Vijay Kumar Gaba

Thursday, February 15, 2018

Household savings - the changing paradigm

Thought for the day

"A good man can be stupid and still be good. But a bad man must have brains."

—Maxim Gorky (Russian, 1868-1936)

Word for the day

Ship (n)

A vessel, especially a large ocean going one propelled by sails or engines.

Malice towards none

If one were to believe some senior political leaders, RaGa is like Ghtochkach (son of Hidimba and Bhim) on 14th day of the epic Mahabharta War.

He alone is stopping all opposition parties to come together to defeat NaMo in 2019 general election!!!

First random thought this morning

Bapu is relevant to Indian politics today, more than ever.

The entire Indian political establishment seems to be living a life of untruth and pretense. Everyone seems scared of Truth. No one even wants to experiment with Truth.

They despise anything and everything associated or even remotely related with the person/thought/institution etc. which is hindering their way to political power and/or material prosperity (including privileges, recognition, money and comfort)

so much so that most of the time, the thing that is being protested against, is actually immaterial to the protestor, e.g., Modi haters haters questioning Yoga Day; Cong protesting against GST and Triple Talaq and BJP protesting against FDI in Retail and Civil Nuclear deal (2009-2014).

Household savings - the changing paradigm

As I noted in recent posts, changes in domestic savings pattern in past one decade is cause of serious concern for Indian macroeconomic fundamentals. (see here)

Traditionally, domestic savings, especially household savings, have been a stable and sustainable source of funding for both private as well public investments. Though liberalization of capital controls has opened the doors for foreign capital. It still is not a major source of funding for domestic enterprise.

More particularly, the decline in financial savings of households that begun in early 2000's has accelerated in recent years. This has serious implications for the economy and therefore equity markets.

I sincerely believe that the government and policymakers have not taken a holistic view of the problem and the steps taken so far are not only inadequate but to some extent misdirected also.

I feel the issue needs to be analyzed comprehensively for making any worthwhile step to augment household savings, especially financial savings. For example, the following questions may need to be answered:

1. Why the financial savings of Indian households have declined consistently over past decade or so?

2. Why should households deploy their savings in financial instruments?

3. Are Indian corporates and governments more productive and efficient users of capital than household savers?

I believe household investors had began meaningful investment in listed equity in late 70’s at the time of FERA dilution of MNCs. Reliance in 80’s and PSU disinvestment and capital market reforms in early 90’s drew the 2^ndlot of household investors. IT boom of late 90’s drew the 3^rdset to listed equity. In these 3decades households invested 8-17% of their financial savings in capital market related products.

Though the household financial savings started declining from mid 1990’s, 2000 was the key inflection point. Since then household have invested more in physical asserts than financial instruments.

The key cause for this trend could be listed as follows:

(a) Fall in average age of house ownership. Higher income levels in urban areas, rise in nuclear families and rise in real estate prices has prompted people to buy houses earlier in their life cycle.

(b) Rise in personal automobile ownership.

(c) Low growth in white collar employment opportunities as compared to growth in workforce has led to phenomenal rise in self owned enterprises leading to diversion of savings to physical assets.

(d) Rise in gold prices in 2000’s has definitely contributed to the trend.

(e) Persistent negative real rates.

In past two years, we have again seen rise in the share of financial savings, especially investment in stocks & mutual funds, in the household savings.

Better accessibility of financial products due to improved banking infrastructure and inclusion efforts could have added few points to the rising popularity of market related products. But the real reasons behind this trend probably are (i) poor real estate market; (ii) positive real rates; and (iii) low return in gold due to global disinflationary conditions.

In my view, none of these reasons are structural and can reverse in due course. So taking domestic flows to Indian equity as constant is fraught with risk.

On the contrary, there are reasons to believe that the rate of household savings may stay lower or even diminish further. For example, consider the following:

(a) Consumer prices for households will remain high, even if the rate of yearly inflation moderates. Expenses on items like education, health, energy, transportation, communication, rental, protein, and fruit and vegetable shall continue to rise disproportionate to rise in income. Hence the savings rate may remain lower.

