Vijay Kumar Gaba

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.

Friday, November 6, 2015

Economics in India is politics agnostic

Thought for the day

"One of the advantages of being disorderly is that one is constantly making exciting discoveries."

—A. A. Milne (English, 1882-1956)

Word for the day

Coriaceous (adj)

Of or like leather.

(Source: Dictionary.com)

Malice towards none

Kailash Vijayvergiya is always misinterpreted.

Wonder why he speaks at the first place!

First random thought this morning

By out rightly rejecting the points made by Arun Shourie, and even disparage him, BJP has proved his point.

The people who have observed L. K. Advani closely, would confirm that he is not the one who could be silenced easily. Be sure, that we would hear the echo of Mr. Shourie's views in LKA's memoires which would be published within few months of PM Modi relinquishing PMO.

Economics in India is politics agnostic

Many readers have raised doubts over my view that in India economic policies and therefore financial markets are politics agnostic. I am though not inclined to modify my opinion. I would rather like to reiterate what I have said on many earlier occasions.

A study of the history of Indian politics would suggest that unlike western democracies only an abysmal minority of Indian voters are strongly committed to a political or socio-economic ideology.

The political discourse in India is usually dominated by contemporary issues and personalities. The economic issues raised during elections are mostly confined to the slogan of poverty alleviation. In recent times corruption has also become a popular electioneering slogan.

Perhaps, no political party seems to have taken issues of poverty alleviation or corruption seriously. Therefore no one has bothered even to outline a conceptual or ideological framework for solving these problems.

Ideologically, the Congress Party abandoned the most acceptable and perhaps most suitable Gandhian Socialism in favor of Nehruvian Socialism that was a poorly mixed concoction of Leninist central planning (central ownership and management of resources and businesses) and British colonial legacy (discretionary patronage to the faithful and loyal).

The model was certainly at cross-purpose with the constitutional federal structure. Poverty, poor governance and corruption were natural off-springs of this system.

BJP started with Deen Dayal Updhaya's Integral Humanism. However, in 1990s it adopted Gandhian Socialism (which is not too far moved from the Integral Humanism) as the principal doctrine. The present leadership has however presented again a poorly mixed concoction of Integral Humanism and Laissez-faire model used by some developed economies principally USA.

Politically leadership preaches "Human Being" as the fulcrum of policy making. Whereas the executive is more focused on "Business" and "Macroeconomics" as the central theme. The conflict is for everyone to see. The consequence is that we seem to be moving in no direction.

The people at the left end of the spectrum exercised significant sway on the bottom of the pyramid in Indian society since independence. They controlled most of labor unions. Though divided between Marx, Lenin and Mao they still were the preferred choice of landless, oppressed and intelligentsia. There was a time when being poor, intelligent (economist, thinker, poet) or rebellious meant being communist.

The things however began to change in late 1980s post dismantling of USSR and the German wall. The Lenin and Marx were relegated to the history lessons. The economic reforms initiated in China under Deng Xiaoping's supremacy, further pushed back the traditional Marxists.

Insofar as the Lohiaites (socialist parties occupying the left of the center space in Indian politics) are concerned, they deserted both Lohia and his ideologue Gandhi as soon as they came into power. Degenerated into motley feudals they mostly have no commitment to any economic idea and mostly follow Congress agenda.

Thursday, November 5, 2015

Beyond Bihar elections

Thought for the day

"If one is to be called a liar, one may as well make an effort to deserve the name."

—A. A. Milne (English, 1882-1956)

Word for the day

Landloper (n)

A wanderer, vagrant, or adventurer.

(Source: Dictionary.com)

Malice towards none

The amount of honking, indecent gestures and road rage - a disciplined driver has to face on Delhi or Mumbai roads is sufficient evidence of growing intolerance in the Indian society.

First random thought this morning

I find my teenage daughter becoming increasingly intolerant these days. She would protest vehemently against most trivial of the things.

Perturbed, I decided to talk to her and straighten out the things. I was speechless, when she presented her reasoning. She said, "I must protest to everything, trivial or important, so that in future when I protest against something important, you should not tell me that I had not protested against such and such thing a few years back and hence I have no right to protest now."

"Protest today to secure the right of protesting in future" - seems to be the mantra!

Beyond Bihar elections

Some readers have sought my views on economic and financial market implications of the results of ongoing Bihar state assembly elections.

It has been my consistent view that Indian economy and therefore financial markets are mostly neutral to the political parties and variety of coalitions of such parties.

