Vijay Kumar Gaba

Friday, November 20, 2015

Catch-22.

Thought for the day

"No matter how corrupt and unjust a convict may be, he loves fairness more than anything else."

Anton Chekhov
(Russian, 1860-1904)

Word for the day

Slugabed (n)

A lazy person who stays in bed long after the usual time for arising.

(Source: Dictionary.com)

Malice towards none

People who have recently performed Chhath Puja in toxic Yamuna waters are more likely to get sorrow, than blessings in return.

I do not have any Award to return. But if I were somebody who is heard, I would have certainly protested loud!

First random thought this morning

The government seems to be in split mind. On one hand they sincerely wish to get opposition's, especially Congress Party, cooperation on key economic legislations, while on the other hand they do not want to be seen compromising on their committed for "Congress Free India".

So on the same day, Swamy and Jaitely send totally conflicting signals to Congress leadership.

The question that would agitate some minds is "whether Swami could have waited for another month, i.e., till the end of winter session of PArliament?"

Catch-22

Indian merchandise exports have been contracting since December 2014 and have now contracted for 11 straight months now.

During April-October Indian merchandise exports have plummeted by 17.6% to US$154.29bn against US$187.3bn during the corresponding period in FY15. Adjusted for export of petroleum products, the picture is only slightly better.

Imports were lower by 15.2% during the same period. However, adjusted for import of petroleum products, imports for the period are almost flat.

No wonder the government is alarmed. In a recent TV interview, the commerce minister sounded almost panicked over falling exports. The Union Cabinet has consequently announced some incentives to support the falling exports.

In my view, these steps may be helpful only in the immediate term. The government would need to make a lot of structural changes to achieve the target of US$900bn total exports by 2019.

The following three things are noteworthy in this context:

(a) In past one decade the export destinations of India have changed in favor of emerging markets from developed markets. The share of North America and Europe has fallen in India's export basket whereas Asia and Africa have gained. Besides USA, China (including HK), UAE and Saudi Arabia are now amongst our top five export destinations.

Many of these economies might be in a midterm downtrend due to correction in commodities cycle; hence the export demand from these economies may not pick up in hurry.

In fact these economies account for much of "invisibles" also, and could be an additional cause of worry on that count too.

For records, China (including HK) now accounts for ~8% of our exports, and over ~13% of our imports.

(b) Gold (including jewellery and gems) and petroleum products account for over one third of our foreign trade. If the recent trend in demand and pricing of these items prevails (which seems most likely) the value of our foreign trade may shrink a little more, regardless of the incentives.

It is critical to note that our imports are relatively less sensitive to GDP growth, as compared with exports.

(c) In past one year INR has strengthened against many of our competing currencies. The trend is likely to sustain should Fed hike rate in next few months.

Schemes like interest subvention could help our exporters to bid lower prices. But that would be no sustainable solution. RBI will have to let INR go and find its true value, which will have much wider implications for the economy. We are thus in a Catch-22.

Thursday, November 19, 2015

Only for the brave hearts!

Thought for the day

"Don't tell me the moon is shining; show me the glint of light on broken glass."

Anton Chekhov
(Russian, 1860-1904)

Word for the day

Saporific (adj)

Producing or imparting flavor or taste.

(Source: Dictionary.com)

Malice towards none

Indian banking industry has emerged as the epitome of women power.

Some pigeons are still in denial.

First random thought this morning

The Chhath was celebrated in Delhi this time at much larger scale as compared with past years. Though, this was the trend for Ganpati and Durga Puja celebrations also, Chhath assumed much larger significance in view of the recently concluded Bihar elections.

No wonder one overenthusiastic Bihari friend was heard evoking Nostradamus to suggest that a worshiper of Sun will rule India and make it a global power. The query - "Where does the French oracle say this?" - my friend finds completely unworthy of an answer!

only for the brave hearts!

Indian consumers and producers materially influence the global prices of many commodities. For example, being one of the largest importers of certain crop nutrients, Indian demand plays an important role in determining the global prices of Urea etc. Indian consumption demand also materially influence the global prices of gold. Likewise, Indian production level influences the global prices of cotton, sugar, etc.

In recent decade, India has also emerged as one of the major importer of pulses. The rising preference and affordability for protein consumption has led to material rise in consumption of pulses in past decade or so. The rise in domestic production of pulses has however not kept pace with the demand.

Sugar is perhaps the only commodity where the Indian demand and supply both exercise influence on global prices. Whereas the domestic consumption is rising at a steady rate of ~2%, the supply of sugar keeps fluctuating with monsoon.

