Vijay Kumar Gaba

Friday, January 15, 2016

It's nowhere close to 2008

Thought for the day

"I was really too honest a man to be a politician and live."

—Socrates (Greek, 469-399BC)

Word for the day

Bellwether (n)

A wether or other male sheep that leads the flock, usually bearing a bell.

A person or thing that assumes the leadership or forefront, as of a profession or industry:

(Source: Dictionary.com)

Malice towards none

How difficult it is to convince the Indian courts that God cannot be insulted (or respected for that matter).

Anyone who claims to be hurt by someone's supposedly blasphemous comments or acts, actually hurts the sentiments of millions who believe God to be Supreme.

First random thought this morning

An RTI petition has revealed that the "Make in India" logo and campaign has been designed and executed by a foreign firm.

On the face, this sounds logical, since the campaign is primarily aimed at encouraging foreign businesses to invest in building manufacturing capacities in India.

But the argument that the Make in India could be ill-conceived in the sense that it does not focus on key strengths of the country is also not without merit.

It's nowhere close to 2008

In past one month the number of market participants anticipating a repeat of 2008 in global markets has grown consistently. The arguments on the other side are rather feeble.

In my view, there is nothing like 2008 in the present scenario. The mere fact that so many people are expecting a 2008 like freeze in the market is sufficient to prove my point.

The following points are also worth considering in this context.

- 2008 events occurred with commodity cycle at the peak and forecast for further strengthening. This time commodity cycle has already moved a long distance towards south and forecasts are all bearish.

- Unlike 2008, the central banks now have a variety of new tools that have been successfully tested for preempting and liquidity freeze conditions.

- In 2008, bankrupt peripheral Europe and rough US derivative traders led the collapse. This time it is China, which is very much solvent, still growing over 5% (even if discount official numbers hugely) and continues to be a command economy. Moreover, China is on its way to Japanification - on the verge of ceasing to be a big influencer of global markets.

- Unlike 2008, this time growth expectations are moderate, and portfolios are positioned for a crash with EM and commodities underweight.

- India is one of the bright spots in global deleveraging in the sense it has managed reasonable growth without compromising debt to GDP ratio.

However, since the developed markets have not done much in past ten years. and India has massively outperformed - it is still possible for markets to correct 10-12% from current level, but it may not stay down for long. At the same time, I do not expect a rally like 2009-10 in 2016.

Thursday, January 14, 2016

Learn from history, please!

Thought for the day

"By all means, marry. If you get a good wife, you'll become happy; if you get a bad one, you'll become a philosopher."

—Socrates (Greek, 469-399BC)

Word for the day

Offing (n)

The more distant part of the sea seen from the shore, beyond the anchoring ground.

(Source: Dictionary.com)

Malice towards none

Indira Nooyi has become the largest alumni donor for Yale University of USA.

Earlier Ratan Tata had also donated large sum to a US university!

First random thought this morning

Adverse weather conditions for two years; difficult economic conditions; stressful financial markets; erosion in political support seen in 2014 general elections; and prominent division in society over issue of religious and cultural tolerance — PM Modi's luck appears to have taken a break.

Not sure, if he needs to seek divine intervention to set things right. But he may certainly want to have a serious re-look at his team.

Learn from history, please!

The election to the state assembly of UP are due in March 2017. The ruling Samajwadi Party has already kick started an aggressive election campaign. The principle opposition parties, BSP & BJP, appear bewildered by the media blitzkrieg of the state government. I saw 4-6 full page government advertisements in mainstream newspapers boasting about the road development plans of the state government. Besides, the FM channels are trumpeting the achievements of the state government rather annoyingly.

Akhilesh Yadav ostensible wants to set an agenda, his opponents would find it hard to challenge, i.e., all-round development of the state. There was no sign of the communal divide or negative commentary on the performance of the central government, the prime minister of BJP.

However, in most of the cities, towns or village we passed through the communal tension was ominously present just a couple of millimeters under the surface. A small prick would bring the monster out of the captivity. Even in larger towns like Hapur, Moradabad, Bareilly, Shahjhanpur, and Rampur - on numerous houses, flags have been hoisted to show the religious identity of the residents. Personal vehicles (even cycles and motorbikes) also support such flags. Even small children of a particular community could be identified easily from their attire.

This all raises doubts about the sustainability of the development agenda.

The ghost of Ram Mandir is already out of the bottle, setting the stage for a tense summer ahead.

BSP has not started yet. But the feeling is that Mayawati may desert the inclusive agenda that won her 2007 elections, in favor of a highly polarizing caste based agenda.

