Vijay Kumar Gaba

Wednesday, October 14, 2015

Strategy update - II

Thought for the day

"Vanity working on a weak head, produces every sort of mischief."

—Jane Austen
(British, 1775-1817)

Word for the day

Bromide (n)

A platitude or trite saying.

(Source: Dictionary.com)

Malice towards none

All said and done - may I dare ask "Who is this Mr. Kulkarni and what business does he have with Mr. Kasuri?"

Strategy update - II

The global financial crisis and consequent economic challenges have provided India with a great opportunity to consolidate her position in the global order - economic as well as geopolitical.

Factors like a 1.25bn strong mostly conservative society, young demography, a strong leadership fully committed to democratic traditions, large pool of English speaking workers, well developed market system, underdeveloped economy with good appetite for investment - make India standout in a world struggling with fast aging and highly indebted societies, torn with civic unrest arising from massive unemployment and geopolitical strife.

It is really unfortunate that at this critical point in time when the entire nation needs to come together and avail this opportunity, every one appears to be quarreling not only with each other, but also with self believes.

· PM Modi has to fight uncooperative opposition and the opponents within broader Sangh Parivar. BJP as a party appears struggling to accept India in the present shape and form. For many undoing the 1947 partition is on top of the agenda. Some of them would even like to go back and undo the British and Moghul rules also.

· Socialist movement that has been hostage to feudal elements for past 25yrs and has degenerated badly, is melting under the pressure of its own internal contradictions. Social justice to them is now synonymous with the interest of their respective families.

· The comatose communist movement is too desperate to save its nest in the Lutyens' Delhi.

· The Congress Party is crumbling under the blind ambitions and incompetence of its first family. At top of their agenda is to secure maximum media coverage so that they remain relevant till next election; even if this media coverage comes at the expense of national interest.

· The wise men (academics, writers, intelligentsia, and artists, etc.) and media — who bear the responsibility to lead the society on a righteous path by showing the light of knowledge are too busy in trifling gimmickry and hence not helping the situation either.

Do not make a mistake - as an investor I am not worried about all this mess. In my strategy I have factored all this commotion.

I am a firm believer in the grit, righteousness, perseverance, tolerance, integrity, austerity, frugality and competence of my fellow countrymen. These characteristics shall allow our economy to sustain and grow - may be not at a rate in double digit as many would like, but at a pace good enough to sustain the interest of investors and businessmen.

I do not usually entertain the thoughts of higher and faster growth potential, radical economic or social reforms.

The earnings season has started on expected lines, with Infosys reiterating what they said a month earlier and what HCL Tech echoed a couple of weeks before. I am not worried about the market falling on poor earnings. In fact I waiting for opportunities to invest at lower levels.

Tuesday, October 13, 2015

Strategy update

Thought for the day

"Selfishness must always be forgiven you know, because there is no hope of a cure."

—Jane Austen
(British, 1775-1817)

Word for the day

Divulgate (v)

To make publicly known; publish.

(Source: Dictionary.com)

Malice towards none

No one has any doubts that the Congress Party is playing as 12th man in the Bihar Polls.

No one dare ask the leadership — "what's the plan?"

Strategy update

Continuing from last week (see here) I present my thoughts on the appropriate investment strategy in accordance with the emerging economic trends.

Trend 1: Economic growth will remain slow to moderate for FY17 too, as the global economy struggles with Chinese slow down, EU and Japan stagnation, and US policy adjustment.

The capacity utilization in India which is presently at much below optimum level, may not improve so as to motivate capex even in FY17; regardless of lower rates. The growth will therefore mostly come from consumption and productivity improvements.

Technology, innovation and services will therefore remain top investment themes. Replacement cycle, especially in utilities and public services, appears an interesting theme to me; in particular power T&D, public transport, financial service look most promising.

Trend 2: The process of elimination to begin forthwith. The global capacities rendered redundant by Chinese slow down and down commodity cycle will get to play a major role in Indian growth. Global E&C services companies will get to play a larger role in Indian growth economics.

The inefficient domestic players, not only less productive small and medium enterprises (SME), but also large PSU and private enterprises, will face serious existential threat from global competition. The government protections like defense set off clause and tariff barriers and FDI limit etc. may be eased materially to maintain growth rate and overcome shortages of capital. To me therefore the Indian businesses of global corporations are preferred over pure domestic E&C services and capital goods companies.

Trend 3: Despite lower inflation and positive real rates the growth in private consumption will remain skewed in favor of upper middle class and rich. Middle class discretionary spend will be constrained by lower employment and wage growth, higher education, health and skilling expenses.

The consumption stock, all richly valued, may not see any major sell-off due to lower growth, but a time correction looks more likely. I would therefore mostly prefer luxury and a little necessity in consumption. For example, I would prefer BMW/Merc over Alto, Fan and Led over AC, Premium liquor over cigarette, dental hygiene over biscuits etc.

Trend 4: Cost of doing business is likely to increase due to higher taxes, stricter compliance norms, enhanced social responsibility standards, transparent and accountable administration, etc.