India is the world's largest consumer of sugar accounting for ~15% of global consumption. We currently consume ~26mt of sweetener every year. The consumption is likely to rise to 29.3mt by 2019-20.

As per the claims made by industry bodies, after textile, INR800bn Indian sugar industry is the largest employer in the country. It therefore may sound enigmatic that Indian sugar industry has not seen any worthwhile investment in past one decade. The domestic production in current year may be the same as it was in 2008. Many sugar mills are burdened with huge debt. They are not able to pay cane farmers in time.

Falling crude oil prices and low domestic merchant power rates also cap the earnings of domestic sugar mills from sale of ethanol (bio-fuel) and co-generated power.

Given these circumstances, the phenomenal rise in stock prices of sugar producers' in past couple of months is noteworthy. A large part of the rise in stock prices may be attributed to the 40% rise in global sugar prices since August lows, due to poor Brazilian crop. Excessive pessimism over the industry's health in past couple of years and optimism over positive policy framework changes may also have contributed to the traders' sentiments.

The government appear to have initiated some steps to support the ailing sugar industry. Financial support for settling cane farmers' dues, export incentives and promise to look into cane price rationalization are some of the steps.

India, which has had a big impact on global sugar prices because of swings between being a net importer and a net exporter of the sweetener, is set for a sustained period as a net exporter in coming years. As per official estimates a surplus is expected in the next few years at least. The Indian exports will thus cap the global sugar prices in next few years.

I do not see myself investing in this sector in foreseeable future. It is only for the brave hearts!

Wednesday, November 18, 2015

Investment strategy 2016 - 1

Thought for the day

"Any idiot can face a crisis - it's day to day living that wears you out."

Anton Chekhov
(Russian, 1860-1904)

Word for the day

Indefatigable (adj)

Incapable of being tired out; not yielding to fatigue; untiring.

(Source: Dictionary.com)

Malice towards none

Madison, Allphones, Wembley.......Veni, vedi, vici.

First random thought this morning

The winter session of the Parliament will begin next week amidst a great deal of anticipation.

Sanguine are anticipating that the government will cover more than the half distance to meet the resurgent opposition in their camp in order to successfully carry out its agenda of inclusive and faster development.

Skeptics anticipate a "no show" as the stalemate continues.

Cynics are anticipating the opposition to gang up and thwart all legislative business, as the government stays put on its standpoint.

Investment strategy 2016 - 1

Indian investors are most likely entering once in five year phase when the return prospects on most asset classes are frustratingly low. Fortunately though the return of investment is not under threat as yet.

On YTD basis benchmark equity indices have given a negative return of ~4%. Given the poor earnings growth, slowdown in global flows and moderation in optimism over economic reforms, the outlook for 2016 is not very encouraging. Save for a major re-rating of Indian equities (no reason to foresee that today) the benchmark indices may return a moderate 10-12% return in 2016, with a reasonably higher degree of risk and volatility.

Despite 125bps reduction in repo rates, benchmark yields have fallen by 20-25bps this year. The best in class debt funds have given 12-13% return over past twelve months. However given that both economic growth and consumer inflation might have bottomed, the scope for a further reduction in rates from the current level may not be great.

Save for a global crisis requiring larger monetary stimulus, one should not expect the rates to fall more than 75bps from the current level. On the contrary, a material spike in consumer prices and/or pickup in investment demand may actually restrict the further cuts to much smaller proportion. This would essentially mean that the debt investment also may not offer more than 8% return in next twelve months.

As the US Fed finally begins the tightening cycle, precious metal may continue to lose their luster - making investment in gold unremunerative.

Leaving apart very high priced locations e.g., South Mumbai, and areas with huge oversupply hang, e.g., NCR and Central Mumbai, real estate prices in many areas may bottom out in next twelve months. Lower rates and stability in employment conditions may spur decent demand in LIG/MIG segment. However expecting any material rise in home prices in next twelve months would be bit unreasonable at this point in time.

So what should be the investment strategy going into 2016?

I will share my views in coming days.

Tuesday, November 17, 2015

At least not yet

Thought for the day

"When a woman isn't beautiful, people always say, 'You have lovely eyes, you have lovely hair.'"

Anton Chekhov
(Russian, 1860-1904)

Word for the day

Diaphanous (adj)

Very sheer and light; almost completely transparent or translucent.

(Source: Dictionary.com)

Malice towards none

After Paris Attacks, Europe may not change the way USA did post 9/11 WTC attacks - because here the malice lies within.

