Vijay Kumar Gaba

Tuesday, October 6, 2015

Festival inflation at 20%

"A noble man compares and estimates himself by an idea which is higher than himself; and a mean man, by one lower than himself. The one produces aspiration; the other ambition, which is the way in which a vulgar man aspires."

—Marcus Aurelius (Roman, 121-180)

Word for the day

Groggy (adj)

Dazed and weakened, as from lack of sleep:

(Source: Dictionary.com)

Malice towards none

Is there a defined policy for compensating families of the unfortunate victims of mob frenzy?

Is the compensation directly proportionate to the VVIP visits, "likes" on social media and length of coverage in media?

Festival inflation at 20%

Last week I shared some general observations made during my rendezvous with Delhi-6 (see here). Continuing the saga, I would like to share some interesting economic findings made during the 6hours tryst with the roots of Indian economy.

· A substantial majority of the shop-keeper buyer at Sadar Bazar whole sale market for household goods were women. Most of these women buyers were from lower middle class of the economy.

An impromptu discussion with a group of five shoppers from east Delhi's resettlement areas flagged an altogether new meaning of double income families.

I now have reasons to believe that it is no longer a domain of young professionals couples working hard to climb up the socio-economic ladder faster or poor couple struggling to meet the ends. It is now an integral part of the survival kit of lower middle class. Wives, mothers and daughters (often less educated) of lower middle class workers are working hard to supplement the family income. Unfortunately, it has little to do with gender equality and more with economic compulsions. These women mostly work through "home-shops", "pavements", door-to-door sales or order received through Whatsapp networks. No protection, no security, and persistent harassment.

· Most of the consumer goods at the Delhi's whole sale markets were "imported", including fruits, dry fruits, pulses, confectionary, decorative items, and stationary, etc. The PM's call for using local mud diyas this Diwali found no reflection here. Almost 100% decorative items, candles, and divine idols were Chinese.

· Most traders and buyers I spoke to, confirmed that the festival demand this year is lower than the previous year. The estimates varied between marginally (5%) lower to substantially (20%) lower.

· Contrary to the headline numbers, the "festival inflation" is in high double digits. The commodity price crash is not visible in prices of utensils, crockery, bed linen, low price sarees, decorative items (mostly rubber and plastic), cosmetics, dry fruits, sweets and confectionary, flowers, stationary, packing material etc. are mostly 10-20% more expensive as compared to last year.

· The wage inflation is close to zero. Cycle rickshaw, coolie, tailoring, etc. charges are same as these were last Diwali. This read with the point above, might at least partly explain the rising struggle, unrest and crime rate in the lower socio-economic strata.

· At least 50% of traders I spoke to confirmed that they have also sold through various online market places. They explained how the "discounts" offered at famous online market places are often farcical. They admitted that they have supplied to sub-standard goods or rejects to online orders. This is in particular applicable to the low price items where the "returns" are much less likely.

Overall assessment - lower household savings, persistent pressure on SME segment, rise in incidence of income inequalities, civil unrest and non-compliance.

Monday, October 5, 2015

Nifty: Good news may give exit to traders

Thought for the day

"Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth."

—Marcus Aurelius (Roman, 121-180)

Word for the day

Deciduous (adj)

Not permanent; transitory.

(Source: Dictionary.com)

Malice towards none

"I know about wanting more. I invented the concept."

Nifty: Good news may give exit to traders

In last few days there has been a spate of news that could cause a "feel good" rally in Indian equities. Considering that Indian equities have witnessed waning momentum in past many weeks, this good news might excite the participants and provide an exit opportunity to traders stuck at higher levels.

Announcement of mega discom restructuring plan, and commitment for massive investment in renewable to achieve with emission target may trigger a rally in the power sector and the lenders facing huge NPA problem from the sector.

Lower US VISA fee for IT companies, as the 2010 law that raised the fee to US$2000 lapses, could cheer IT sector where a number of companies including Infosys, HCL Tech and Tech Mahindra have issued profit warning in past couple of months.

The news that the government is considering a substantial disinvestment plan in public sector undertakings could potentially reverse the slide in PSU stocks seen in past few months.

