Vijay Kumar Gaba

Monday, June 20, 2016

Nifty votes for "Stay"

Thought for the day

"Sins cannot be undone, only forgiven."

—Igor Stravinsky (Russian, 1882-1971)

Word for the day

Overslaugh (v)

To pass over or disregard (a person) by giving a promotion, position, etc., to another instead.

Malice towards none

The reaction of Congress leader over Raghuram Rajan's decision to move on clearly shows that it has scant regard for institutions; It prefers people over institutions.

First random thought this morning

In past RBI has had many illustrious governors who were well respected by the government, businesses, investors, bankers and global financial community. The outgoing governor Raghuram Rajan is just one of many and certainly not the only one.

At this point in time, it is preposterous to assume that the new appointee will be less competent than him.

If someone seeks my opinion I will vote for Urjit Patel, who I find equally competent.

Nifty votes for "Stay"

Despite higher somewhat higher volatility, Nifty ended the week absolutely unchanged. Though momentum continued to be weak, the short term overbought conditions have eased.

The Indian market participants appear to be firmly favoring a "Stay" vote in Brexit pole scheduled this Thursday. No major selling is anticipated on that count.

Today morning session may witness some exceptional volatility over RBI governor issue, which in our view would totally irrational and short-lived.

I would reiterate my trading strategy as mentioned last week (see here)

My trading strategy under the circumstances would be as follows:

(a) Any fall (sharp or shallow) in the market is a buying opportunity from medium term perspective.

(b) Nifty continues to face resistance at 8330 level and has a strong near term support in 7860-7930 range. Any fall below 7750 level will be an opportunity to create aggressive leveraged long positions.

(c) On Bank Nifty 18000 is a strong near term resistance. The near term support exists in 17150-17300 range but meaningful support is only around 16800 level. This suggests that the correction will essentially be led by banking stocks. I will consider aggressive leveraged long position in banking stocks around 16300 level.

(d) I continue to maintain August 2019 Nifty target of 13900 and view on cyclical Nifty bottom at 7490 level. Any fall below this is exceptional buying opportunity.

Friday, June 17, 2016

Gold is not the endgame

Thought for the day

"If we were to wipe out insects alone on this planet, the rest of life and humanity with it would mostly disappear from the land. Within a few months."

—E. O. Wilson (American, 1929)

Word for the day

Villatic (adj)

Of or relating to the country or to a farm; rural.

Malice towards none

Is CBFC social police or a constitutional institution?

If it is constitutional - why it does not appear to respect the "Right of Equality" by treating male nudity differently from female nudity?

If it is social police - do we really need it?

First random thought this morning

The media circles are abuzz with the juicy rumors of 2017 presidential elections. With BJP in poll position, normally it should be a "No contest". However, there could be an intense battle within BJP over choice of an "appropriate" candidate for the top post.

As per media reports, BJP is considering some RSS ideologue for the post. If this happens, it will might be another reason to consolidate the opposition and add more decibel to the "BJP vs. Rest" pitch.

Gold is not the endgame

The socio-economic disparities are rising in the developed world at a pace unprecedented in the economic history. The situation in my view is likely to materially worsen in coming years.

Inarguably, the so-called unconventional monetary policies followed by the central bankers own the primary responsibility for this phenomenon.

With an overwhelming US$15-17trillion worth of bonds, many of which are 10-30year maturity, are yielding negative return at this point in time. Many more promise to return no income to the holders.

Poor savers and pensioners who mainly rely on their savings for their livelihood are stressed like never before.

Large economies like Japan and EU have mostly failed in their vigorous efforts raising inflationary expectations in their respective economies. There is therefore little incentive to invest in these economies. The employment opportunities are therefore not likely to rise in any sustainable manner.