First random thought this morning

Narendra Modi is perhaps the only post independence Indian leader that has divided Indian populace in two vertical camps - pro-Modi and anti Modi, leaving no one neutral. During 1970s we witnessed deeply divided opinions about late Mrs. Indira Gandhi, but neutrality was still an option then. Many exempted Mrs. Gandhi by blaming her son Sanjay Gandhi for the governance lapses and atrocities.

To some it may sound ironical, but the truth remains that Mahatma Gandhi is the only other leader that still divides the Indians in two camps - those who venerate Gandhi and those who hate him.

At least not yet

The recently concluded result season was a disappointing one, though not unexpectedly. Belying the government data of GDP growth of over 7% and the confidence to grow over 7.3%, the corporate data was bleak and unpromising.

· The new order flows did not match the claims of various government ministries, especially roads and railways. The guidance of larger players like L&T and Thermax etc. simply does not match the government projection.

· The balance sheets of Indian corporates look as stressed as ever, despite optical deleveraging through asset sale and equity dilution. The new money raised by Indian corporates may not equal to fresh interest accrual to the stressed assets.

· The asset quality remains poor. The claims of asset quality bottoming would be put to a rigorous test if commodity prices travel few miles more towards south. It might open a whole new segment of stressed assets, i.e., MSME.

· The trend in household consumption, especially rural and non-metros, is seen discouraging by major players like HUL and Dabur.

· The results clearly indicate that so far the companies have managed to retain a part of the raw material decline advantage. A stronger INR due to RBI rate cuts and better CAD might have also helped bottom lines of many indebted corporates.

However, these advantages are not sustainable. The lower demand, as evidenced by persistent disinflation of producers' prices and poor revenue growth, will force companies to pass on larger share of raw material cost advantage. A likely rate hike by US Fed will inevitably lead to a weaker INR - increasing the debt repayment and interest outgo on forex debt for many Indian corporates.

· There is little evidence on the ground of any structural improvement on the supply side. The recent episodes of astronomical rise in prices of certain food items suggests that food inflation is not an entirely cyclical issue in India and will continue to haunt the policymakers for much longer than presently expected.

Moreover, in next few quarters, the global commodity prices may find their respective bottoms. This accompanied with weaker INR and higher inventory carrying cost, will put an end to disinflationary trends in manufacturers' prices. Failure to improve supply side in next couple of years may materially constrict the expected cyclical recovery. Remember, unlike in past cycles, the policy rate in India do not have much scope to fall from the current levels.

In my view, the policy rate movement in next two years could be -1.00% to +0.50. Yes, I am building a small rate hike probability, should INR weaken materially due to Fed hike.

In my view, the growth in car sales may not be extrapolated to a general improvement in consumer sentiment; nor should CV sales growth be equated to industrial recovery. At least not yet.

Monday, November 16, 2015

Nifty: midterm weakness creeps in

Thought for the day

"People don't notice whether it's winter or summer when they're happy."

Anton Chekhov
(Russian, 1860-1904)

Word for the day

Inconnu (n)

A person who is unknown; stranger.

(Source: Dictionary.com)

Malice towards none

Sooner the government turns its focus to people from markets better it would be for everyone.

First random thought this morning

In our zeal to defeat enemies, we mostly fail to recognize when we have turned just like them.

Socialists like Lalu and Mulayam are more feudal now; BJP appears more like Congress; Mamta is definitely more communist than CPM; Japan became more like USA post WWII; China is more like Japan now.

What is the point of waging a war if the winner must emulate the ideology and conduct of the conquered?

Nifty: midterm weakness creeps in

I had written on 26 October 2015 that "Nifty has reached a critical level from midterm perspective". (see here)

Confirming my fears, Nifty has now given clear break down signal on both weekly and monthly charts. From pure technical perspective, Nifty is in down trend from midterm perspective. The down trend shall persist until Nifty manages to stay above 8250 level for considerable time.

A monthly close below August closing of 7667 in November or December will open the door for further weakness in the benchmark indices. However, as I said earlier this month (see here) the current fall in the market is not that much of a worry to me. The real worry is that if Nifty fails to close materially above 8300 by December end (monthly closing) 8450-8500 range will become a very strong resistance for 1H2016. Meaning, we may have another low to negative return year.

Tuesday, November 10, 2015

Strategy for Samvat 2072

First random thought this morning

The market behavior yesterday made one thing quite clear that not many participants are expecting and major legislative action from the government. No one appear concerned that the government will face incrementally stiffer challenges in conducting the legislative business in the Parliament.