Some poor job data in US triggered a massive rally in safe haven bonds, clouding rate hike plans of US Federal Reserve. Further strengthening of sentiment could stem the outflow from EM equities providing some relief from FPI selling in past couple of months. We may even see some inflows in view of strengthening INR and opening of further limit for FPI investment in government bonds.

Technically, on short term charts Nifty is on the verge of completing an inverse H&S pattern. A close above 8010 level in next couple of trading sessions could take it to test 200EMA (8180-8200 range) or even a little further. However a failure to close above 8010 this week, will annul the H&S formation.

Thursday, October 1, 2015

Ignoring strengths to focus on weakness

Thought for the day

"If you do not expect the unexpected you will not find it, for it is not to be reached by search or trail."

—Heraclitus (Greek, 544-483BC)

Word for the day

Wont (n)

Custom; habit; practice.

(Source: Dictionary.com)

Ignoring strengths to focus on weakness

Trading has been one of the primary strength of famous Indian enterprise. Traditionally Indian have been very successful in trading their skills, knowledge, labor, resources, and produce - earlier for gold & other luxuries, then for British patronage & privileges, and later for technology, oil, USD, chocolates, watches, cosmetics, and other pursuits of better quality of life.

Manufacturing has not been a particular strength of Indian economy, outside cottage industry. I may not be entirely wrong in stating that success in pharma and automobile manufacturing using indigenous technology & skills is mostly an extension of cottage industry. Before you point it out to me, the Indian textile has mostly been a low value add conversion and job work industry. Post independence we have mostly followed the colonial model, except that we set up factories locally to trade low skill but cheap labor.

With this background, I would like to share my observations made during the visit to some major whole sale markets in and around Delhi last week.

Delhi-6

The area comprised within and around the Pin Code 110006 in the capital city of Delhi is one of the largest trading hubs in the country. Sadar Bazar (Plastics, chemicals, households items), Naya Bazar (Food grains), Khari Baoli (Pulses, Spices, Dry Fruits, oils etc.), Chandni Chowk (Textile, Paper & Hardware), Pahar Ganj (Timber), Kashmiri Gate (auto parts) and Darya Ganj (Medicine, printing, publishing) are prominent trading areas. Azadpur, largest wholesale market for fruits & vegetable lies 12miles north of Delhi-6.

A three hour trip to Sadar Bazar was sufficient to know precisely where the current policy making is lacking - "the policymakers care least for the strength of our economy and overly focus on weaknesses."

The total apathy of administration to the business of trading was truly appalling.

· There was no space to walk. Buyers have to struggle with handcarts, bullock carts, auto rickshaws, cycle rickshaws, coolies carrying huge and wide loads on their heads, loose electricity wires dangling ominously, and other perils like stray cows and dogs.

· I did not witness any security apparatus for a market which trades billions worth of goods every day. There is no way a fire tender could reach in time to the market, should any unfortunate event happen.

· There is no public toilet for thousands of traders who work there and buyers who frequent there regularly. A long queue of people relieving themselves was seen right in the middle of the crowded market.

· The narrow street leading to the market was mostly blocked by vehicles parked in an unauthorized manner. The nearest car park is located in a dump yard two miles away from the main market. There is no public transport available for the market.

Still worst, the administration of the city has NO respect whatsoever for the traders which are critical part of the supply chain that forms backbone of Indian economy. On their part, a large number of traders may be non-compliant....to continue on Tuesday, 06 October.

Wednesday, September 30, 2015

Are you surprised?

Thought for the day

"Opposition brings concord. Out of discord comes the fairest harmony."

—Heraclitus (Greek, 544-483BC)

Word for the day

Wayworn (adj)

Worn or wearied by travel.

(Source: Dictionary.com)

Malice towards none

The common man is certainly not interested.

Who are the people, Mr. Anand Sharma is addressing with so much passion?

Are you surprised?

Governor Rajan surprised the market yet again front loading the monetary easing by cutting key policy repo rate by 50% to 6.75%, lowest since March 2011. The market could have celebrated the occasion more enthusiastically but for the chilly winds blowing from Pacific that kept many participant indoors.

I have been maintaining that RBI monetary policy may not have much impact on Indian equities in near term. I see no reason to change this view.

Nonetheless, I find it pertinent to highlight key points in the much awaited policy statement of the Governor Rajan that made me thoughtful. I found the statement a mix of positives and negatives - more negatives than positives from equity market view point.