I sincerely believe that at this juncture no one appears to have any clue how to get out of this vicious cycle. So, we are likely to see many trial and errors, including from US Federal Reserve. The traders in financial markets therefore need not unduly worry about any move (e.g., a Fed hike in July) or absence of a move (e.g., BoJ staying put yesterday). Any adverse movement in the asset prices due to such trial and error would restored shortly through a prompt reversal or neutralizing effort.

The investors may however need to plan their strategy carefully. Though the endgame need not be built in the strategy for next 3-5years; a longer term strategy would require the end game to be factored.

There is no dearth of experts who have written about the endgame of the current monetary policy practices. Most of them suffer from historical hindsight and extrapolation of current trends.

Being no expert of global economics and monetary system, I can afford to conveniently break from the empirical experience and think freely. I believe the endgame will be mark a watershed in global economic history - among other things, many systems will become redundant; many currencies will cease to exist; and monstrous debts will be written off the books.

It is difficult to fathom that this task can be achieved under the current democratic system. Communism will therefore make a grand entry sometime in next two decades, in my view.

A large number of analysts have forecasted that gold will be a preferred currency of the world amidst all this chaos. I beg to disagree.

In my view, the factors (scarcity, indestructibility, religious sanctity, universal acceptability, and feudal ownership etc.) that made gold a preferred currency during many crises in the global history would have become redundant in two decades. It will therefore be something new and contemporary that will become global reserve currency....to continue on Tuesday.

Thursday, June 16, 2016

Brexit & Me - 3

Thought for the day

"The world depends on fungi, because they are major players in the cycling of materials and energy around the world."

—E. O. Wilson (American, 1929)

Word for the day

Onomatopoeia (n)

The formation of a word, as cuckoo, meow, honk, or boom, by imitation of a sound made by or associated with its referent.

Malice towards none

Surname "Gandhi" is nor an asset always.

Ask the poor fellow Varun Gandhi!

First random thought this morning

The market participants are seriously worried about Brexit, as they were about Grexit a few years back. Someone has even termed it Lehman 2.0!

I wonder - Has the world ended post Lehman 1.0? or WWI or WWII or Bretton Wood or anything else? Pakistan stock market that was shut down post Lehman, is the best performing Asian market this year and has been included back in MSCI.

Let me assure you, after Brexit, it will be Trump and then something else. The world is not coming to end, neither markets. Caution is good, paranoia is not.

Brexit & Me - 3

Referring to the specific queries of the readers regarding my views on the impact of Brexit (see here), I may offer my two cents as follows, for whatever worth it is.

1. Impact on Indian stock market

Regardless of the initial volatility and panic, Brexit may overall have an positive impact on Indian economy and hence stock markets. For example—

· Brexit may push the global yields further into negative territory and also pressurize EM currencies (Including INR). This may encourage global corporations to (a) invest in expansion of their operations through LBOs; and (b) hike their stakes in India listed entities which offer decent dividend yield. Microsoft's LBO of LinkedIn is latest example.

· Brexit may send GBP & EUR lower with respect to USD, JPY, CHF etc. This shall help the Indian corporations which have borrowed in these two currencies (e.g., Tata Group entities).

· Investors and businesses holding unhedged assets in UK and EU may see erosion in book value of their investments.

· Given the poor yields on most European, Japanese and American bonds, and likely pressure on European stocks, the chances of any material outflows in the medium term are low.

INR-GBP and INR-EUR

· In near term, given the diverging inflation expectations and consistent RBI intervention in Fx markets, I do not expect INR to appreciate materially against major European currencies, despite the rising differential in yields.

Indian exports to EU and UK

· India is a net importer from Europe. A steady INR vs. GBP & EUR shall help on aggregate basis, though the exporters may suffer should the competing currencies weaken disproportionately vs. GBP & EUR.

· Indian IT sector could get another vista of growth, similar to Y2K.

Gold prices

· In immediate term Gold prices may firm up materially. However, it will be a good opportunity to sell gold, in my personal eccentric view. I believe gold is in a secular bear market and shall be much below the current price 2 decades later. Will write more on this later.

