Vijay Kumar Gaba

Wednesday, March 15, 2017

The road ahead

"Wisdom stands at the turn in the road and calls upon us publicly, but we consider it false and despise its adherents."

— Khalil Gibran (Lebanese, 1883-1931)

Word for the day

Luciferous (adj)

Providing insight or enlightenment.

Malice towards none

Let's hope with a BJP led government in Manipur, would make Delhi people realize that Manipuri people are very much Indians and deserve to be treated like that when they come to Delhi for study or work.

First random thought this morning

It is truly sickening to see that most senior journalist and so called veteran political analysts continue to see the election results from the prism of caste and religion.

Can't for a moment they assume that "youth, women, poor and farmer" group encompasses most people from minority communities, dalits and backwards also!

What could be the basis of their belief that a young woman MLA from economically poor background will not adequately represent Dalit and Muslim women?

Has anyone tried to report, how many youth, women, poor and farmers contested on BJP ticket in UP and won?

The road ahead

The recently concluded assembly election results, especially for the largest state of Uttar Pradesh, have triggered a number of debates in the society.

On the political front, it is now widely accepted, even by his most vocal adversary like former Finance Minister P. Chidambaram, that the Prime Minister Modi has inarguably emerged as the tallest political figure in the country. The UP and Manipur elections establish that his area of influence is now all encompassing.

To that extent, it would be safe to presume that the crisis of leadership with which we have struggled since 2004 is mostly resolved.

Most observers and commentators are interpreting the current assembly election results to mean a rather long period of policy continuity along with political stability, something we have not seen in a long time.

This may motivate skeptics to portend that we may see even more unconventional measures like abolition of 86% currency notes.

But, at the same time, it gives confidence that we may continue to see politically tough but economically prudent decisions being taken and implemented. The case in point, total decontrol of transportation fuel, gradual decontrol of cooking fuel and rationalization of farm subsidies. Something, Indian politicians have notoriously avoided to do in past.

From social viewpoint, the apparent acceptance of PM Modi by large minority communities and socially backward and most backward sections of the society (not traditional supporters of his party) is an encouraging development.

One, it is likely to reduce unnecessary friction in the society, allowing the government to focus on the growth agenda.

Two, it shall increase the pressure on the government to make growth more inclusive.

Three, it may help in repairing the image of the Indian state in international arena; especially in light of the adverse publicity it earned during the past three years on account of the allegations of mistreatment of dalits and oppression of minority community.

The direct economic impact of the emergence of PM Modi as undisputed leader of India, is still uncertain.

From macro economy viewpoint, PM Modi's resolve to maintain fiscal discipline, avoid unproductive doles, and making the growth deeper and broader should support macro and external stability for Indian economy.

However, from micro viewpoint, we may see significant disruption in many areas. The key things to be watched would be (a) the form, pace and extent of wealth redistribution he is promising; (b) how the needs for foreign capital & technology and protecting the domestic businesses are balanced; (c) how the need to modernize and organize the businesses is balanced with the need to promote labor intensive small and cottage businesses; and (d) how the public sector investment is used to catalyze the private investment.

...to continue tomorrow.

Thursday, March 9, 2017

If they fail, well...they fail

Thought for the day

"Couples are wholes and not wholes, what agrees disagrees, the concordant is discordant. From all things one and from one all things."

—– Heraclitus (Greek, 544-483BC)

Word for the day

Portmanteau (n)

A word made by putting together parts of other words, as motel, made from motor and hotel, brunch, from breakfast and lunch, or guesstimate, from guess and estimate.

Malice towards none

The blame of loss lies on whose shoulders?--------

(a) If BJP losses

(b) If SP-Cong alliance losses.

(c) If BSP's vote shares falls below 18%.

First random thought this morning

What is the role of media of in the business of elections.

Is it an influencer, trying to mold public opinion in favor of or against a particular party or candidate?

Is it a reporter, just reporting the events occurring on the ground?

Is it a mediator trying to bring parties together or creating rift in them?

Is it an agent that brings political parties closer to people and their issues?

Then the question remains - what should ideally be media's role in the business of election, if at all there should be one?

If they fail, well...they fail

A very senior government official, who retired recently, argued that it is time to invest in public sector stocks. His argument was rather simple - the level of corruption is diminishing fast, level of professionalism is improving and transparency is much better now to provide comfort to investors.

