Vijay Kumar Gaba

Thursday, August 18, 2016

Market leadership may change soon

Thought for the day

"O, what a tangled web we weave when first we practice to deceive!"

—Walter Scott (Scottish, 1771-1832)

Word for the day

Honorific (n)

A title or term of respect.

First random thought this morning

From "Nani Yaad Kara Denge" by Rajiv Gandhi, to the latest Balochistan rhetoric - little has changed in independence day speeches made from Red Fort, insofar as Pakistan is concerned.

Those reading too much in the PM's Baloch reference might be doing just that - too much.

Market leadership may change soon

The current bull market in Indian equities began three years ago in early September of 2013. This was the time when the then finance minister P. Chidambaram and the newly appointed RBI governor Raghuram Rajan made some concerted efforts to repair the fragile balance of payment conditions. Many more fiscal and monetary corrections were also initiated.

In due course, the efforts were duly supplemented with the massive correction in the global commodity prices; abundant liquidity infusion by the central bankers in developed markets; yields vanishing from the global bond markets hence motivating the global liquidity to funnel into the emerging economies like India; and marked political changes in India that were perceived to be reform and action oriented.

The benchmark indices have gained 55-60% in past three years. However, over the same period the broader market indices have gained over 130-140%. If we consider the fact that INR exchange rate vs. USD has appreciated by about 2% in this period, the return in USD terms is even higher.

My greed and fear chart shows that the present spread between greed and fear (as represented by the divergence between the performance of the broader markets and the benchmark indices) is the maximum recorded during the past three years and compares well with the divergence recorded during the peak months of the past cycle (August 2007-January 2008).

Considering that in strict technical sense, the benchmark indices are not showing any signs of any major correction as yet, the spread may normalize only through meaningful correction in the broader markets.

I therefore am gearing for a ~10% correction in broader markets while the benchmark indices record gains of ~5% over next three months.

I would not mind even if I go completely wrong on my timing; since I seriously find the valuations in broader markets little bubbly.

Wednesday, August 17, 2016

I'm Ok. Thank you!

Thought for the day

"We build statues out of snow, and weep to see them melt."

—Walter Scott (Scottish, 1771-1832)

Word for the day

Blandishment (n)

Something, as an action or speech, that tends to flatter, coax, entice, etc.: Our blandishments left him unmoved. E.g., We succumbed to the blandishments of tropical living.

Malice towards none

The day after the Newspapers highlighted the speeches/comments made by PM, AK, CJI and Salman Khurshid.

This morning it's a new Sun.

First random thought this morning

We just celebrated 70th anniversary of our independence from the colonial rule of the British. We witnessed the expression of nationalism and patriotism in a variety of ways.

I joined a group of Punjabi farmers in Pilibhit for the celebrations. Most of them or their parents had migrated from the west Punjab in 1947. After the flag was hoisted, speeches were done and snacks were eaten, I raised a tough question - "why did you chose to migrate to this side of the border? Was it love for INDIA or fear of being persecuted?"

After two minutes of silence - all of them nodded for the latter!

I'm Ok. Thank you!

Since approval of the Constitutional Amendment Bill that has paved the way for implementation of a common GST regime in the country - a number of readers have asked me does this transformative change warrants any change in investment strategy, as highlighted at beginning of the current year (see here).

I had then mentioned that "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", while categorically stating that "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." (see here)

I have reviewed my investment strategy comprehensibly in this light and I see no reason to change my core investment strategy due to GST for the simple reasons that—

(a) I follow a strategy which is designed to be mostly policy independent and enjoys an optimum beta relative to macro economic growth;

(b) I had anticipated GST & other positive policy changes; higher rural income & consumption due to normal monsoon; and rise in urban wages etc.;

(c) Global competitiveness, technology, innovation and market leadership have always been at the core of my investment strategy. I have always avoided businesses that sustain purely on policy arbitrage and political patronage. The small and midcap businesses that would find it hard to compete in an open globally competitive market place with little policy arbitrage and political patronage have been in a "No Go" zone for me for long. (see here)

I continue to believe that the investee companies will be such that have demonstrated capabilities to remain relevant over many business cycles due to their product, market and technology leadership, strong financial position, lower beta to macro fundamentals, proven managerial capabilities.

I do savor the flavor of the season, but just as I do a pinch of pickle with my staple moong dal khichdi - not more, not less.

The movements in the market prices of financials and IT/Pharma have created some imbalances in my portfolio. These need to be corrected rather urgently.

I have therefore advanced my midyear portfolio review for FY17 by a month. I shall be planning and implementing the corrective measures by the end of this month itself.

