Vijay Kumar Gaba

Wednesday, March 28, 2018

FY18 - Market recap

Thought for the day

"It took me years to understand that words are often as important as experience, because words make experience last."

—William Morris (English, 1834-1896)

Word for the day

Kismet (n)

Fate, destiny

Malice towards none

Who stole my Data?

Has anyone heard about Google Baba?

First random thought this morning

One may call Rahul Gandhi by whatever name, ridicule him, reject him outrightly, but one thing is definite - he has put the mighty BJP on defensive.

Since past couple of months in particular, Rahul Gandhi would make some seemingly absurd allegation and the entire BJP machinery (including firebrand defense minister, textile minister, law minister and army of spokespersons) would remain busy denying it and levying some counter allegations.

The TV channel debates appear like someone in a crowded room has thrown his s**t in the air and switched on the fan.

FY18 - Market recap

The financial year 2017-18 started on a very optimistic note for Indian financial markets.

BJP had just scored a massive electoral victory in UP. This was widely assumed to mean that people and economy have moved on leaving the scar of Demonetization behind.

The market participants were full of hope anticipating GST to be panacea for many economic ailments.

The proposed New bankruptcy law, that was about to be passed by Lok Sabha, promised speedy resolution of NPAs.

Analysts were very optimistic about earnings finally growing after staying mostly flat for two preceding years.

The world economy and markets were also looking in great shape. The fears of Trump disrupting the global economy had mostly receded. US Fed had assured of orderly normalization of monetary policy. ECB and BoJ were still in "whatever it takes" mode and appeared in no hurry to withdraw stimulus.

Riding on the high hopes, markets world over rose to new highs. Indian equities also scaled new highs, before some dark cloud started gathering on the horizon.

Energy prices suddenly appeared sustaining at higher levels. US President appeared acting on his threat to build tariff walls and VISA restrictions. US yields started to rise. Domestic inflation started to pick up. Liquidity tightened, pushing rates higher. FPI flows turned negative even in debt. Market started anticipating a hike from RBI instead of cut. A bout of new bank defaults raised fear of fresh slippages. CAD shot up beyond 2% of GDP. Growth targets were cut. Earnings did not match the expectations.

The market accordingly responded negatively.

Benchmark equity indices corrected ~10% from their all time highs. Broader markets corrected even higher. One year SIP return vanished. Debt fund returns also moderated considerably as bond yields rose sharply.

Introduction of long term capital gains tax and inclusion of equity funds in the ambit of dividend distribution tax in union budget for FY19 changed the rules of the game for equity investors.

Change of rules prescribed by SEBI for categorization and benchmarking of mutual fund schemes also caused some disturbances in the market.

A certain degree of uncertainty has crept in after the recent bypolls in UP & Bihar, and withdrawal of TDP from NDA fold.

Consequently, the financial year is ending on rather cautious note with below par returns and considerably moderated expectations forFY19.

10yr benchmark yields rose and bond trading volumes shrunk.

Markets corrected sharply in last two months.

Consumption best performer, pharma the worst.


	$Sector wise.jpeg$

Foreign investors remained consistent sellers most of the year. Domestic flows sporadic.

Huge divergence in mutual fund returns. Small cap and FMCG funds best performers. Pharma fund the worst.

Large cap funds returns mirrored the nifty. Multi cap a shade better. Small cap outperform despite late sell off.

FY18 NIFTY EPS downgraded to ~Rs455, from Rs520 in the beginning of FY18.

FY19 still elevated.

Technically Nifty at threshold of two important events — (a) crossover of 50EDMA below 100EDMA and (b) Nifty sustaining below 200EDMA.

In mid 2015 this occurrence resulted in sharp corrections.

Tuesday, March 27, 2018

What is bothering Indian markets - concluding part

Thought for the day

"We are living in a epoch where there is combat between commercialism, or the system of reckless waste, and communism, or the system of neighbourly common sense."

—William Morris (English, 1834-1896)

Word for the day

Genethliac (adj)

Of or relating to birthdays or to the position of the stars at one's birth

Malice towards none

India gets a new passion - "Akash Ambani's wedding".

This shall keep us busy for most of 2018.

Many thanks to the Lord Almighty for it!

First random thought this morning

The important question which nobody is answering is "whether the Government of India is a discreet time series or a continuous one?".

If it is a continuous series than the people at the helm must be accountable for everything - all policies, programs, resources, inadequacies, success, failure - everything. Then passing blame on the predecessors for anything is not justifiable. Especially when the current dispensation does not mind taking credit for their good deeds that start bearing fruits in its regime.

If it is a discreet series, then everything needs to be reported broken in the blocks of period during which various people/parties were at the helm, and credits and blames may be assigned accordingly.