He strongly felt that these changes are remarkable, sustainable and should lead to much better growth in these mostly large companies, with huge asset base.

I am somehow not convinced. I continue to believe that owning a miniscule stake in the businesses in which majority stake is owned by the president of India does not make much business sense.

My argument is simple. Like any other corporate house, the businesses of PSUs could be divided into two categories - (a) core businesses and (b) non-core businesses.

The core business of government of a democratic welfare state could only be the socio-economic welfare of the people. Making profit is usually incidental and mostly undesirable in these businesses. Running these businesses in an professional, efficient, and transparent way should ideally not add to the profitability of these businesses.

The non-core businesses of a democratic welfare state is an anomaly. The government has no business in doing such businesses. Why would an investors, who obviously invests for making money, should be investing in non-core business of a confused entrepreneur.

With 5% teledensity, Department of Telecommunication was a social venture. With close to 100% teledensity, BSNL, MTNL are non-core businesses for the Government. They should be looking for a closure to this business, with satisfaction that its objectives have been fully achieved. Trying to perpetuate this business and compete with private enterprises is not a good idea for the government.

Same is true with banking, civil aviation, power, capital equipment, and roads etc.

The Rail Minister wants us to buy minority stake in a company that runs business of railway ticket booking and catering food to rail passengers. He should answer, why government should at all be doing this business.

No matter how much transparent, non-corrupt and professional the manager of a PSU be, the fact is, and it would remain, that the majority owner does not care a dime for the minority shareholders. The regulator has so far not shown any teeth, insofar as the protection of minority shareholders' interest in PSUs is concerned.

For example, PSU banks have been burdened with the cost of servicing the Jan Dhan accounts. Could you raise a voice against it in the AGM. The most inefficient employees of PSUs are automatically entitled to the benefits of 7th pay commission award.

In my view, for investment the PSUs should be evaluated like any other private enterprises. If they fail corporate governance criteria, well they fail.

While I do not hold any brief for the momentum traders, to investors, PSUs have rarely made money.

And for those who are excited about the superlative performance of PSUs in the current market context, the following data point could be useful.

The current bull market started from last week of August 2013, with the government taking definitive steps to correct the problems of twin deficits and inflation.

In the last 42months period, Nifty has gained 47% and PSUs have gained around 22% (PSU Nifty, data available from march 2014). The worst underperformer IT sector has also registered similar gains. Metals and infrastructure have done only marginally better.

The current bull market had been about inflation and interest rates.

Auto and banks have clearly led the rally, and appear tired.

Wednesday, March 8, 2017

An Elephant and six blind men

Thought for the day

"To God everything is beautiful, good, and just; humans, however, think some things are unjust and others just."

—– Heraclitus (Greek, 544-483BC)

Word for the day

Fusillade (n)

A general discharge or outpouring of anything, e.g., a fusillade of questions.

Malice towards none

Karan Johar, one could appreciate.

But why Abu Azmi is a news?

First random thought this morning

What would be a good development strategy for Indians:

(a) Be proud about their ancient past, and attempt to recreate it.

(b) Be proud about their ancient past, and continue to live a life a complacent life.

(d) Forget about past, begin the development process from where we stand today.

(e) Let it be, we are doing just fine.

An Elephant and six blind men

Once upon a time, there lived six blind men in a village. One day the villagers told them, "Hey, there is an elephant in the village today."

They had no idea what an elephant is. They decided, "Even though we would not be able to see it, let us go and feel it anyway." All of them went where the elephant was. Every one of them touched the elephant.

"Hey, the elephant is a pillar," said the first man who touched his leg.

"Oh, no! it is like a rope," said the second man who touched the tail.

"Oh, no! it is like a thick branch of a tree," said the third man who touched the trunk of the elephant.

"It is like a big hand fan" said the fourth man who touched the ear of the elephant.

"It is like a huge wall," said the fifth man who touched the belly of the elephant.

"It is like a solid pipe," Said the sixth man who touched the tusk of the elephant.

They began to argue about the elephant and every one of them insisted that he was right. A wise man was passing by and he saw this. He stopped and asked them, "What is the matter?" They said, "We cannot agree to what the elephant is like." Each one of them told what he thought the elephant was like. The wise man calmly explained to them, "All of you are right. The reason every one of you is telling it differently because each one of you touched the different part of the elephant. So, actually the elephant has all those features what you all said."

"Oh!" everyone said. There was no more fight. They felt happy that they were all right.