(b) Implementation of GST will reverse the wealth transfer for at least couple of years. Lower revenue for the government, hence lower social welfare spending growth; higher incidence of service tax; disruption of thousands of household businesses to the advantage of large organized players; employment restructuring as redundancies rise on a massive scale and skill requirement change.

(c) Factors like lower investment growth, higher productivity gains through automation & elimination of redundancies, restructuring of PSUs shall continue to impact the employment growth, especially for skilled labor.

(d) Lower employment opportunity may force more and more people towards self-enterprise, leading to higher household debt.

(e) Last but not the least, the trend for changes in consumption pattern shall continue. Bicycle and Transistor Radio have definitely given way to motor cycle and smart phone as essential marriage gift (dowry) in hinterland. The running expenses are to be paid by someone after all - be it the bridegroom, his parents or the bride's parents.

The economic growth will have to find an alternative source of funding (no capital control) or a way to grow household savings (lower taxes, higher real rates, cheaper houses/rent, good public health/education/transport, and farm employment).

We have seen a glimpses of this happening in FY19 budget, but we need to travel a long way before these measure lead to reversal of trend in household savings....to continue tomorrow

Wednesday, February 14, 2018

Household savings - the changing paradigm

Thought for the day

"In the carriages of the past you can't go anywhere."

—Maxim Gorky (Russian, 1868-1936)

Word for the day

Aesopian (adj)

Conveying meaning by hint, euphemism, innuendo, or the like.

Malice towards none

Imagine living in a world without Google!

Trust me you will find no Aadhar there.

First random thought this morning

As a matter of practice, on quarterly basis a large number of publically traded companies provide guidance to public about their future performance. Regardless of the fact that the guidance so provided is often laced with appropriate disclaimers and caution statements, the market participants place material reliance on such guidance. Not only average household investors but senior analysts and tend to base their decisions on such guidance.

Unfortunately, the management of companies are not accountable to anyone, if their guidance is unthoughtful, misleading or mischievous. This liberty to guide without accountability should be unacceptable.

Household savings - the changing paradigm

I have been frequently travelling to the state of Uttar Pradesh (UP) for past few decades. The state with more than 210million residents, is critical to Indian politics and economics. If UP was an independent country it would be the fifth most populous country in the world, behind China, India, USA and Indonesia.

In past two decades especially, during every trip to the states, I have experienced many changes. Though there are many things that have remained the same over many decades.

Last week while driving to Lucknow from Delhi via NH24, I observed few changes that are worth taking a note.

Anyone who has travelled to western UP during winter months must have experienced huge traffic jams caused by bullock carts overloaded with sugar cane.

Many a times driving on even national highways was a nightmare as the cane farmers would overload the carts with their produce for taking it to sugar mills, mostly at late night or early morning hours when roads are engulfed by dense fog on most nights.

These carts would block the roads, would travel the wrong way, and would slow down the traffic considerably causing long traffic jams.

This year, I did not witness even a single bullock cart carrying cane. All the cane was being transported by trolleys pulled by tractors. The things that had not changed a bit was overloading the career ominously, totally disregarding the safety of other road users, driving on the wrong side, slowing the traffic and preposterously telling everyone to go to hell if you do not like it this way.

As an investor, the immediate thought that came to my mind that the cane farmers in UP have truly been paid their arrears, and tractors companies with good market share in western UP must be doing extremely well.

But the seeker in me wanted to know more. So I took detour, leaving the highway and passing through some villages.

Speaking to people, I realized that cane farmers have had two good seasons, and the current season is also good. Crop is good and price is also good. While the potato farmers are distressed and wheat farmers are worried about a low yielding crop due to early rise in temperature.

One thing that is more worrisome is the change in economic behavior. None of the farmers seemed thinking about saving the bounty for bad times. Expensive motorbikes, SUVs, smart phones, designer clothes, cosmetics have become essential. Even holidays have appeared on "to do" lists. But health checkups, training, skill development, higher education appear nowhere in the priority lists. None of the 25odd farmers I spoke to, had given any thought to a lateral career movement for their kids....to continue

Friday, February 9, 2018

Household savings - 2

Thought for the day

"The American landscape has no foreground and the American mind no background."