In fact the most euphoric periods in Indian equity markets occurred during most politically instable periods. Morarji Desai (1977, FM H. M. Patel, Bureaucrat – FERA dilution, Gandhian socialism, Mandal Commission), V. P. Singh (1989, FM Madhu Dandavate, Socialist – tax reforms, social justice), Chandrasekhar (1990, FM Yashwant Sinha, Bureaucrat, fiscal commitment, government exiting non-strategic businesses) PV Narsimha Rao (1991, FM Manmohan Singh, Economist – economic liberalization, Industrial delicensing, LERMS, financial sector reforms), Devegoda/I. K. Gujaral (1996, FM P. Chidambaram, Lawyer turned politician – dream budget, tax reforms), Vajpayee (1998, 1999, FM Yashwant Sinha, Jaswant Singh – divestment of government monopolies like roads, power, coal, NELP, NHDP, SEZ, nuclear program) and Manmohan Singh (2004, FM P. Chidambaram – RTI, MNREGA) were all coalition governments supported by socialists/communists (including JDU/RJD), full of internal contradictions and inherently unsustainable.

Not incidentally, these were periods when many key economic reforms were conceived and implemented to accelerate economic growth. Therefore, assumption that any change in political equation post Bihar polls would materially impact the primary trend of Indian economy or markets would be unreasonable and without much basis.

Nonetheless there would be some short term implications of the Bihar result the impact of which might be felt next week.

If NDA wins Bihar elections

(a) The market may move higher due to covering of short positions created in anticipation of NDA loss. Nifty may rebound to the recent high of 8330 in this scenario.

(b) The opposition parties may adopt even more belligerent posturing in the winter session of the Parliament, undermining the even slender chances of any breakthrough on key economic legislations like GST. Wary of growing influence of BJP, the principal parties in poll bound states of West Bengal (2016), Tamil Nadu and Uttar Pradesh (2017), may also take aggressive position against the government proposals.

If Grand Alliance (GA) wins Bihar Elections

(a) The market may witness fresh selling. However, the short covering at lower levels may limit any dramatic fall in benchmark indices.

(b) The efforts to repeat the Bihar GA experience in other states may accelerate. We may see some dissent amongst NDA constituents. The opposition parties may adopt even more belligerent posturing in the winter session of the Parliament.

(c) The government may have to become more flexible in its approach to economic reforms and engage more with opposition parties.

Wednesday, November 4, 2015

2H2015 trend may continue in 1H2016

Thought for the day

"The third-rate mind is only happy when it is thinking with the majority. The second-rate mind is only happy when it is thinking with the minority. The first-rate mind is only happy when it is thinking. "

—A. A. Milne (English, 1882-1956)

Word for the day

Desultory (adj)

Digressing from or unconnected with the main subject; random:

(Source: Dictionary.com)

Malice towards none

If the betting market is to be believed, Pappu Yadav with 5-8 seats may emerge the real king maker in Bihar.

Considering that no party has so far spoken anything against him publically, it is safe to assume that everyone sees friend in him.

First random thought this morning

Rabid is a strong word in political context. It becomes even stronger if the government is finding it hard to build consensus around key economic legislations like GST. Regardless it has been used and the consequences shall follow.

What bothers me more is that the terminology has been used as part of the suggestion that the current dispensation at the centre is more "tolerant" to the opposing views than the previous ones.

I do not care much about the people returning the awards and honors, but would certainly stop for a moment and think if Gulzar is trying to say something.

2H2015 trend may continue in 1H2016

Yesterday I highlighted a variety of factors that are bothering the Indian markets (see here).

Among these reasons, I feel the fundamental reasons are cyclical in nature and should correct themselves in normal course of the economic and business cycle.

The domestic macroeconomic factors are supportive but the global economic slowdown appears more secular in nature. So the adjustments are going to much longer time.

The political factors are permanent in nature and need not be bothered about too much, in my view.

The technical factors are therefore more critical from near term viewpoint.

As I suggested earlier also (see here), the benchmark indices are close to the tipping point on monthly charts. The current correction is not bothering me. What bothers me more is the potential persistence of it.

In my view, 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 3, 2015

Five reasons markets are nervous

Thought for the day

"Weeds are flowers too, once you get to know them."

—A. A. Milne (English, 1882-1956)

Word for the day

Ferhoodle (n)

To confuse or mix up

(Source: Dictionary.com)

Malice towards none

The hot topics these days is "intolerance". USA, RBI, Moody's, Intelligentsia, Artists, Politicians, Media, Twitterati, and the government - all are talking about this.