The moral of the story is that there may be some truth to what someone says. Sometimes we can see that truth and sometimes not because they may have different perspective which we may not agree too. So, rather than arguing like the blind men, we should say, "Maybe you have your reasons." This way we don’t get in arguments. (Source:Jain World)

A similar situation has arisen in Indian equity markets in past few months. There is strong disagreement amongst analysts, commentators, investors and observers with respect to valuations and therefore sustainability of current price level.

The disagreement, in our view, is a consequence of limited view each of us seems to be taking.

In my view, under the present circumstances, it would be more appropriate to take a holistic macro view of the market. Views based purely on earnings multiple or assets using extrapolation of near term historical data may probably not lead to accurate conclusions.

A non-linear view considering wider historical perspective and socio-political context may be necessary to make a valid argument for staying invested in Indian equity markets.

Tuesday, March 7, 2017

"Kya Lagta hai?" (Whats the outlook?)

Thought for the day

"Hide our ignorance as we will, an evening of wine soon reveals it."

—– Heraclitus (Greek, 544-483BC)

Word for the day

Salaam (n)

A salutation meaning “peace,” used especially in Islamic countries.

Malice towards none

Democracy in India is a farce. Politicians swear by democratic traditions only until they are elected to a public office. As soon as they assume the office, they become feudal lords, irrespective of their socio-economic backgrounds and political ideologies.

They need servants to carry their mobile phones, bags and briefcases; to open doors of cars for them; to open doors of elevators for them.

They seek privileges even in temples and hospitals.

First random thought this morning

Life of suitable boys in smaller cities and town is really tough. No girl from larger towns and cities wants to relocate there for marrying them; and most eligible girls from their towns want to relocate to larger towns after marriage.

A very rich boy from a town in UP aptly put it like this - "Money can certainly not get you everything. For few things you need to slug out in Mumbai/Delhi".

"Kya Lagta hai?" (Whats the outlook?)

Nowadays, I am getting numerous calls every day, asking invariably the same couple of questions, i.e., "Kya Lagta hai?" (Whats the outlook?); and "Kya karna chayiye?" (what should be the strategy?)

The first questions seeks opinion on both -the political situation as well as financial markets. The second question is limited to the financial markets.

Insofar as the political situation is concerned, my view has been consistent that BJP is well on its way to become the Congress of 1950s and 1960s. In few years, it will have competition only from within.

In near term, the party is most likely to win the assembly elections in UP and Uttrakhand. In Punjab BJP and SAD alliance is losing, and In Goa and Manipur they are very much in the race.

Regarding investment, I may reiterate what I have been saying for past three decades.

Investors must be well versed with their socio-economic environment. They should be aware about the events and circumstances that may impact their investment portfolio. But it is not necessary to react to each and every event and data point that comes to their knowledge. In fact most events and data points may actually not need any action on their part.

Investors may better follow a rather simple investment style to achieve their investment goals. It is highly likely that most find this path boringly long and apparently less rewarding, but in my view this is the only way sustainable returns could be obtained over a longer period of time.

I believe, taking contrarian views, speculating policy changes and implications of election outcome, anticipating short term performance (e.g., monthly sales, quarterly profits etc.) and reacting to that, or arbitrage on information/rumor of a corporate action are examples of circuitous roads or short cuts that usually lead us nowhere.

Taking straight road means investing in businesses that are likely to do well (sustainable revenue growth and profitability), generating strong cash flows; have sustainable gearing; timely adapt to the emerging technology and market trends, and most important have consistently enhanced shareholder value.

These businesses need necessarily not be in the “hot sectors” like commodities in early 1990’s, ITeS in late 1999s, or infrastructure and financials in 2004-07. These businesses may necessarily not be large enough to find place in benchmark indices.

I have discussed it many times in past. However, given that the market may be entering a prolonged period of high volatility and low returns, making investors jittery and indecisive, in next few days I shall present my thoughts as to why contrarianism or lottery seeking attitude to investing might not be the right one and may expose investors to greater losses.

Of course there is nothing proprietary about these thoughts. Many people have often repeated it. Nonetheless, I feel, like religious rituals and chants, these also need to be practiced and chanted regularly.

Friday, March 3, 2017

Markets not in equilibrium

Thought for the day

"The downtrodden are the great creators of slang.'

