet on rural segment

Slump in infra projects belies recovery story

Car sales grow 18.14% in April, fastest in 30 months

Brazil's Only Hope Is Mr. Market

Monday, May 11, 2015

Care for the big elephant sitting right to ya

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).

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.

Regarding interest rates, Buffett noted that if rates were to increase to more normal levels, stock prices would look expensive.

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

Inequality, Immigration, and Hypocrisy

The Return Of Peak Oil

Why the British election matters to the United States

April PMIs Provide More Evidence BRICs Are Buckling