First positives:

* Indian Manufacturing has been in expansionary mode for the ninth month in succession. Industries such as apparel, furniture and motor vehicles have experienced acceleration. Furthermore, the resumption of growth in production of consumer durables in recent months, after a protracted period of contraction over the last two years, is indicative of some pick-up in consumption demand, primarily in urban areas.

* Rising public expenditure on roads, ports and eventually railways could, however, provide some boost to construction going forward.

* Year-on-year food inflation dropped sharply, led by vegetables and sugar. Cereal inflation moderated steadily during April-August.

* Liquidity conditions eased considerably during August to mid-September. In addition to structural factors such as deposit mobilisation in excess of credit flow, lower currency demand and pick-up in spending by the government contributed to the surplus liquidity.

* Foreign exchange reserves rose by US $ 10.4 billion during the first half of 2015-16.

* Despite the monsoon deficiency and its uneven spatial and temporal distribution, food inflation pressures have been contained by resolute actions by the government to manage supply. The disinflation has been broad-based and inflation excluding food and fuel has also come off its recent peak in June.

* The coming Pay Commission Report could add substantial fiscal stimulus to domestic demand, but the government has reaffirmed its desire to respect its fiscal targets and improve the quality of its spending.

* While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed.

* CPI inflation is expected to reach 5.8 per cent in January 2016, a shade lower than the August projection.

...and the areas of concern are—

* Since August 2015, global growth has moderated, especially in emerging market economies (EMEs), global trade has deteriorated further and downside risks to growth have increased.

* Since the Chinese devaluation, equity prices, commodities and currencies have fallen sharply. Capital flight from EMEs into mature bond markets has pushed down developed market yields, and risk spreads across asset classes have widened.

* In India, a tentative economic recovery is underway, but is still far from robust. Rural demand remains subdued as reflected in still shrinking tractor and two-wheeler sales.

* External demand conditions have turned weaker, suggesting a more persistent drag from lower exports and cheaper imports due to global overcapacity. This contributes to continuing domestic capacity under-utilisation, decelerating new orders and a rising ratio of finished goods inventories to sales.

* As a result of still tepid aggregate demand, output price growth is weak, but input material costs have fallen further, leading to an increase in margins for most producers. Weak aggregate demand appears to have more than offset the effect of higher margins to hold back new investment intentions.

* Some forms of bank credit such as personal loans grew strongly as did non-bank financing flows through commercial paper, public equity issues and housing finance. (This read with "lower currency demand, indicates much lower business activity at retail level, elevated financial stress and rising household leverage.)

* With services exports moderating, the widening of the merchandise trade deficit could lead to a modest increase in the current account deficit (CAD) during Q2.

* The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank. Bank deposit rates have, however, been reduced significantly, suggesting that further transmission is possible. Markets have transmitted the Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent. (This highlights the elevating risk profile of corporate debt. Expect more Amtek like cases in future.)

* With global growth and trade slower than initial expectations, a continuing lack of appetite for new investment in the private sector, the constraint imposed by stressed assets on bank lending and waning business confidence, output growth projected for 2015-16 is marked down slightly to 7.4 per cent from 7.6 per cent earlier.

The bond and currency market reaction to the rate cut was also bit surprising. One would have expected a larger move both in yields and INR. May be the market wants to hear more from the governor before making a decisive move.

Tuesday, September 29, 2015

Mind your expectations

Thought for the day

"Corpses are more fit to be thrown out than is dung."

—Heraclitus (Greek, 544-483BC)

Word for the day

Minimax (n)

A strategy of game theory employed to minimize a player's maximum possible loss.

(Source: Dictionary.com)

Malice towards none

PM Modi is able to inspire all but Congress and her associates!

Mind your expectations

If one were to go by media reports - (a) all the market participants are keenly waiting to hear RBI governor this morning; (b) a large majority has already assumed and assimilated a 25bps cut in policy repo rate; (c) a more aggressive easing will catalyze a sharp rally in Indian equities led by rate sensitive financials, realty, auto and infra sectors; and (d) a 25bps cut with no clear promise for more cuts will disappoint the markets and a sell off will follow almost immediately.

All seems so simple and well settled. Life cannot be easier than that!