The more I hear the debate - the more intolerant I'm becoming.

First random thought this morning

"Heads I'll go, tail I won't"....."Ooops! its tail."...... "No I'll take best of three:)" ....."Ooops! it's tail again(:"....."It's final now. I'll take best of five:)"

Remember playing this trick to yourself ever.

Many politicians play this trick by terming each state legislative election a "semi-final" before next general election.....30 semi finals to what itself could be described as semi-final if the incumbent wins!!!!

Many habitual punters (euphemistically called short term investors) too play this game every time their bets go sour.

Five reasons markets are nervous

The enthusiasm seen amongst market participant during early October has cooled down in past few trading sessions. A variety of factors are responsible for sudden dampness in the sentiments.

A discussion with some senior market participants brings out the following five prominent factors bothering the investors in Indian equities, though not necessarily in the same order:

(1) The corporate performance has not been encouraging. The investment demand was not expected to witness any major recovery, but the consumption demand also appeared to have surprised the market negatively.

The most worrisome part is that the management's of leading companies in both the segments (capex as well as consumption) are not hopeful of any major improvement in near future. Some exporters though have expressed hope of improvement, but the global economic sluggishness is making it difficult to accept their guidance at par. Despite relative attractiveness, the chances of any material re-rating of Indian equities therefore appear dim.

(2) In its latest statement on 28th October, US Federal Reserve has put the rate hike agenda firmly back on track. Consequently, the risk-on rally that took place post Fed's September meeting is fizzling out. Commodities', EM currencies, bonds, gold etc. all have corrected sharply post Fed's latest statement.

The foreign flows have turned negative last week after remaining positive for past three weeks. A December hike might cause a material correction in EM asset prices, including Indian equities and INR.

(3) The political discourse in the country has taken turn for the worst. The incumbent government has been put on defensive over some socio-religious issues, clouding the economic agenda somewhat.

The perception of potential derailment of economic agenda has gained so much currency that even global rating agency Moody's has to take note of it.

(4) The elections in Bihar are proving to be the most bitter in recent times. The rising animosity amongst leaders of various parties is obliterating the chances of wider political consensus on key economic issues. Irrespective of the outcome of Bihar elections.

The expectations from the outcome of winter session of the Parliament are now minimal.

(5) Technically, market has weakened materially. The market momentum is very low as volumes and volatility have fallen materially. On monthly charts, Nifty has formed a strong resistance between 8250-8300 range. Failure to cross this range sustainably by end of 2015, will make this a medium term resistance zone, clouding the market outlook for 2016 as well.

...more on this later this week

Monday, November 2, 2015

Risk off

Thought for the day

"Did you ever stop to think, and forget to start again?"

—A. A. Milne (English, 1882-1956)

Word for the day

Barghest (n)

A legendary doglike goblin believed to portend death or misfortune.

(Source: Dictionary.com)

Malice towards none

Better response to "Award Wapsi" would be to give award to the next in line at that point in time when the respective awards were originally given!

First random thought this morning

A section of society is suggesting that rising intolerance against differentiated "opinions", "viewpoint" or "lifestyle" is "BJP in Power" phenomenon. The point worth examining however is whether intolerance is actually fluttering of people with weaker or no roots and the it was British rule that systematically weakened the "Indian Roots" and no government post independence ahs actually made efforts to reinforce the them.

It is critical to take note of RBI governor's recent argument that "India’s tradition of debate and open spirit of enquiry is critical for its economic progress". Global rating agency Moody's also echoed similar sentiments in a recent report.

Risk off

Post FOMC statement last week, the global "risk-on" rally has sort of halted. Bonds have also corrected along with equities.

EM currencies, including INR, that have gained in October ended the month on a weaker note.

The risk aversion is also visible in reversal of trend in FPI flows. After remaining net buyers for most of the October, they turned net sellers post 28th October.

Globally, the benchmark S&P 500 index is showing distinct weakness. As per Zero Hedge analysis, the last time S&P 500 rallied at such a pace (from an extreme of oversoldness) and reached such an extreme level of overboughtness, things went south rather quickly...(see here)

I have been highlighting for past two weeks that Nifty is also sitting at the tipping point and likely to make a sharp move. The move that started last week may accelerate this week as some major results come out and Bihar election conclude.

I would reiterate that the fall will be a buying opportunity....more on this tomorrow