Leaving the politics aside, my point is that the country's development paradigm will have to change dramatically for the development to become a sustainable agenda in Indian context.

The state will have to leave the responsibility of the economic development to the private enterprise. The role of the state should be limited to setting the guiding principles and red lines that cannot be crossed under any circumstances. Rest will have to be left on the market forces.

The state will have to play a much larger and active role in the traditional and cultural arena. Historically, the development and promotion of art, culture, science and education has been the primary responsibility of the state. All the famous kings have excelled in this responsibility. And this excellence of the state in supporting and promoting the art and knowledge had only made India the golden bird, it used to be once.

The state needs to focus on that in substantive manner, rather than dissipating its energies on micromanaging the economy. Conferring ceremonial Padma and other academy awards is grossly inadequate.

On the sidelines, winter crop in UP and Uttrakhand is going to be poor. Wheat and sugar may not be a problem due to buffer stock, but potato could be hot this summer.

Tuesday, January 12, 2016

Growing like Ginger

Thought for the day

"Where there is reverence there is fear, but there is not reverence everywhere that there is fear, because fear presumably has a wider extension than reverence."

—Socrates (Greek, 469-399BC)

Word for the day

Kvell (v)

To be extraordinarily pleased; especially, to be bursting with pride, as over one's family.

(Source: Dictionary.com)

Malice towards none

Why is it so difficult to accept that in Pakistan government and are different establishments independent of each other!

First random thought this morning

The global markets are more integrated than ever. Various segments of markets, e.g., currencies, commodities, equities, credit and money, are more integrated than ever.

Portending divergence in performance based on historical behavior could be fraught with serious risk. In very simple terms - today if I lose a wager in commodities, the obligation may have to be settled by liquidating position somewhere else. Similarly, if my bets on Europe go awry, I may not be able to hold on to my positions on other jurisdictions. Vice versa, if I make good money somewhere, I am encouraged to take similar bets elsewhere.

Growing like Ginger

In past two weeks I travelled through many expressways, highways, lanes, by-lanes, alleys, and trails in Uttar Pradesh and Uttrakhand. The experience was, as usual, enlightening and enthralling.

During my journey, I observed many emerging trends and changes (some structural in nature) in occupational & consumption patterns that would have material economic implications in coming years. I believe it is critical for investors in Indian assets to comprehend and assimilate these emerging trends in their investment strategy.

Over next few days I shall be discussing some generic observations and their likely economic implications.

I have been writing about the consistent struggle between the degenerated traditions & unmindful culturalism on one side and aspirational modernism & pursuit for basic standards of life on the other. With each journey through various parts of the country, I find this struggle intensifying and producing results which are extremely encouraging at one end of the spectrum and potentially explosive at the other end of it. In between it traverse through the realm of ridicule, humor and disaster.

For example, consider the following.

A decade ago, Bareilly, a typical Tier-II town in UP had just three outlets that would accept payment through credit cards and there were two internet cafes to serve a population of 700k. Today, a proposed smart city, it has Shopping Malls, hundreds of small shops accepting payment through electronic means, over 100% penetration of mobile telephones, and almost all adults hooked to Whatsapp and Facebook. A myriad of private management, engineering and medical collages have mushroomed all over.

For a city which proudly burned down theaters for displaying movie posters in English, now Queen's language is the preferred medium of education of children even for domestic helps. Consequently, each street of the city boasts of its children working as managers, engineers and doctors in large metropolis and foreign countries. The proud parents travel frequently to Mumbai, Delhi, Benguluru, USA, UK, Dubai, Singapore and Australia.

The city is growing like ginger - in all directions and without any plan. Each marriage adds a new room to already crumbling and overcrowded house. A shop mushrooms from nowhere for every unemployed youth.

The city has virtually no industrial base to create employment. A small camphor factory and a matchbox factory are the only traces of industrialization in the city.

Bareilly was a major center of traditional arts like Kashidakaari, embroidery, Zardozi, bamboo art etc. But in last decade or so these arts have lost ground to professions like mobile & auto mechanic, catering, E-Rickshaw, etc.

The roads which were occupied by cycle rickshaw and cows are now a melee of young rash bikers, mini busses, cars, auto rickshaws, cycle rickshaws, and cows. Brawls over parking are common and frequent.

Each street, club and hotel had an elaborate New Year Party. The scale of festivities and fervor was something I never saw in Delhi or Mumbai.

There is little awareness about the rich historical past of the city amongst youth.