Without speculating over Governor Rajan what may or may not do later today, I find it pertinent to note that global markets, including India and US, are almost there, where these were before US FOMC met earlier this month with much anticipation and expectations.

There are many more incidental data point that need to be considered while forecasting market direction on the basis of what RBI governor does or omits to do. For example, consider the following:

(a) In the previous RBI rate cycle (Jan 1998- Apr 2003), RBI's primary policy rate fell 500bps from 11% to 6%. In this period SBI prime lending rate fell 375bps from 14% to 10.25%.

The current cycle began at RBI policy rates 8% and SBI prime lending or base rate at 10%. Obviously this cycle will be much smaller as compared to the previous one.

(b) The previous cycle saw cash reserve ratio (CRR) falling 650bps from 11% to 4.5%. This cycle is beginning with CRR at 4%. This move along with material re-capitalization of banks catalyzed a super cycle in Indian banking stocks.

(c) The previous rate cut cycle (FY1998-FY2003) saw economy growing at 5.4% CAGR. The growth accelerated with a lag from FY04 onward and averaged over 8% in next five years.

The accelerated global demand catapulted by huge infusion of liquidity by central banks was one of the reasons responsible for acceleration in growth. This time global liquidity is almost redundant to global demand.

(d) The producers price inflation averaged around 4% during FY1998-FY2003, incentivizing investment in capacity building. This time inflation expectations are much lower, at least for next 2yrs.

(e) Indian equities yielded NIL return during 5yr period FY1998-FY2003. The following five years (2003-2007) yielded over 40% CAGR.

However, in past five years, Indian equities have already yielded in excess of 5% CAGR. So the returns in this cycle may be much lower as compared to the previous bull market.

What I infer from these and many such data points is that this cycle is nothing like the previous one. The cycle may be short and not that sweet. Neither leveraging nor de-leveraging will be an umbrella theme. Cheaper credit may not propel consumption or investment like before.

I am therefore keeping my return expectations for next couple of years very low.

Monday, September 28, 2015

Bank Nifty: Treading dangerous waters

Thought for the day

"No man ever steps in the same river twice, for it's not the same river and he's not the same man."

—Heraclitus (Greek, 544-483BC))

Word for the day

Donnybrook (n)

An inordinately wild fight or contentious dispute; brawl; free-for-all

(Source: Dictionary.com)

Malice towards none

What would change if India gets a permanent seat in UNSC?

Bank Nifty: Treading dangerous waters

Bank Nifty has is trading 70% higher than the peak registered in January 2008. It has gained more than 90% since the bottom of 2013.

Fundamentally the returns given by banking stocks could be matter of interesting debate. Since 2013 the banking sector has seen consistent decline in credit growth.

A large part of this decline could be structural as (a) the fuel price subsidy reforms and deregulation of petrol and diesel prices has drastically reduced the funding requirements; (b) the change in taxation norms for debt oriented mutual funds has moved the short term credit market away from banks to bond market; and (c) lending against gold and shares has also fallen.

The cyclical part of decline especially in housing, commercial vehicles and infrastructure projects has also worsened in past three years.

The capital inadequacy of PSU banks has risen with worsening NPA cycle.

These factors make it difficult to expalin this bull market in banking sector.

In strict technical sense, Bank Nifty broke down on daily charts last month. This month it has shown distinct signs of breaking on Weekly charts. A fall below 16200 level may open the flood gates.

Fall below 970 for HDFC Bank and 644 for Yes Bank could be two pointers to the bad times coming in Bank Nifty.

Thursday, September 24, 2015

Sitting tight and liquid, and praying

Thought for the day

"Youth is easily deceived because it is quick to hope."

—Aristotle (Greek, 384-322BC)

Word for the day

Penitent (adj)

Feeling or expressing sorrow for sin or wrongdoing and disposed to atonement and amendment; repentant; contrite

(Source: Dictionary.com)

Malice towards none

Well done Mr. Fadnavis!

Now please also tell us whatever the previous government did to suppress the freedom of expression and appease religious minorities was right and you see nothing wrong in continuing with those practices.

Sitting tight and liquid, and praying

Past few months have been tough on both investors and investment experts. The rise in uncertainty and consequent rise in volatility in asset prices and returns has made the task of asset allocation tougher. Traders appear even more exasperated.