—Edith Wharton (American, 1862-1937)

Word for the day

Gorgonize (v)

Hypnotize, Petrify

Malice towards none

Is it true that Sardar Patel was once ready to negotiate the whole Kashmir for Hyderabad?

At least some accounts of independence and partition say so. (see here)

First random thought this morning

Prime Minister Modi is visibly angry these days. The outburst in the Parliament, though not unprecedented was quite disquieting.

One would like to understand what is bothering him most. Is it the opposition ganging against him and trying to engineer a coup in BJP? Is it sub-par performance of economy despite all his good intentions and best efforts? Is it rising tension at the borders despite all his brilliant diplomatic endeavors? Is it failure of BJP leadership to reign the fringe elements from raising frivolous and regressive issues? Is it fear of loss in forthcoming assembly and general elections? or is it something else?

But whatever it is, he might need to mend his style of working and take more people on board for sure, in the larger interest of the nation.

Household savings - 2

Ever since Indian embarked on the path to liberalization and globalization in early 1990s, it has been a fabled story for global investors. There have been many instances in the interim when this story appeared faltering and investors appear giving up hopes. But the lure of youngest demography and the burgeoning middle class has kept their hopes alive.

If we write the India Story as follows, one can see "household savings and investment" forms the very core of the whole India story.

If this virtuous cycle is defied and the new cycle looks something like the following, trust me, there will be no India Story left to tell about, whatsoever.

Thursday, February 8, 2018

Household savings - 1

Thought for the day

"If only we'd stop trying to be happy we'd have a pretty good time."

—Edith Wharton (American, 1862-1937)

Word for the day

Lenity (n)

The quality or state of being mild or gentle, as toward others.

Malice towards none

Q. Should Caesar's wife be above all suspicion at all the time?

Answers:

Amit: Who is Caesar?

Rahul: Which wife?

Mamta: What's suspicion?

Swara: Why only wife?

Yogi: Take her mobile back

First random thought this morning

Suddenly, the entire country seems to be engrossed in a variety of conspiracy theories. The most popular ones suggest:

(a) Some Congress leaders are planning a coup in NDA and in within BJP also, to weaken Modi and stitch up a formidable alliance that will decimate NaMo.

(b) One senior Congress leader is planning to engineer a collapse in stock market later this year, so as to create an environment of negativity just before next general elections.

Household savings - 1

A careful reading of the Economic Survey 2017-18 and Union Budget FY19, gives an impression that policy makers' understanding of household savings and investment trends and preferences is piecemeal and therefore somewhat confused.

In my view, household savings is one of the most critical element of Indian economy. Ignoring it or undermining it, is certainly fraught with grave risk.

The consistent fall in household savings in past decade or so, is therefore a matter of concern and needs to be addressed.

Moreover, the recent change in the composition of household savings in favor of financial savings also needs closer scrutiny.

(a) After rising for two decades since economic liberalization began in 1991, household savings have been declining since FY10.

(b) The share of household savings in total savings declined from around 68 per cent in 2011-12 to 59 per cent in 2015-16. The savings of household sector as a ratio of GDP have declined from 23.6 per cent in 2011-12 to 19.2 per cent in 2015-16, while that of private corporate sector have increased.

(c) Within the households’ savings, there has been a substitution away from physical to financial assets, with the share of former declining by over 10 percentage points.

(d) The pattern of household’s financial savings was significantly different in 2016-17 vis-à-vis the preceding 5 years. While the overall financial savings of the households registered an increase of over 20 per cent in 2016-17, (significantly higher than the growth witnessed in any of the preceding 5 years), there was a decline in the savings in the form of currency by over 250 per cent (of about Rs. 5 lakh crore). This decline primarily owed to the withdrawal of high denomination currency notes in November 2016 and partial remonetisation by end March 2017.