Friday, August 12, 2016

Overeating invariably leads to indigestion

NEXT POST OF MORNING TREKK WILL BE PUBLISHED ON 17th AUGUST 2016

GREETINGS TO ALL OUR READERS FOR 70th INDEPENDENCE DAY OF INDIA.

Thought for the day

"Man has no right to kill his brother. It is no excuse that he does so in uniform."

—Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Polyphonic (adj)

Consisting of many voices or sounds.

Malice towards none

Indian Railway proposes to allow private parties to buy train names for a fee.

Would be great source of revenue and peace if the government makes it a policy and sells the names of all its schemes, e.g., Dhirubhai Ambani Gram Sadak Yojna or Godrej Worli Sea Link!

First random thought this morning

Almost every day, newspapers carry reports raising doubts about how Dr. Zakir Naik might be working against the national interest for long.

If these reports are even partially true, the security apparatus of the country might need a complete overhaul.

Not having done in the aftermath of 26/11, should be considered a brazen lapse on the part of the administration.

Overeating invariably leads to indigestion

In our country - SIP, Asset Allocation and Diversification are indubitably most misunderstood and misused terms in the context personal investing, in my considered view.

With due regard to the utility, competence and integrity of the investment advisors and wealth managers, I feel that their training and orientation lacks the understanding of investment basics. This deficiency in understanding is transmitted in the behavior of common investors and fully reflected in their investment patterns.

For example, consider the following—

(a) A systematic investment plan (SIP) is typically used to meet multiple objectives, e.g., investment discipline, benefit of compounding, avoiding the need to time the market, ease of managing investments, etc.

However, it is common to see advisors recommending SIP as a tool of cost averaging. Conceptually, cost averaging can only done in a static asset. How is it possible to do average cost in a dynamic asset like mutual fund portfolio that may change almost every day. In India even the constituents of benchmark indices have changed rather frequently!

(b) Asset Allocation (AA) is a procedure usually followed to bring the asset portfolio of an investor in synch with his risk appetite and life cycle. The task cannot be completed unless the advisor has a complete knowledge of the investor's assets, both financial as well as non-financials. This is seldom the case in Indian context.

Tell you an interesting anecdote relating to this.

Once I was sitting with the promoter of a south India based pharmaceutical company, who had material stakes in real estate business also. His wealth manager from a renowned global bank was also sitting with him. The promoter had got a few crore in dividend from his company and wanted to invest the money.

The wealth manager was privy to only 0.5% of his total asset portfolio. Nonetheless, he suggested him a 50:40:10 Equity:Debt:Gold allocation. In the equity part he suggested a set of mutual funds including a pharma sector fund and a mid cap diversified fund with 37% exposure to midcap pharma companies. In debt he suggested FMPs with material exposure to real estate bonds.

These suggestions were made to a person whose ~90% legal networth was invested in the equity of a single pharma company; 9% networth was in rent yielding (fixed monthly income) real estate and 1% was cash. Being a Andhra landlord, it is anybody's guess that he must have few kilos of gold at home that does not reflects in his balance sheet.

In this case, what would you think of the advisor suggesting the referred asset allocation plan, that I leave it to you.

(c) In the name of diversification, investors are many a times sold a variety of mutual fund schemes which not only are similar in risk profile, sectoral exposure, but in fact contain the same securities.

The point I am trying to make is that the greed dominating the investor's sentiment near the peak of a market cycle and fear overwhelming them closer to the bottom of a typical market cycle is no co-incidence.

It is the understanding, training, orientation and skilling of both investors and advisors that is lacking.

Unfortunately, it is not the investors & advisors alone, but the regulators & government may also be wrong about the dynamics of the equity investment in India.

In my view, post liberalization of trade and commerce in 1990’s, the number of self entrepreneurs has certainly increased in the country. This has coincided with the sharp fall in public sector employment. The aggregate private sector employment level has not been able to compensate for fewer opportunities available in public and unincorporated private sector. Consequently, the total number of employees on live payrolls has fallen sharply since early 2000’s.

The combination of two – lower employment opportunities and liberal business rules – has perhaps forced people towards entrepreneurship. The number of self owned enterprise has swelled in past one decade, implying people are investing in more in equity, but not in listed equity.

As per 67^th round of NSSO survey (June 2011), there were 58million unincorporated enterprises in India (excluding agriculture, construction and those registered under Factories Act). Over 85% of these enterprises are run by the owner himself, without any hired worker. 44% of these were run from the residence of the owner. These enterprises employed 108mn people against just 39mn on the live payroll in organized sectors, including 11mn in private sector.