Immigration and VISA policies of UK & EU

· Brexit, in my view, will force both EU and UK to liberalize immigration and VISA policies for skilled workers. Indian workers & businesses may get to compete at par with European workers & businesses looking for opportunities in UK and also the UK businesses and workers looking for opportunities in EU.

· Also read:

· Brexit & Me -1

· Brexit & Me - 2

Wednesday, June 15, 2016

Brexit & Me - 2

Thought for the day

"Change will come slowly, across generations, because old beliefs die hard even when demonstrably false."

—E. O. Wilson (American, 1929)

Word for the day

Comity (n)

Mutual courtesy; civility.

Malice towards none

If the Orlando event had happened in India, some parties would have alleged that BJP is in cahoots with the perpetrator for polarizing voters on communal lines.

First random thought this morning

Traditionally opposition leaders have been criticizing the incumbent government for failure on socio-economic fronts. The current scenario is no different. Opposition leaders across parties have criticized the Modi government for failing on various fronts, especially employment and inflation. This is mostly rhetoric.

However, the Congress VP, Shri Rahul Gandhi went a step further and claimed that, if voters elect a Congress government in 2017 assembly elections, he would solve the Punjab drug abuse problem within a month.

To me its sheer blackmailing the citizens, and amounts to sedition.

Brexit & Me - 2

The impact analysis of binary outcome of 23rd June UK referendum is mostly focused around five factors - (1) Impact on GBP & EUR; (2) Impact on UK economy especially in terms of foreign flows, terms of trade, demand, etc; (3) Status of London as an international financial centre; (4) Sustainability of EU post UK exit; and (5) Impact on immigration of workers as the fresh wave of nationalism hits the Europe and elsewhere.

The analysis I have seen so far, concludes that in the event of a "Leave" vote — UK economy will be seriously impacted (GDP contraction of 2-7% over next decade); both GBP and EUR will depreciate dramatically against major currencies (gold & USD assets will soar); London may lose its pride as international finance center; fund flows from EU nations, Russia and China to UK will diminish materially; migration of workers across EU and UK will be restricted hampering the economic activity; both UK and EU will weaken in strategic importance. A "Leave" vote therefore prima facie appears a lose-lose situation for both EU and UK.

However, in the event of a "Remain" vote, where UK will be able to re-negotiate certain terms of engagement with EU, a reverse effect (though not as dramatic) is anticipated. Both UK and EU will emerge as gainer in this case.

Without questioning the merits of assumptions made in the consensus impact analysis, I fail to understand why Britons will vote to "Leave".

But democracy is known to surprise people. The democratic election processes world over have produced verdicts which were considered irrational and beyond comprehension at that point in time. However, in hindsight, very few of these decisions have proved to be disastrous, so as to say.

As per the latest opinion polls the Britons are fairly evenly split. "The UK Independence Party, which won the last European elections, and received nearly four million votes - 13% of those cast - in May's general election, campaigns for Britain's exit from the EU. About half of Conservative MPs, including five cabinet ministers, several Labour MPs and the DUP are also in favour of leaving."

Those in favor of "Leave" believe "Britain is being held back by the EU, which they say imposes too many rules on business and charges billions of pounds a year in membership fees for little in return. They also want Britain to take back full control of its borders and reduce the number of people coming here to live and/or work. One of the main principles of EU membership is "free movement", which means you don't need to get a visa to go and live in another EU country. They also object to the idea of "ever closer union" and what they see as moves towards the creation of a "United States of Europe"." (From BBC FAQ on Brexit. See here for more details)

Those who favor a "Remain" vote feel that Britain should assume a more active role in EU by leading it, rather than withdrawing from it under the undue influence of false Elizabethan notions glories.