What is bothering Indian markets - concluding part

In past three weeks I have shared my assessment of the factors that seem to be bothering the Indian equity markets presently. Many of these concerns arise out of strong reasons like rising cost of capital, fresh round of slippages in bank loans, and below par earnings' performance so far. Whereas, many concerns are mostly anticipatory and hypothetical in nature, e.g., political uncertainty, fiscal slippages beyond manageable levels, continued GST led disruption, etc.

In this concluding part, I would like to highlight the concerns over sustainability of current global growth rate, in the wake of rising rates and inflation pick up.

In my view, debating or worrying about inflation (or deflation for that matter) at this point in time may be meaningless. The global economy is at the cusp of a number of material changes that will shape the future of global economy for next couple of centuries perhaps. The comparable situation that comes to mind is the industrial revolution days of 19the century.

Historically, energy and food inflation have bothered the people most. There is little indication that we can have any bout of sustainable inflation in both.

As the ageing demographics in the developed world inspires the work automation technologies — the life styles, consumption patterns, trade balances etc are all set to change beyond recognition.

In the medium term therefore the chances of world slipping into a sustained period of deflation are much higher than any inflation outburst.

At the same time the demographic imbalances and technology inequalities will inevitably trigger a wider unrest.

Given that an overwhelming majority of world's population lives in poor and technologically deprived (on relative basis) countries, we might see another round of colonization (this time virtual) taking place.

But these are long term concerns. In the near term stagflation (lower growth and higher inflation) seems like a valid concern.

As the recent Absolute Return Partner's recent letter to investors (see here) pointed out, "the US output gap has now vanished. It is therefore fair to say that there is currently little slack overall in the US economy. Plenty of economic slack in the post-crisis environment is very much why inflation has been so modest in recent years – not only in the US but worldwide. If economic slack has now largely disappeared, at least in the US, rising inflation and a more aggressive FOMC is only what can be expected."

(It may be noted that the Absolute Return Partner do not appear subscribing to the inflation bust theory. They seem more inclined to the deflation bust story).

In a recent BoFA fund managers' survey, an overwhelming 74% of respondents expressed that global economy is in late cycle of growth. This was the highest percentage in Survey history. At the same time the respondents voiced the highest inflation expectations in over 13 years. As a reminder, global growth turns south coupled with inflation you get "stagflation", and when as a result the "late cycle" economy end, recession begins.

The market worry may however be stemming from the paradoxical investor behavior. The survey report notes that even as the "smart money" sees both a stagflation and recession as just around the corner, they put in even more cash into the market. Ominously investors yet to act on fears, as rates and earnings are keeping the bulls bullish. Cash levels fell from 4.7% to 4.6%."

Friday, March 23, 2018

What is bothering Indian markets - 9

Thought for the day

"Things cannot make themselves impossible."

—Stephen Hawking (British, 1942-2018)

Word for the day

Pullulate (v)

To breed, produce, or create rapidly.

Malice towards none

How would the life of Indians change, if Google, Facebook, Twitter and WhatsApp services are withdrawn from them?

#RaviShankarPrasad

First random thought this morning

Former RBI governor Raghuram Rajan reportedly said in an interview that 7.5% economic growth was not enough to employ 1.2 crore people joining India’s workforce every year. Rajan said India must grow in double digits and a 10% economic growth was achievable in near future.

It is difficult to find out exactly when this wisdom dawn upon the former governor of RBI.

Nonetheless, an overwhelmingly large number of people blame him for wrongly choosing the inflation in a classical inflation vs. growth trade off.

What is bothering Indian markets - 9

FY18 has been one of the best years for initial public offerings (IPOs) of Indian equities. In first none months of the year corporates garnered over Rs1.5trn of investment, against Rs1.4trn garnered in FY08.

To make the temporal comparison, the fund raising at 1.5% of GDP was lower than the 2.8% recorded in FY08 and 1.8% in FY10.

However, at ~24x PE ratio, the cost of equity was at ~4%, which is very much comparable to the bubble years

Though the IPO momentum has continued in 1Q2018, the investors' interest appears waning as the market corrected.

The fatigue is very much conspicuous as two high profile PSU IPOs (Bharat Dynamics Limited and Hindustan Aeronautics Limited) in March have failed to attract sufficient bids from non-institutional investors at least.

In Union Budget for FY19, the government has budgeted Rs800bn receipts through disinvestment of public sector equity. The target may have to be raised if GST revenue misses target. Some of this target could be met through inter se sales (e.g., IOC buying government stake in OIL and HPCL and BPCL buying government stake in GAIL). Nonetheless, these transactions will need debt raising by the buying entity, thus straining the availability of funds for growth financing.

PSBs are also required to raise Rs580bn equity from market as part of the recapitalization approved in October last year. Given the recent development and likely fresh round of write offs and slippages, the target may have to be raised.