New Year celebrations in Bareilly city

Changing face of the city

....to continue tomorrow

Monday, January 11, 2016

Nifty: Hope prevails

First random thought this morning

This winter has been unusually bright and warm. This has certainly extended the Christmas festivities for the urban populace in North India. The farmers are though a worried lot. Wheat farmers in Punjab, UP and MP who have been braving drought for past two years appear to be throwing in the towel.

Many agricultural tenants have defaulted on their obligations and many distressed marginal farmers have put their land on the block.

Thought for the day

"Wisdom begins in wonder."

—Socrates (Greek, 469-399BC)

Word for the day

Unputdownable (adj)

(especially of a book or periodical) so interesting or suspenseful as to compel reading.

(Source: Dictionary.com)

Malice towards none

If you have to name just one, what in your view would be the most critical problem afflicting India presently?

Nifty: Hope prevails

As the benchmark indices tested the lows recorded in September 2015, the broader markets demonstrated remarkable resilience.

The current level of outperformance of mid and small cap is in fact widest since the current up move started from late August 2013.

Juxtaposed with the rising retail participation, strong response to new issues, improved market breadth and consistent domestic flows into the market, it is clear that:

(a) presently the equity is the most preferred asset class with domestic investors;

(b) despite uncertainty over economic reforms, and poor corporate performance the domestic investors have not lost faith in equities and remain mostly hopeful of a imminent recovery;

As I have been pointing out in recent months, historically, this outperformance of low quality and small cap has invariably marked the cyclical peak for the markets and is usually followed by a sharp correction.

It is though difficult to put a timeline on expected sharp correction in broader market, I will still hazard a guess - between 20th February and 20th May 2016.

Wednesday, December 30, 2015

Investment Strategy 2016 - 8: Investment Strategy

Next issue of Morning Trekk will be published on 11 January 2016.

We wish all the readers a great year ahead!

Thought for the day

"When I told the people of Northern Ireland that I was an atheist, a woman in the audience stood up and said, 'Yes, but is it the God of the Catholics or the God of the Protestants in whom you don't believe?"

—Quentin Crisp (English, 1908-1999)

Word for the day

Wing-Ding (adj)

A noisy, exciting celebration or party.

(Source: Dictionary.com)

Malice towards none

Rahul Gandhi is on leave, but this time with due permission of the Twiterrati!

First random thought this morning

Reportedly, 30 students in Kota have committed suicide in 2015, supposedly for failing to cope with the pressure to succeed in professional examinations.

Three things are worth pondering: (a) No one is crying for these children as they would normally do for farmers committing suicide; (b) To make matter worse, the government is considering to reverse "no hold till class eight" policy so that even younger students feel the pressure; and (c) 3 Idiots was highly overrated as a movie with social message - students have learned to take a leak at teacher's door, drink alcohol; commit suicide, and make fun of a language but parents have not learned to let children live their life!

Investment Strategy 2016 - 8: Investment Strategy

As discussed in one of my earlier posts, I believe that 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 continues to be clouded. 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.

So what should be the investment strategy going into 2016?

Asset allocation

Since I do not expect much fall in interest rate, I would maintain equity overweight in my portfolio (65%). Presently I am holding a material part of my equity portfolio as tactical cash (25%). I would like to deploy this cash fully in equities over next 3months. My target return for overall financial asset portfolio for 2016 would be ~9%.

Debt investment

I would like to largely confine my debt investments to accrual products only; strictly avoiding search for capital gains in my debt portfolio.

However, I may consider debt funds with very long duration if benchmark yields rise over 8.25% due to some global event.

I would avoid undue credit risk in my debt portfolio to make few bps additional return. Though I would not like to be paranoid about the credit risk and not waste my time looking for risk where none exists.

I would target 7% post tax return on my debt portfolio.

Equity investment strategy

I would maintain a balanced stance on my equity investments and consider entire spectrum of companies rather than focusing on large caps only. I would:

(a) Target 10% price appreciation and 1% dividend yield from my equity portfolio;

(b) Normalize overweight on global pharma and IT;

(d) Continue NIL weight on pure commodity plays;

(e) Increase exposure to domestic cyclical businesses through solution providers, technology leaders and innovators rather than pure product or construction companies;

(f) Overweight luxury discretionary consumption;

(g) Continue to avoid PSU in general. However, I may consider some of the top PSU banks if stocks prices correct irrationally from the current levels.

Equity trading strategy

(a) I would like to trade frequently in at least one third of my equity portfolio and use 'buy & hold' strategy for the remaining part.