According to the supporters of "Remain" vote—

"The supposed choice — Europe or the world — is still posed. Today’s Brexiters hanker after Elizabethan glories, reimagining Britain as the footloose privateer leaving Europe behind to make its fortune in far-flung lands. Ask them about trade with Europe and they talk about the deals to be made instead with India or China, about revitalising the so-called Anglosphere of the US, Canada, Australia and New Zealand, and about refurbishing ties with the nations of the Commonwealth. Economics, they believe, is nothing against such dreams.

The harsher reality, political and economic, has been heard during the referendum campaign from US President Barack Obama and other friendly nations. This is not an either/or choice between Europe and the world. Rather, engagement in Europe amplifies Britain’s voice on the global stage; retreat from its own continent would leave the nation in unsplendid isolation." (Click here to Read more on FT)

Well, Britons will decide what they find appropriate and in their best interest.

I am here more concerned with the anticipated volatility in the markets ahead of the 23rd June poll. I need to decide whether I need to hedge my portfolio against a "Leave" vote; or keep my cheque book ready for a good buying opportunity.

I will answer my readers' queries (see here) and outline my strategy in coming days.

Tuesday, June 14, 2016

Brexit & Me

Thought for the day

"Every kid has a bug period... I never grew out of mine."

—E. O. Wilson (American, 1929)

Word for the day

Heuristic (adj)

Encouraging a person to learn, discover, understand, or solve problems on his or her own, as by experimenting, evaluating possible answers or solutions, or by trial and error: a heuristic teaching method.

Malice towards none

Making ROI of all elected offices "NIL" through constitutional provisions could be a short cut to eliminate corruption in the society!

First random thought this morning

The children who were born after liberalization of the economy in 1990s, have not seen unending queues for everything, including food, cement, two wheelers, houses, passport, etc. These are the people whose thinking is not constricted by the mindset of forced abstinence. These are the children who could freely dream big and aspire for the best.

PM Modi is lucky to be at the helm when this free spirited generation is coming out of colleges and joining the work force and entrepreneurial pool. With them marching ahead, India might have grown faster anyways - regardless of who is occupying 7RCR!

Brexit & Me

On 23rd June 2016 the citizens of UK will vote in a referendum to decide whether UK shall remain a part of the 28 member European Union (EU).

The incumbent Prime Minister David Cameron had promised to hold this referendum if he won the 2015 general election, in response to growing calls from his own Conservative MPs and the UK Independence Party (UKIP), who argued that Britain had not had a say since 1975, when it voted to stay in the EU in a referendum.

The latest opinion polls conducted to assess the mood of the people have found the "Leave" group leading the "Remain" group; thus suggesting the prospects of UK leaving EU. The markets participants, who are watching this referendum keenly, have been jittery lately. The global risk assets have accordingly corrected sharply in past few days.

Many of my regular readers have asked for my opinion on the issue. In summary, the inquiry is focused on the likely impact of the referendum on (1) Indian stock markets; (2) INR-GBP & INR-EUR; (3) Indian exports of good & services to EU and UK; (4) Gold prices; and (5) Immigration & VISA policies of UK and EU.

Well I am no expert in international economics and foreign relations. I may therefore not be able to answer these queries in much intelligent manner. In anyways, millions of reams of paper and thousands of terabytes of cyberspace has been consumed by experts in analyzing the situation and answering these questions. Back home I see a number of studio experts expressing concerns & views over the issue every day.

Nonetheless, much like an unsuccessful poet, I will not miss this opportunity to recite my poem!

I understand that this referendum is mostly political with collateral economic implications. Two things are clear to me - (a) In case of "Leave" verdict, it will take minimum of two years for UK to exit EU. The general view is that it may actually take much longer to give effect to the verdict; and (b) In case of a "Remain" verdict, UK will still get to re-negotiate the terms of stay to its advantage. So in effect, 24th June will not be much different from 23rd June.

I have been saying this repeatedly, the core of European (including UK) problems lies in the fact that for decade some people have been spending more than their earnings. There are therefore only two probable solutions to the problem – (a) They start earning more than what they spend and redeem their debt from the surplus earning; or (b) they start spending less than their present income and start redeeming their debt from the residual earning. Any third solution (including Brexit and doles as proposed by Swiss government) will only be temporary and unsustainable.