I would therefore prefer, companies paying full taxes, are already fully compliant and socially responsible as opposed to those known for efficient tax management and political connections.

Trend 5: Inclusive and sustainable growth would indubitable mean faster and deeper growth of financial sector.

I have been underweight on financials (zero weight for PSU banks for last three years). I guess this would need a change now. Will let you know when I figure out how to do this.

Monday, October 12, 2015

Nifty: Greed paving way for fear, very slowly

Thought for the day

"There are people, who the more you do for them, the less they will do for themselves."

—Jane Austen
(British, 1775-1817)

Word for the day

Jejune (adj)

Without interest or significance; dull; insipid.

Lacking knowledge or experience; uninformed

(Source: Dictionary.com)

Malice towards none

Earth quack with epic center in Delhi - first in many decades. No damage done.

Mother Nature has warned!

Please do not let this warning go unheard!

Nifty: Greed paving way for fear, very slowly

Since the current up move in Indian market started from September 2013, last month for the first time large caps have outperformed the broader markets. Also for the first time in many months, domestic investors were net sellers in equity when foreign investors were net buyers.

This combined with the fact that the market has been losing momentum for many weeks, is sufficient indication that the investor at large are turning cautious about equities.

I shall be closely watching for a material fall in market breadth, volatility and fund flows. The first indication of acceleration in all three together will be the best opportunity to short Indian equities.

The moot point is whether the market could surprise and rise materially from here.

I feel, the risk reward at this point in 5:2, i.e., 10% downside for every 4% rise in benchmark indices. The ratio is much worst is case of broader market indices.

Friday, October 9, 2015

Re-set is on

Thought for the day

"Everything that exists is in a manner the seed of that which will be."

—Marcus Aurelius (Roman, 121-180)

Word for the day

Frabjous (adj)

Wonderful, elegant, superb.

(Source: Dictionary.com)

Malice towards none

Why market is not bothered about Syria?

It could potentially inflict much more damage to global markets than Greece default could have!

Re-set is on

As mentioned in past two few days (see here) the economic conditions continue to remain challenging, both in local and global spheres. My investment strategy recognizes this and is placed accordingly.

Speaking specifically for the local economy, the following trends envisioned in making strategy a few years ago have taken roots and are likely to strengthen in next couple of years, viz.,

(a) The potential growth rate for Indian economy has been realistically accepted and adjusted to 7-8% (new series) level.

Having adjusted to the lower potential growth, the focus is shifting to make structural changes in the growth paradigm to make it more inclusive and sustainable.

The rebalancing includes subsidy rationalization (targeted and efficient), democratization of investment (vs. feudal character earlier), improving terms of trade through localization of imports (make in India), and federalization of state finances, etc.

(b) The global commodity super cycle has peaked and shall remain soft in foreseeable future. The disinflation may benefit the aggregate Indian economy, but corporate profitability will be adversely impacted.

Benign inflation, positive real rates, higher taxes and stricter compliance standards shall accelerate the wealth re-distribution process.

So far the process of wealth re-distribution in India was mostly political and characterized by material leakages. Corruption in public offices has been a typical method of wealth redistribution. The process is now becoming economic, transparent and efficient.

(c) The growth is now planned mostly through productivity enhancement against additional investment earlier. Financial inclusion, Skill India, Digital India, Smart cities, GST etc. are political reflections of this trend.

This trend is critical as it would not only allow growth to be inclusive but also help in managing the scarcity of capital. Remember, the swathe of liquidity sloshing around are not "capital". These may chase a few basis point arbitrage opportunities in global financial markets. But only a tiny fraction of this is available to be deployed as risk capital in a chaotic democracy like India.

(d) The cost of doing business would increase in direct proportion to the ease of doing business.

Global competition, higher cost of capital, better & stricter compliance standards, and enhanced social responsibility standards, transparent and accountable administration may force a whole lot of small and medium (and some large also) business out of business. The elimination process will be painful for financial investors.

Net week I will present my views on what these trends mean for investment strategy and what are the changes that may be required as these trends gather more strength.

Thursday, October 8, 2015

Near term markets to track Yellen

Thought for the day

"Anger cannot be dishonest."

—Marcus Aurelius (Roman, 121-180)

Word for the day

Flummox (v)

To bewilder; confound; confuse.

(Source: Dictionary.com)

Malice towards none

"Talvar", the movie, is projected as a neutral inquest into the infamous NOIDA double murder case.

Ask anyone coming out of theater and you will find a distinct bias towards accused parents' innocence!

So is film a success or failure, I mean regardless of the box office collection?

Near term markets to track Yellen

1HFY16 was generally a bad period for investors, particularly so for emerging market investors. Currencies, equities, commodities, and real estate all asset classes have seen material price erosion and higher volatility. Except for some safe haven bonds and currencies, which could sustain the onslaught, most developed economies' bonds and currencies also suffered.