Under the circumstances you cannot find fault with me, if I pray, totally with selfish motive and all my sincerity — "May RBI governor please (a) not effect any change in the monetary policy stance and key rates; and (b) make a strong commentary on the inadequacy of government's efforts in reviving economic growth and preparing for a potential 2008-09 like global contagion."

This coming on the back of a spate of growth downgrades and global risk-off trade, may lead to material correction in Indian equity and bond prices. The assets which are quoting at "middle of the channel prices" may correct sharply to the lower bound of the channel and provide an entry point where I do not have jostle with too many other buyers.

I firmly believe that:

(a) We have already entered the phase of low inflation and lower growth. With most extant drivers of growth (US, EU, China, Commodity producers) throttled by sluggish demand and excessive debt, it is highly unlikely that we may see any meaningful recovery in wages and industrial commodities, energy & food prices for next few years.

This phase may last at least for next 3years. The interest rates in India are definitely not rising from the current levels in this period. They may in fact be cut materially once the liquidity conditions improve.

Given the relatively strong macro fundamentals, the government of India securities (Gilts) therefore would make an attractive low risk investment.

My simple calculation suggests if I can get an entry when benchmark 10yr trades at 7.9% yield, I may be able to get ~9% CAGR for next 3yrs, assuming the benchmark yields correct by 65-70bps over this period.

Not at all bad when the nominal growth is expected to be close to 10%.

(b) The convergence of equity yields and bond yields has historically led to beginning of most bull markets in Indian equities.

A sharp correction in equity prices, alongside bond price correction courtesy Governor Rajan and Chairperson Yellen will also provide a hassle free entry point in Indian equities.

As indicated this Monday (see here) the market internals are weakening with each passing day. In past two days, the cracks in Nifty have widened further.

I do not know what would be the immediate trigger, but ~7K on Nifty appears quite plausible from here.

In the meanwhile, I am sitting tight and liquid.

Wednesday, September 23, 2015

Clear majority for NDA in Bihar!

Thought for the day

"What it lies in our power to do, it lies in our power not to do."

—Aristotle (Greek, 384-322BC)

Word for the day

Enervate (v)

To deprive of force or strength; destroy the vigor of; weaken; enfeeble, debilitate, Sap.

(Source: Dictionary.com)

Malice towards none

Congress and Apple Inc. ......hmm........hmmm........hmmmmmm.

Clear majority for NDA in Bihar!

Somehow the Bihar election has become a major event for the markets. Many financials experts have reported on the probable outcome of the elections and subsequent impact on the Indian politics and economy.

Reading many of these lengthy report, I am reminded of the song Eer Bir Phatte made popular by Amitabh Bachchan in 1996 (see here). The song depicts a poor guy who always tries to imitate his smarter friends but never succeeds. Regardless, I am also trying to present my report on the Bihar elections.

Speaking to many people living across Bihar, people from Bihar now living in Delhi and Mumbai having close ties with the people back home, and trustworthy political activists, political workers, NGO operators & my colleagues who have travelled to the state extensively in the recent times I have concluded as follows:

The election

(a) BJP led NDA may emerge as a clear winner in the State. Except for a few pockets in South Central Bihar, the alliance may dominate the entire State.

(b) Like 2010 and in line with the national trend of past 4 years, the winning alliance will get a clear majority. (170-210 seats out of 243)

(d) Nitish Kumar led JDU will be a major loser in this election, but will retain the principal opposition roll.

(e) RJD will be the biggest loser in the election in terms of credibility and sustainability.

Political fallout

(1) The non-Congress ruling parties in Odisha, West Bengal and Tamil Nadu will become more cautious of BJP and may become reluctant to cooperate too much at the center.

(2) The Congress with its back firmly stuck in the wall, may become more belligerent in the Parliament. It may also see acceleration in exodus in poll bound states of UP, West Bengal, Assam, etc.

(3) PM Narendra Modi and BJP President Amit Shah will be able to silence the isolated voices of dissention within the party.

Economic consequences

(A) Expect almost immediate acceleration in public spending on infrastructure development.

(B) The improved law & order conditions may stem the exodus of talented, wealth and wealthy from the state.

My team is planning an extensive 10day trip to the State. Shall get back with first hand assessment by middle of next month.