(b) I see strong pair trading opportunities in differentiated performances within same arena, e.g., private banks, consumers and exporters.

(c) I also see strong trading opportunities emerging in commodities' space. Though I would mostly like to trade in this space on the short side after each technical bounce.

(d) I would actively look for shorting opportunities in PSU space, especially those who will see (a) material rise in wage bill due to implementation of 7th Pay Commission recommendation; or (b) lose out to foreign competition as government opens up more areas to global competition.

Miscellaneous

(a) I would not consider precious metals for financial asset allocation.

(b) I assume a relatively stronger USD and weaker EUR & CNY in investment decisions. Therefore I would be discreet in choosing exporters and foreign currency borrowers for investments.

What will change my view?

1. Full blown recession in US.

2. Surprise recovery in Europe and Japan.

3. Hard landing in China.

4. INR breaking and sustaining over 70/USD.

5. Full blown economic crisis in middle east led by lower energy prices.

It is critical to note that short selling and derivative trading involves materially higher risk. These require much higher level of technical expertise and knowledge and therefore not suitable for all investors/traders. The readers should seek expert advice before making any investment or taking a trading call.

Also Read

Adapt to lower return on investments

10 things to watch

2016: Technical trend

Global growth and flows

Investment, savings & consumption

Corporate earnings & valuations

Market outlook

Tuesday, December 29, 2015

Investment Strategy 2016 - 7: Market outlook

Thought for the day

"There is no need to do any housework at all. After the first four years the dirt doesn't get any worse."

—Quentin Crisp (English, 1908-1999)

Word for the day

Abdominous (adj)

Having a large belly; potbellied.

(Source: Dictionary.com)

Malice towards none

Akhand Bharat, as apolitical entity was created by whom and when? And it stayed so Akhand for how long?

First random thought this morning

After South India, now cities in north England and South America face unusual floods. Mother Nature is certainly happy with the way this world is growing. We shall continue to face Mother's angst, if we do not mend our ways ASAP. If past five years are a trend 2016 should see even worst of Mother Nature.

I guess, Paris climate agreement needs to become a substantive accord to please Mother Nature and not just remain a piece of diplomatic hypocrisy.

Investment Strategy 2016 - 7: Market outlook

Unlike past couple of years, this year portending a clear market outlook is much tougher. In December 2013 the greed was a dominating factor as the market was well supported by rising global liquidity and ZIRP and pregnant with hope of a new dawn. In December 2014 the fear was clearly overpowering greed. Global weather was wet and windy as QE began to taper, China's slip became conspicuous and indubitable leading commodity world to crumble; and in domestic arena also skepticism began to grow as the things did not appear working out as expected.

Today as we stand at the exit point of 2015, most fears have come true. The markets, especially commodities, seem to have mostly adjusted to the worst case scenario. Given this, normally the greed should be the dominating factor. Looking at internals of the domestic market movement in past quarter or so, it indeed appears to be so.

However, the global narrative continues to be worrisome. The entire commodities' space looks rather hopeless. There is general consensus that USD strength consequent to end of Fed's ZIRP regime and likely CNY devaluation will add to deflationary pressure. The Eurozone yields and ECB and BoJ stance also appears to be subscribing to this likelihood.

Seesawing between hope of recovery gathering some steam and fear of a global meltdown, outlook for 2016 remains sketchy. In my view, we will have intermittent phases of grey and sunshine during the year and trading short term cycles will be the dominant theme.

The forces of Fear are likely to get fresh ammunition during 2016 with the disinflationary impact of stronger USD and higher Fed rates taking roots, EU and Japan continue to flirt with recession, commodity universe continuing to sink and the impact of fall in commodity prices begins to reflect on global financial system.

Like before, many battles of this ongoing global war will be fought in India too. Indian politicians continue to side with the Fearful, providing them with enough ammunition and food to survive.

The forces of hope may get traction from the policy reset in India becoming tangible. The investors’ sentiment at present is positive about the cyclical recovery. Investor positioning and market internals are clearly pointing towards that. The market implied volatility, volumes and breadth continues to remain low. The volume concentration in top 25 traded stocks is close to all time high.

I am not too excited about a conventional cyclical recovery in 2016. Cost efficiencies, productivity gains and ground breaking for some of the prominent FDI projects in manufacturing area would create excitement in market. Staple consumption could be supported by higher urban wages and normal rural income (assuming a normal monsoon). Export demand may continue to remain sluggish.

Also Read

Adapt to lower return on investments

10 things to watch

2016: Technical trend

Global growth and flows

Investment, savings & consumption

Corporate earnings & valuations