I guess this is a good news. Any marginal success on this count will be a major positive surprise for the market.

Strategy for Samvat 2072

Unlike Vikram Samvat 2071 that began on an extremely buoyant note with PM Modi appearing in full control of the things, Samvat 2072 may not be welcomed with similar enthusiasm. The sentiments are somber and confidence diminishing.

The below par corporate performance, worsening socio-political environment clouding the outlook for any major economic reforms in near future, specter of US rate hike and consequent turbulence in the global markets is indicating development of a perfect storm that may hit Dalal Street sometime in next 4-5months.

I am inclined to side with the view that US rate hike and consequently adjustments in global currency, credit and commodity markets may eventually benefit Indian businesses in the medium term.

I also subscribe to the view that the robust fiscal conditions achieved through some brave decisions like not passing over the entire benefit of lower crude prices and raising resource for infrastructure development through higher indirect taxation (road cess, clean India cess etc.) and lower subsidies, will help Indian economy in tough times.

I am also inclined to ascribe higher value to the measures like UDAY and bankruptcy reforms rather than ruing delay in GST implementation.

I continue to maintain that we are in a portfolio building phase. A large part of Samvat 2072 might see markets stuck in the eye of the storm and progressing virtually nowhere.

My Strategy

· Preferably complete planned strategic asset allocation by March 2016.

· Target 12-13% absolute return in the risk portfolio over next five years.

· Normalize overweight on global pharma and IT.

· Normalize underweight on financials. Overweight private sector lenders, NBFCs catering to LIG and MIG borrowers and add top PSU lenders.

· Continue underweight on global commodities.

· Gradually increase exposure to domestic Cyclicals, excluding minerals and metals. Prefer solution providers, technology leaders and innovators rather than pure product or construction companies.

· Maintain overweight on domestic consumers. Overweight luxury discretionary consumption.

· Increase allocation to 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.

· Avoid precious metals.

· Assume a stronger USD and weaker EUR in investment decisions.

WISH THIS DIWALI BRINGS HAPPINESS, GOOD HEALTH AND PROSPERITY TO ALL

(NEXT POST ON MONDAY, 16TH NOVEMBER 2015)

Monday, November 9, 2015

From Patna straight to New York

Thought for the day

"They who dream by day are cognizant of many things which escape those who dream only by night."

Edgar Allan Poe (American, 1809-1949)

Word for the day

Twilight (n)

A terminal period, especially after full development, success, etc.:

(Source: Dictionary.com)

Malice towards none

"My name is Rajan - Chotta Rajan!"

First random thought this morning

PM Modi once famously told the Congress Leadership, on the floor of the Parliament, that his political acumen (सूझ बूझ) is beyond any doubt. The recent socio-political events may however force him to rethink accuracy of that claim.

After belittling and rendering the award returnees irrelevant, restoring the order in FTII, punishing the illegal beef trader and getting justice for Kalburgi and Mohd. Ikhlaq - a retrospection would guide him that the things could have been handled in a different and perhaps better way.

From Patna straight to New York

The Bihar election is finally over. And I must congratulate the InvesTrekk team for once gain reading the people's mind most accurately.

I feel the market will be disappointed and may shed a couple of percentage points early this morning. But that would be all for the sake of Bihar elections. Nothing more.

I am more worried about the jitteriness that is growing in the Western Hemisphere. The recent US data has put the December "Lift off" back on table. The global financial markets appear eager to make necessary adjustment before the Yellen and her colleagues meet middle of next month.

The bond market was first to react with US benchmark 10yr yields rising 9% and German yields rising over 32% last week.

Commodities markets were equally jittery. The Reuters all commodities CRB Index fell to 16yr low, led by precious and industrial metals.

USD strengthened with DXY Index closing into 100 mark, the highest level since April 2015. Offshore Yuan touched the lowest level since the August devaluation. EUR also fell close to its April lows.

Indian benchmark yields and INR have also gave away much of their respective gains since September Fed meeting.

Moreover, the 2QFY16 result season is almost over with most surprises on the downside. It is likely that we may see serious earning downgrades before 3QFY16 results. Bihar results will certainly not help the sentiments.

I believe that after adjusting for the Bihar election results early this week (some selling and some short covering at lower levels), Indian equity may remain under pressure from FPI selling pressure as USD carry trade continue to unwind and domestic investors refuse to support the market unlike September.

As I said, I am not worried about the 10% fall in Nifty that we may witness before March 2016. My worry is that the market may enter a protracted phase of uncertainty and inactivity making 2016 a difficult year for market participants and investors.