These self owned enterprises generated annual gross profit of Rs628.36bn; whereas all listed companies in India generated gross profit of Rs610.44bn in FY12. 1/3^rd of this profit was earned by top 36 PSUs. Top 100 listed companies accounted for over 76% of this value addition.

The point I am making is that there is a strong equity culture amongst Indian households. However, factors like fewer employment opportunities, better business opportunities and dismal performance of publically traded equity have led them to invest more in their own business and/or home equity rather than listed equity.

Advising these people to invest in equity, directly to through NPS, EPF, ULIP etc. may actually not be a good idea. Because, these are the people who are highly aspirational but can ill afford any additional risk. They are therefore easily swayed by the forces of greed and fear.

Thursday, August 11, 2016

Prevention vs. punishment

Thought for the day

"O, wind, if winter comes, can spring be far behind?"

—Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Cosmopolis (n)

An internationally important city inhabited by many different peoples reflecting a great variety of cultures, attitudes, etc.

Malice towards none

Nowadays there are two types of people in India - One: whose WhatsApp DP displays patriotic themes like the Tricolor or symbol of Indian Army; Two: the others.

First random thought this morning

The decision of Manipur Iron Lady to enter politics with the objective of making it to top is commendable. I guess this may mark a watershed in Indian politics.

For example, one, it may re-inspire many other right thinking citizens, including those who got completely de-motivated and disenchanted after their brief sojourn with Arvind Kejriwal. Two, it may trigger a rethink in the Congress Party that good people are willing to join politics if they are allowed a fair opportunity for rising to the top. Three, it may strengthen the forces of sustainability and equity against crony capitalism and crony socialism.

Prevention vs. punishment

Most of us would have encountered traffic cops hiding behind trees, electric poles, etc., waiting for someone to commit a traffic crime like jumping the signal or violating the prescribed speed limits.

It is usually annoying on an isolated road with scant traffic. Few of us have motivation to obey traffic rules under such circumstances. Many a times one even would not notice the traffic signal as there is no traffic on either side of the signal. You leisurely cross the signal and suddenly two cops spring up from nowhere waiving at you to pull over. Thereafter usually some negotiations are pursued and a suitable deal is arrived at.

But have you noticed that these traffic cops are usually not seen where serious traffic jams take place every day morning and evening. Have you ever seen a traffic cop filling a small two feet wide pit in the middle of the road, that is causing traffic jam of several kilometers. At least I have not.

So where is the disconnect?

In my view, the disconnect lies in the orientation of the personnel assigned the duty to manage the traffic on roads.

I did speak to some of them, asking "what is your primary duty?" A majority of them said "to enforce traffic rules". No one said "to ensure safety & security of people using the roads; maintain smooth flow of traffic; and/or properly guide the road users". None of them was aware of the bird named "right of way" on the road.

Prevention does not appear high in our priority of things. Punishment is what we pursue vigorously.

This perhaps applies to the whole spectrum of the public compliance management system - be it police, taxation, civic administration or anything else.

One may argue that it's not only the public compliance system, but the personal management also; as reflected in disease management at household level (including overwhelming use of self medication).

Our schools teachers are also mostly focused on the "marks obtained" by the students rather than focusing on the overall personality development of the students, including inculcation of traits like patriotism, nationalism and compliance. Consequence is that we are popularly regarded as a society which is cynical; argumentative; performs only when whipped; complies only for the fear of punishment; and usually puts personal interest before the common interest. The trust abyss between police/security forces and citizens is also a consequence of this orientation.

The government has great opportunity at hand to address this shortcoming in formulation of GST rules regulations and new education policy.

This mindset and orientation impacts our investing behavior also. Will discuss it tomorrow.

Still working on the implications of GST on my investment strategy. Will share with the readers next week.

Wednesday, August 10, 2016

Coffin before cadaver

Thought for the day

"A man, to be greatly good, must imagine intensely and comprehensively; he must put himself in the place of another and of many others; the pains and pleasures of his species must become his own."

—Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Fletcherize (v)

To chew (food) slowly and thoroughly.

Malice towards none

Arrogance cannot touch wisdom. This inherent protection distinguishes wisdom from intelligence.

We need more wise people to manage policy. Intelligence is mostly dispensable.

First random thought this morning

Broken table, high velocity winds, no coach, no room in Olympic village - are some of the platitudes for not winning medal at Olympics.

I wonder why can't our sportspersons simply say that we played our best (which they certainly did); and the better amongst the world's best won the medal. I mean it is plain truth and must be totally acceptable to all.