Demand slowdown in China, which has been one of the key drivers of global economic growth in past decade or so, has been one of the primary reasons for the fall in asset prices. Other major economies, i.e., Japan and European Union have continued to struggle with deflation/disinflation. US economy has shown some signs of stability, but the growth trajectory is far lower and flatter than the pre-crisis (GFC-2008) period.

The emerging markets that had been tremendously benefitted from easy credit driven demand since early 2000s are suffering from poor capacity utilization (low demand), high debt burden (huge capacity building), and deteriorating fiscal balance (high public debt, social sector spending, poor tax collection) and monetary conditions (currency depreciation, rising debt servicing costs and reserve depletion).

Under the circumstances, the Indian economy has shown remarkable resilience on relative basis. However, on standalone basis, the Indian economy has also been struggling.

Challenged by poor external demand conditions (falling exports) and slower domestic demand growth (poor monsoon, low employment growth, lower public spending, poor asset quality of banks impeding credit growth, lower capacity utilization and poor debt servicing capabilities impacting private investment, etc.) Indian economy has been struggling to keep its nose above the water. Persistent lower energy prices have proved to be a major boon in this period.

Overall, both monetary and fiscal conditions have shown improvement bucking the broader emerging market trend. Inflation has been effectively contained. Interest rates have started to come down. Financial sector asset quality is showing signs of bottoming. The government's leverage to invest without compromising fiscal discipline has improved, and is reflecting in road, defense and energy sector investments.

The global growth forecast for 2HFY16 and FY17 have been mostly moderated. Considering the poor demand conditions, the Indian economy is also expected to grow a slower pace of 7-7.5% against earlier estimates of 7.5-8%.

The poor demand environment is likely to reflect in the corporate performance also. However, considering that 2HFY16 shall see the advantage of lower commodity prices and interest rates, we may see the decline in earnings being arrested as the poor top line growth gets compensated by improvement in margins.

Insofar as equity markets are concerned, having little support from earnings in the near term, the direction will be mostly determined by the flows. Therefore, global liquidity and risk appetite may remain more relevant than the local economic and corporate performance.

...to continue tomorrow

Wednesday, October 7, 2015

Midyear Strategy review - Searching for reasons to be bullish

Thought for the day

"To refrain from imitation is the best revenge."

—Marcus Aurelius (Roman, 121-180)

Word for the day

Amphigory (n)

A meaningless or nonsensical piece of writing, especially one intended as a parody.

(Source: Dictionary.com)

Malice towards none

Nawaz Sharif says UN must intervene to protect Kashmiri people from atrocities of Indian government.

Azam Khan says UN must intervene to protect the Indian Muslims from the atrocities of Indian government.

What do you say?

An Investor's Diary

With each passing day, the expectations of the market participants from legislative reforms are diminishing. The acrimonious Bihar election is obliterating any chance of any political rapprochement in near term. It is well recognized that even if NDA wins Bihar elections, the Rajya Sabha arithmetic will not be in favor of the government for another one year at the least. The GST law and other legislative reforms are therefore much less talked about in the market place.

Realizing its political limitations, the government is now focusing on administrative reforms, and rightly so. This change in focus is generating material investment opportunities, and therefore invoking keen interest from market participants.

The proposed restructuring of state power utilities is one such measure that was long pending. From whatever details are publically available, it appears that this measure could result material improvement in both energy and power sector. Proposed revival of jinxed Dabhol power plant and LNG terminal should also be looked as extension of this exercise.

Increased emphasis on renewable sources of energy and commitment to cut emission norms could truly prove to be game changer.

Material changes in road sector, including creating environment for exit of inefficient, inadequately capitalized and/or highly indebted developers, have accelerated the revival of stalled projects and paved the way for commencement of new projects.

Reviving the proposals to privatize loss making PSUs and Sagarmala projects is another indication of changed focus of the government.

The government has shown unflinching commitment to fiscal discipline. It has shown remarkable restraint in deciding not to pass the entire crude price benefit to the consumer and augment resources needed for roadways and railways through higher duties. This has perhaps encouraged, an otherwise cautious, Governor Rajan to frontload rate cut.

It is well understood that these measures will neither help private consumption nor encourage private sector investment in the near term.

Nonetheless, these measures will create a strong foundation for cyclical revival of the economy. Revival of stalled projects, restructuring of state power utilities and empowerment of banks to takeover managements of defaulting corporates will provide much needed respite to public sector lenders and help them raise capital and improve their capital adequacy. Newly created payment and small banks will become efficient channels for bringing the micro savings to the mainstream as compared to the post office and Small Savings Organization (SSO).

In the meanwhile, spate of poor data from US and Europe has queered the pitch for the US Federal Reserve. The growth is becoming scarce and demand is falling. We are definitely in a low inflation (or no inflation) low return environment. India may not be an exception in the mid term.

In next few days, I shall review the likely changes in investment landscape and the evaluate whether any changes are required changes in the strategy.

Tuesday, October 6, 2015

Festival inflation at 20%

Thought for the day

"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.