Besides, few high profile public offerings (e.g., NSE. six India Railway ancillaries, GoAir, National insurance, Reliance General insurance, UTI AMC, HDFC AMC, IREDA, EESL, are also planned to hit the market in next few months.

Then there is this superstition amongst many market participants that a large overpriced IPO always leads to the market fall. The popular example cited is the infamous IPO of ADAG's Reliance Power Limited in early 2008. The Rs115.6bn IPO was oversubscribed 72x, generating bids worth over Rs7trn. Unfortunately, the listing of IPO coincided with the global melt down. Even after a decade, the market value of that company is still 85% lower than the IPO valuation.

Given (a) below par performance of many recently listed IPOs; (b) just ~10% CAGR on Nifty during four years from FY15 to FY18; (c) one year FD, Liquid Fund returns close to 7%; and (d) full tax exemption for LTCG being no longer an USP for equities — the market is obviously worried about the impending supply of paper.

Thursday, March 22, 2018

What is bothering Indian markets - 8

Thought for the day

"Life would be tragic if it weren't funny."

—Stephen Hawking (British, 1942-2018)

Word for the day

Disjune (n)

Breakfast

Malice towards none

माटी को हक दो-
वह भीजे, सरसे, फूटे, अंखुआए,
इन मेडों से लेकर उन मेडों तक छाए,
और कभी न हारे,
(यदि हारे)
तब भी उसके माथे पर हिले, और हिले,
और उठती ही जाए-
यह दूब की पताका-
नए मानव के लिए।

—केदारनाथसिंह

First random thought this morning

One way to tackle this issue of reservation in jobs and admissions could be to invite all castes and communities to seek reservation. Then allow proportionate reservation to all the castes, sub-castes and communities which have sought reservation. This will at least end these frequent agitations once for all.

In the matter of religion, the government may work out a new list and recognize all thousands of sects, sub-sects, and cults as separate religion, making it clear that the government will remain secular and no special privileges or patronage will be accorded to any religion; and no Form, government or otherwise, can have a religion column.

What is bothering Indian markets - 8

The government implemented a nationwide Goods and Services Tax from July 2017. The single tax subsumed a plethora of indirect taxes like Excise Duty, Sales Tax, Entertainment Tax, and a number of other Local Taxes.

The roll out of GST has been a mammoth exercise, considering the complexities involved in multiple state wise tax structures. The situation is further complicated by the fact that GST implementation has apparently forced a large number of businesses which were hitherto escaping the tax net. Naturally there is a game of Tom of Jerry between the tax authorities and the new tax targets.

The early trends suggest that GST collections have fallen to Rs863bn in January 2018, after initially recording a run rate of well over Rs900bn in first three months. This fall is not in tandem with the broader economic growth trend, that has picked up in 3QFY18.

Recent reports have suggested huge discrepancies in the GST returns filed so far.

As per reports, the revenue department analysis of returns filed so far suggests that only 16 per cent of the summary sales returns under GST have matched with the final returns.

According to the GST returns data, 34 per cent of businesses paid Rs 34,400 crore less tax between July-December while filing initial summary return (GSTR-3B).

These 34 per cent of the businesses have paid Rs 8.16 lakh crore to the exchequer by filing GSTR-3B, whereas analysis of their GSTR-1 data show that their tax liability should have been Rs 8.50 lakh crore.

As per the analysis by the revenue department, initial returns filed and taxes paid by 16.36 per cent of the businesses have matched with their final returns and tax liability. They paid a total tax of Rs 22,014 crore.

However, the data also showed that there was excess tax payment of Rs 91,072 crore by 49.36 per cent of businesses registered under GST between July-December. While they have paid Rs 6.50 lakh crore as GST, the GSTR-1 filed by them shows that their liability should have been Rs 5.59 lakh crores.

Given that the success of GST is mostly predicated on the accuracy of self assessment and voluntary compliance, 84% of the taxpayers filing erroneous returns is certainly a matter of concern.

GST being the single largest source of revenue for the government, accounting for about one third of the gross tax revenue, the fiscal balance of the government depends to a large extent on success of GST.

Moreover, the impact of GST on smaller and unorganized businesses (mostly unlisted) which have been mostly out of tax net hitherto, is not fully known as yet.

The realization of full impact will only clear the picture about the loss of employment opportunities, impact on household savings & consumption, and incremental growth of medium & large organized businesses (many of them publically traded).

The uncertainty is obviously bothering the investors in Indian equities.

In my view, this concerns may not be totally valid. Such a major change obviously take some time to stabilize. However, if the experience drawn from implementation of VAT (MODVAT, CENVAT) and service tax are considered, there is little doubt that the mechanism will stabilize in due course and be beneficial for the Indian economy; regardless of the teething troubles for few quarters.