‑Anthony Burgess (English, 1917-1993)

Word for the day

Malfeasance (n)

The performance by a public official of an act that is legally unjustified, harmful, or contrary to law; wrongdoing

Malice towards none

Many "intellectuals" who are frequently visible on TV and social media, do not appear to be much intelligent.

Wisdom is something, that has not even touched them.

First random thought this morning

The government has shown remarkable resolve in sustaining the dismantling of control of transportation fuel and cooking gas. The highest ever single rise in LPG prices, when the UP elections are in critical phase, clearly demonstrate this.

Why economists like former Prime Minister Manmohan Singh and Amartya Sen; and politicians like P Chidambaram fail to mention it when they criticize the government on economic failure. This prejudice and partisanship is making even their valid criticism incredulous.

Markets not in equilibrium

In my view, a combination of following six factors determines the movement of stock markets, under any given circumstance.

1. Macro outlook

2. Earnings outlook

3. The quality and quantum of flows (liquidity)

4. Valuations

5. Positioning vis-à-vis alternatives like debt, real estate, gold etc.

6. Market technical (demand and supply equilibrium)

In the state of equilibrium of these six factors, the markets are calm; and average returns are closure to nominal GDP growth, usually higher than the risk free rate.

In this state usually the premium for alpha generation (outperformance of individual stock return over average return) is not great, as stable macro conditions, adequate liquidity, steady flows, reasonable valuations, and balanced market technical allow most businesses to grow in tandem and there is little case for unusually premium valuations of some businesses over most others.

On the contrary, when these key factors are not in equilibrium, i.e., one or more factors are far away from the mean position, the divergence in stock performance is significant and thus the premium for alpha generation is much higher.

From this viewpoint, if I analyze the market performance of past couple of years, it is clear that the divergence in performance of stocks is unusually high. Especially, many small and midsized companies have outperformed their large size peers massively. The premium for alpha generation has been accordingly significant.

Historically, whenever, the key factors impacting the stock markets have remained in the state of inequilibrium for longer period, the corrections needed to revert to the state of equilibrium have been sharper, deeper and painful.

If the correction occurs from bottom to mean, the pain occurs from missing the move. If the correction occurs from the top to mean, the severe erosion in prices causes the pain.

This makes me conclude two things:

(a) The phenomenal rise in the assets under management of institutional investors like mutual funds, pension funds and portfolio managers may be related to the premium for alpha generation. This becomes even more clear, if we consider the stupendous rise in the asset under management of portfolio managers who invest in broader markets.

(b) The key factors that impact the market are not in equilibrium. This essentially implies that we shall soon see the correction - this time top to mean, via bottom.

Thursday, March 2, 2017

Is it TINA alone?

Thought for the day

"Women thrive on novelty and are easy meat for the commerce of fashion. Men prefer old pipes and torn jackets.'

‑ Anthony Burgess (English, 1917-1993)

Word for the day

Shrive (v)

To grant absolution to (a penitent).

To impose penance on (a sinner).

Malice towards none

The award for Best Global Jumlebaaz goes to— PM Narendra Modi!

ohhh... sorry...sorry

it goes to- President Donald Trump!

First random thought this morning

From 10k feet above, the entire unrest in DU appears to be part of a desperate strategy of CPI (M) to regain some relevance in Indian politics.

Unfortunately for them, they could only motivate some anti BJP voices. No support for communists agenda.

The meddling by Congress in the matter shall only further erode the already diminished support base of the party

AAP could be an unintended beneficiary here.

Is it TINA alone?

A deeper analysis of the current behavior of Indian stock market would need to examine at least two factors:

(a) How much is the role of TINA (There Is No Alternative) in the rise in inflows into the Indian equities?

In past three years we have seen marked acceleration in the domestic flows into the Indian equities. More importantly, the rise in flows has been accompanied by the acceleration in the institutionalization of the investment process.

A much higher proportion of flows is now coming through regulated institutional investors like mutual funds, portfolio managers, pension schemes, etc. Thus is quite unlike the past instances when the investors preferred to invest themselves.

Even more importantly, a significant part of the fresh flow appear to be committed for longer term. Steady rise in SIP (Systematic Investment Plan) and pension fund contributions indicates towards this trend.

Given the longer term nature of inflows, the investment managers are in a better position to take investment calls on relatively smaller and midsized companies where the business cycle are more volatile & comparatively untested, but growth potential is significantly higher as compared to the larger stable businesses. The market breadth therefore is deeper and broader this time.