Coffin before cadaver

The outgoing RBI governor made his last policy statement yesterday. Many had anticipated this to be his swan song - something meaningful that will work as a guiding principle for his successor and the newly constituted monetary policy committee.

Unfortunately, the statement, as usual, had nothing noteworthy. It is full of prejudice and incongruence. Much worse, it clearly shows the absolute lack of interest on part of the incumbent RBI leadership.

In fact, I get a feeling that the policy statement has nothing to do with the policy stance, which has been taken regardless of anything mentioned in the statement. It is thus a classic case of "coffin before cadaver".

The statement, for example, notes about the global economic conditions as follows:

· Since June 2016, several developments have clouded the outlook for the global economy.

· The near-term outlook in emerging markets is still fragile.

· World trade remains sluggish in the first half of 2016.

· Yields on government bonds have fallen further and the universe of negative yielding assets is expanding at a fast pace, reflecting high risk aversion and expectations of further monetary accommodation by systemic central banks.

· Commodity prices, barring those of precious metals, remain soft due to weak demand.

However, the statement does not make any attempt to correlate these conditions to the Indian economic outlook. There is nothing to suggest that the policy stance assimilates the global conditions and is designed to provide a cover to the Indian economy from the likely cascading impact of a global slide. Addition of, nowadays usual, "whatever it takes" in the policy statement would have gone a long way in improving the sentiment of the stakeholders.

On the domestic economic outlook, the policy statement inter alia, notes that:

· On the domestic front, several factors are helping to support the recovery.

· The target for kharif production set by the Ministry of Agriculture appears within reach. Industrial production picked up in May on the back of manufacturing and mining, following a contraction in the preceding month. Service sector purchasing managers polled the thirteenth successive month of expansion in July on the basis of a sharp acceleration in new business.

· Business confidence is also looking up in recent months, though the Reserve Bank’s survey for March 2016 suggests that capacity utilisation, seasonally adjusted, is still weak.

· Retail inflation measured by the headline consumer price index (CPI) rose to a 22-month high in June, with a sharp pick-up in momentum overwhelming 3 favourable base effects. The rise was mainly driven by food, with vegetable inflation higher than the usual seasonal rise at this time of the year. Fuel inflation remained subdued, mainly due to sustained deflation in prices of liquefied petroleum gas.

· By early August, the cumulative rainfall was 3 per cent higher than the long period average, with more than 80 per cent of the country receiving normal to excess precipitation. Kharif sowing strengthened after a lacklustre start, particularly with respect to pulses. Barring cotton, jute and mesta, sowing of all crops is currently above last year’s acreage

· Liquidity conditions eased significantly during June and July on the back of increased spending by the Government which more than offset the reduction in market liquidity because of higher-than-usual currency demand.

· In the external sector, merchandise export growth moved into positive territory in June after eighteen months. This upturn was reasonably widespread, covering chemicals, marine products, handicraft, plastic, rice, electronic and engineering goods. On the other hand, imports continued to decline, albeit at a slower pace than in recent months.

· Looking ahead, the momentum of growth is expected to be quickened by the normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to consumption spending that can be expected from the disbursement of pay, pension and arrears following the implementation of the 7th CPC’s award. The passage of the Goods and Services Tax (GST) Bill augurs well for the growing political consensus for economic reforms.

RBI thus recognizes that domestic conditions are favorable whereas the global outlook is clouded. Business confidence is improving but capacity utilization is weak. Food inflation is totally seasonal and monsoon augurs well for the food prices.

It also notes that the consumers are getting huge payouts in terms of 7th pay commission and direct cash transfer. GST is closer to reality than ever.

Does RBI not realize that under the circumstances businesses may need support to convert their confidence into higher capacity utilization; and inflation feared out of GST cannot be controlled by tight monetary policy.

So why not cut rate upfront and support businesses. In fact not supporting businesses at this point may actually prove to be inflationary as demand outstrips the supply.

Just because the governor does not want to take a decision, RBI cannot leave the economic argument outside the policy stance.

Nonetheless, I am sure that a rate cut, and a large one this time, is coming before Santa arrives in the town!

Tuesday, August 9, 2016

Strategy for post GST era

Thought for the day

"When my cats aren't happy, I'm not happy. Not because I care about their mood but because I know they're just sitting there thinking up ways to get even."

—Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Conciliate (v)

To overcome the distrust or hostility of; placate; win over: to conciliate an angry competitor.

Malice towards none

After denying Sahara Shri any reasonable opportunity to get out of jail, now SC appears to be trying hard to keep him out of jail!