Europe urgently needs significant productivity gains, pick up in investment activity and creation of additional jobs, austerity in public spending, deleveraging, changes in policies for immigration to improve demography, and household & public deleveraging.

.....to continue tomorrow

Monday, June 13, 2016

Nifty: Some jitters ahead of keenly watched events

Thought for the day

"When you have seen one ant, one bird, one tree, you have not seen them all."

E. O. Wilson (American, 1929)

Word for the day

Slyboots (n)

An engagingly sly or mischievous person.

Malice towards none

After an intensive research of two years, I could find one good thing about Arvind Kejriwal - While all other parties use proxies for making nonsense, defamatory, unpleasant, and controversial statements, AK does it all himself.

First random thought this morning

I find controversy over the movie Udta Punjab, totally avoidable.

To the CBFC - expletives are inextricable part of the common conversation in Punjab; drugs are as common as Lassi; even Amir Khan did pee on the wall of historic Red Fort in PK.

To the film maker - the film serves no interest (artistic or public), as it shows a problem everyone concerned is fully aware of, and offers no worthy solution.

Nifty: Some jitters ahead of keenly watched events

This week, FOMC meet, and consequent movement in global currencies, commodities and equities might influence the trading pattern in Indian equities also. Besides, the Brexit poll scheduled for next shall also impact the sentiments.

Last week, Nifty failed at its strong immediate resistance level of 8330 and corrected a bit. The fall in Nifty however lacked any conviction and was driven more by caution.

With this correction though the short term indicators have turned little bearish, suggesting that the correction may extend little further, there is no reflection of any weakness on the medium and long term charts. To the contrary, this correction is taking some froth out leading to strengthening of medium term outlook.

My trading strategy under the circumstances would be as follows:

(a) Any fall (sharp or shallow) in the market is a buying opportunity from medium term perspective.

(d) I continue to maintain August 2019 Nifty target of 13900 and view on cyclical Nifty bottom at 7490 level. Any fall below this is exceptional buying opportunity.

Friday, June 10, 2016

In serach of leadership - 2

Thought for the day

"What can I know? What ought I to do? What can I hope?"

—Immanuel Kant (German, 1724-1804)

Word for the day

Dulcinea (n)

A ladylove; sweetheart.

Malice towards none

The censor Board might have unwittingly supported the petition seeking ban on Santa Banta jokes!

First random thought this morning

The debate over PM Modi's speech to joint sitting of US parliament, suffers from over enthusiasm (BJP) on one side and avoidable cynicism (Congress) on the other side. There are some in "It's good....but...." (JDU) category also.

But one thing is certain - no one could accuse BJP of arranging a "paid audience" to applaud the prime minister, like they did in case of Madison square or Sydney event.

In serach of leadership - 2

In search for leadership, I visited all the sectors and concluded that at an umbrella level it is the Indian consumer who will lead the economy and therefore the market higher. But the leadership may not come from the straight jacket consumption theme.

Soaring aspirations, deeper inclusion, affordability, rise in real income, and better access to markets and products may drive the consumption.

I also see an exponential rise in the intensity of competition amongst producers and retailers to gain market share. This shall keep (a) the general price environment and (b) product profile favorable to the consumer. Besides, it should improve the accessibility of the consumer materially.

In my therefore, the complex themes like -

(a) Building infrastructure for consumers' access and services - like shopping malls, movie theaters; supply chains & logistic services, mobile apps, etc.

(b) Enabling consumers through technology and leverage - Micro lenders, retail oriented NBFCs & banks, payment infrastructure, etc.

may do much better than the simple producers and retailers.

I believe that the share of large brands in Indian consumer basket may increase substantially over next five years; of course at the expense of unorganized and marginal cottage and MSME players. I am therefore not perturbed by the entry of market disrupters like Patanjali in branded consumer product space. On the contrary I feel that such players will help faster expansion of markets and would be beneficial for all the established large players.