(e) There was a significant decline in the proportion of deployment of financial savings in bank deposits and life insurance funds and an increase in share of currency, provident and pension funds, claims on government (primarily in small savings) in 2015-16. Savings held in shares and debentures more than doubled, and within this category, mutual funds segment increased by 126 per cent in 2015-16 over the previous year.

...to continue tomorrow

Wednesday, February 7, 2018

What to do?

Thought for the day

"There are two ways of spreading light: to be the candle or the mirror that reflects it."

—Edith Wharton (American, 1862-1937)

Word for the day

Cerebrate (v)

To use the mind; think or think about.

Malice towards none

Tension with neighbors is just another indicator of complete Congressization of BJP.

In Indira days "external threat" used to be the common refrain to garner support.

First random thought this morning

The current winter season has been unusually dry. In most part of the country drought like conditions exist. A recent road trip across UP and MP suggests that most of the smaller rivers have dried up and larger rivers' water level is much lower than normal.

The weather is unusually warm and wheat crop is ripening early. The yield is expected to be low despite higher acreage.

In hills summer flowers are blooming in peal winters, which as per folklores mean that the monsoon may be below par.

All this does not augur too well for Indian agri sector.

What to do?

In past two days a number readers have been asking about my vies about the market. "Should I sell now or wait for a bounce back?" is the common refrain. Only 3 readers have so far asked me whether they should be putting fresh money in the market.

I am in no position to offer any specific advice to anyone. However, for the benefit of all readers, I may share my personal views as follows:

(a) Most indicators are suggesting that the extant bull market ended months ago. We witnessed a strong bear market rally in past few months, just like the one we witnessed in July 2007-Janaury 2008 period when despite sub-prime defaults the benchmark indices gained ~50% and broader markets outperformed.

This time from end September 2017 and till mid January , we have seen broader market indices rising 24-30% despite macro environment worsening, and valuations transgressing into bubble territory.

(b) For the entire bull market that started from end August 2013, the broader market indices are still outperforming Nifty by ~40% (midcap) and ~55% (small cap).

As is the case always, this outperformance may be corrected over the course of next many months. Given that the distance to be covered is still very long, the journey is going to be very painful, exhausting and to a large extent frustrating. I therefore continue to maintain an all large cap portfolio.

(c) In my view, the market correction has just started and has a long distance to cover over next one year or so. We may see intermittent up moves, but the market shall eventually head down.

In strict technical sense, in my view, the following scenario is likely over next one year:

Base case for 2018

Nifty should bottom around 8470 in next 12months, i.e., a 50% correction of the rally from 6825, the low of March 2016.

Probable scenario for 2018

Nifty may correct 38 to 50% of the up move (5285 to 10114) in next 13months. Which means, the downmove may bottom between 8280-7700 Nifty level by January 2019.

Worst case scenario

The worst case scenario could be that Nifty corrects the entire gains made since March 2016 low of 6825.

(d) Since almost everyone is looking to sell at rallies, the rallies form here may be small, and in many cases only intraday.

(e) Rising rates, inflation and tighter liquidity are a totally foreign to a significant majority of investors who entered market in past decade or so.

The humongous losses on bond portfolios, when crypto bubble is bursting and economic growth is peaking at much lower level than widely anticipated, are most likely to entail a knee jerk reaction from inexperienced, over confident and overleveraged investors.

Brexit will add more uncertainty to the global markets this summer, as it would also be an unprecedented situation, with potential to cause a spiral effect across Europe.

(f) Back home, prospects of a below par monsoon, specter of political instability, less than expected earnings growth, and tighter liquidity shall keep equities under pressure.

In view of all this, I am certainly little extra cautious on my equity portfolio.

However, as an investor I certainly do not believe in a binary type situation (i.e., raising 100% cash). I am though holding reasonable amount of tactical cash, that should enable me to pass through these difficult time and give me an opportunity to add few extra bps to my returns.

To sum up, my strategy is very defensive portfolio, reasonable amount of cash, low return expectations, no contra calls and no fishing (bottom or otherwise).

If you feel that I have not answered the question "sell now or wait for bounce" categorically; well I have not and I cannot!