It is worth examining whether this higher allocation to the equity and related instruments, marks a structural change in the behavior of Indian household investors, or it is just due to TINA factor, as real estate is in bad shape, informal credit market is in shambles, deposit rates have fallen, tax arbitrage for equity has widened, and gold has become very volatile and unpredictable.

Insofar as the global investors are concerned, a rally in developed markets did prompt a move towards these markets from emerging markets. However, given the remarkable stability of Indian rupee , resilient growth, improving macro, and relatively well regulated market, they have remained overweight on India.

It is worth examining, how would they react if RBI does let INR slip to 70-71/$ level, as has been suggested by many experts.

(b) Indian equities are not cheap by any standard. Relative to their developed market peers these may appear fairly valued, but not 'cheap'. The case for re-rating of Indian equities needs to be examined carefully.

Is the macro stability enough reason for re-rating; or we need to see improvement in earnings' outlook also?

In my view, if TINA is amongst the key factors driving equity prices, a great deal of caution is needed. I do not see any case for sustainable re-rating of Indian equities as yet.

Wednesday, March 1, 2017

This time it's different

Thought for the day

"He said it was artificial respiration, but now I find I am to have his child.'

‑ Anthony Burgess (English, 1917-1993)

Word for the day

Scapegrace (n)

A complete rogue or rascal; a habitually unscrupulous person; scamp.

Malice towards none

Next time the Supreme Court hears the BCCI case, it must keep in mind the case of CBCF (popularly known as the censor board).

The people from the trade are not always the best regulators.

First random thought this morning

At the end of the battle of Kurukshetra, the victorious Pandava brothers argued amongst themselves as to who should get the credit for their victory.

Krishna suggested that Barbarika's (Bhima grandson also worshiped as Khatu Shaym ji) head, which had watched the whole battle from a hilltop should be allowed to judge.

Barbarika's head suggested that it was Krishna alone who was responsible for the victory. Barbarika replies, “All I could see were two things. One, a divine chakra spinning all around the battle field, killing all those soldiers. The other was Goddess Mahakali, who spread out her tongue on the battle field and consumed all the sinners as her sacrifice".

And some, who claim to be saviors of Hindu Dharma, and great devotees of Krishna and Kali, still insist Pakistan killed Gurmehar's father.

This time it's different

My recent interactions with investors and businesspersons have convinced me that the current market up move is distinct in some sense.

Historically, most bull markets have been driven by high hopes and fueled by greed of investors. Asset prices correct sharply as hopes are belied and fear overtakes the greed.

But in the current instance, I do not see much hope in the air. The usual euphoria that is usually seen with broader market indices at all time high, is conspicuous by its absence.

Greed and fear more or less are in balance.

But still prices are moving higher!!!

The move to replace 86% of country's currency in a single swap; a strong drive by taxation authorities to enforce compliance has confounded the small and medium sized businesses. Their entire business model that was based on poor tax compliance, lack of transparency, and informal financing stands challenged. Imminent implementation of GST also adds to the uncertainty for them. Outlook for both private consumption and investment therefore remains clouded.

Severe correction and illiquidity in real estate market has eroded the wealth effect by a good measure.

Despite bumper crops across North Indian planes, the farmers do not appear enthusiastic, as crop prices have plummeted. The specter of El Nino, that impacted monsoon for two consecutive years, reappearing in late summer this year is also looming large on their psyche.

Financial sector is still struggling with humongous burden of non-performing assets. Though, the rate of accretion has slowed down notably in past couple of quarters, the recoveries of NPLs has not been encouraging by any measure.

To the contrary, new pockets of potential stress are emerging especially in power and telecom. The capacity utilizations remain low, and managements are not guiding any material pickup in next few quarters.

Bankers are also not sure about the repercussions of the shakeout in 'start-up" and "E-commerce" space. Lenders' direct exposure to these sectors may not be large, but personal credit to the employees who would lose their jobs could potentially bring some pain.

RBI has already indicated that the monetary easing cycle may be over for the time being. In fact, there are some voices already making a case for tightening of monetary policy, as higher global commodity prices, a stronger USD (as Fed hikes), and likely rebound in agri inflation, could raise inflationary expectations.

The macro advantage in terms of control over twin deficits and inflation could therefore also wane to some degree later this year.

The rally in stocks prices needs to be analyzed in light of these constraints.

....to continue