However, I feel till the time market fully consolidates and evolves into a fully organized market, the participants may struggle to generate returns that could be compared to their historical earnings.

I would therefore stick to my stated strategy of focusing on upper middle class and aspirational consumption.

On product side, I would therefore like to focus on aspirational products like lifestyle drugs, beer, premium liquor, household upgrade (lighting, tiles, plywood), luxury housing, premium automobile, packaged food (non-basic), etc.

On services side, I shall focus on direct consumable services e.g., telecom, transportation & logistics, health, education, organized retailing, entertainment, banking etc.

Implementation of GST would be an additional advantage for the theme, but it is not a necessary condition to my mind.

Thursday, June 9, 2016

In serach of leadership - 1

Thought for the day

"Immaturity is the incapacity to use one's intelligence without the guidance of another."

—Immanuel Kant (German, 1724-1804)

Word for the day

Hypnagogic (adj)

Of or relating to drowsiness.

Malice towards none

Pakistan is getting increasingly isolated in the global community.

While BJP may be right in claiming some credit for this, it is largely doing of Pakistan administration and Army.

In desperation our neighbor may try some misadventure. Are we fully prepared this time?

First random thought this morning

The people clamoring for a second term for Governor Rajan, have conveniently forgotten that he was appointed by P. Chidambaram, the then finance minister. It was a collaborative effort (GAAR deferment, gold import restrictions, FCNR deposits, USD swap for OMCs, etc.) that stemmed INR rout and led to dramatic improvement in current account.

The point is why did these people not clamor for second term to PC. They rather celebrated his exit!

In serach of leadership - 1

As I mentioned in my post on Monday (see here) that on technical parameters the latest bull market in Indian equities is confirmed. In strict technical sense, we may see Nifty gaining 100% from the 6987 closing on 29 February 2016.

Usually all new bull markets begin with new leadership with leaders of previous bull markets taking a back seat.

For example, late 1980’s bull market was led by commodities like cement, steel and energy. Then commodities had a bad decade in 1990s. Late 1990’s bull market was driven by new economy businesses like IT, media and communication. For next many years most of these businesses did not do well. The big bull market (2003-2007) was driven by credit and investment theme. Large projects (power, roads, ports, real estate development etc.) their financiers, developers, builders, equipment suppliers and service providers led the charge. The subsequent years have seen decimation of these businesses. The last bull market (2012-2014) was clearly led by domestic consumption and services exports (IT & pharma)

The interesting part is that in most cases financials have travelled the complete boom and bust cycle.

This time the leaders of 2012-2014 bull run have underperformed, but so far no clear leaders has emerged. Financials, midcaps, infra, metals have all moved at similar trajectory. Real Estate is a notable outperformer, but from a very low base. Similarly, other small sub-sectors like sugar, paper, farm chemicals have also done well. But these are too small to lead a US$1.5trn market up by 100%.

The challenge presently therefore is to hazard a guess which sector or businesses will lead the current bull charge. As always, I would like to begin the process with setting the assumptions and deducing what may likely not do well.

1. US economy continues to grow at a feeble pace; China does not hard land and Europe just muddles along.

2. The government continues to maintain strict fiscal discipline and continue to encourage foreign capital and businesses to invest in India.

3. Government raises substantial resources through aggressive assets’ sale to recapitalize struggling public sector banks.

4. GST and Real Estate Regulator become a realty by FY18.

5. Over next two years, US Fed raises rates gradually with the Fed fund rates peaking at 1.5-1.75%; EU and Japan rates stay negative.

6. USD does not strengthen materially from here and China need not effect a major devaluation of its currency.

I have expressed my opinion in many earlier posts also, that the bull market in Indian equities will commence mostly due to domestic reasons. The global factors, primarily liquidity may provide some extra impetus......to continue