First random thought this morning

The State Assembly elections in UP are always interesting. In post Congress era (1989-current) UP has seen Janta Dal, SP, BSP and BJP in power, either alone or in coalition.

2017 elections promise to be equally interesting. With 71/80 seats in Lok Sabha from the State, BJP has taken the position of primary defendant. SP is also a defendant being the party ruling since 2012. INC is defending its choice of leadership. BSP is defending its position as the principal opposition party, and therefore a natural claimant of power if people vote for a change. JDU & RLD are marginal forces in the State.

The moot point is who is the challenger to CM Akhilesh Yadav?

Strategy for post GST era

After a decade long political scrutiny, the constitutional amendment bill that would enable implementation of a uniform nationwide indirect tax (GST) over next decade or so, is just few inches away from becoming a reality.

Regardless of the differences amongst various stakeholders with regard to the rate structure, and rights and obligations of the proposed GST council; the tax reform appears all set for implementation sometime in the next two years.

As state last week "The economic paradigm shifts with each progressive reform. The businesses, investors and consumers need to fully assimilate it and adapt to the new regime. Those who fail to adapt to the changed reality fast, run the risk of becoming redundant under the new economic paradigm". (see here)

It is therefore pertinent that I review my investment strategy to assimilate the changes that would occur due to GST implementation.

The conventional wisdom suggests that the following factors could majorly impact the performance of companies:

(a) The opportunity for tax evasion may diminish considerably, making many unorganized sector businesses unviable. This should help the competing large organized sector businesses gaining market share at the expense of fragmented smaller players. Players with material underutilized capacity, strong brands and market leadership will naturally be in a better position to take advantage of the opportunity. Consumer electronics, packaged/processed food, auto ancillary, textile, garments & footwear, and paints, lubes & chemicals are some of the areas where tax incidence is material and the market is fragmented with dominant share of unorganized sector.

(b) There could be a wave of M&A deals, as the smaller units find it tough to survive under the new regime. The larger companies with stronger balance sheets could take advantage of this round of consolidation to deepen their market penetration.

(c) We may see serious rise in road traffic within 3years of GST implementation, as road network improves further and Octroi check posts are demolished across the nation.

(d) Building of supply chain, both in physical and virtual sense, is one area that might attract maximum investment due to this change. Some companies will benefit from capacity building in this area; the others are that would benefit from the capex in capacity building.

(e) This change is not standalone development. This is accompanied by a host of other developments aimed at standardizing the business & compliance practices (ease of doing business) to attract the global investors and businesses. On successful implementation of GST, we may see exponential rise in competition for domestic players from the global businesses. I believe, any business which is not globally competitive should not find place in my portfolio....to continue

Monday, August 8, 2016

Nifty: All clear till next station

Thought for the day

Nothing wilts faster than laurels that have been rested upon.

—Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Bumptious (Adj)

Offensively self-assertive, e.g., a bumptious young upstart.

Malice towards none

Mrs. Funny Bone is not funny. Painting all 125cr Indians with the single brush is not funny at all.

Moreover, I retain my right to judge public personalities (including politicians, film stars and sportspersons) based on my likings; and Rajesh Khanna was indeed a below average actor, in my strong view.

Did someone bat for tolerance and freedom of expression a while ago?

First random thought this morning

In an open admission the prime minister admitted that the anti-social elements are violating the peace and social harmony; rather brazenly. More disturbingly, he suggested that these elements are using BJP's agenda to pursue their nefarious designs.

Two questions: 1. Is this count for the failure of law and order machinery? 2. Does BJP's agenda need a review.

Nifty: All clear till next station

Last week Nifty recorded its highest weekly close after 10th April 2015, making a strongly bullish weekly candle.

In fact after many week, Nifty appears set for an easy up move on all daily, weekly and monthly charts.

It is remarkable that the technical position of Nifty has strengthens when implied volatility (India VIX) is close its all time lows (no panic) ; market breadth is marginally negative (little retail frenzy) and domestic flows are negative for many weeks (consistent profit booking). Moreover, frequent rotation of sectors leading Nifty higher or supporting it to stay at higher levels is keeping individual sectoral indices below overbought zone.

As of today, rate sensitive like banks, real estate and automobile look set for a decent up move. PSU banks in particular look better placed in strict technical sense.

Nifty faces marginal resistance in 8680-8710 zone. A strong resistance will come only above 8864 level. No surprises if we see Nifty marking a new high in next 6-8 weeks. For now 8437 is a very strong support.

Bank Nifty has no credible resistance on its way to new highs. 18690 on closing basis is a strong support.