Vijay Kumar Gaba

Tuesday, July 17, 2018

Pain of professional investing

Thought for the day

"If you are the master be sometimes blind, if you are the servant be sometimes deaf."

— R. Buckminster Fuller (American, 1895-1983)

Word for the day

Garbology (n)

The study of the material discarded by a society to learn what it reveals about social or cultural patterns.

Malice towards none

Will it be Nath vs. Scindhia in MP and Gehlot vs. Pilot in Rajasthan assembly elections later this year, to give a walk over to BJP?

First random thought this morning

The Uttar Pradesh government is relentless in propaganda of its "achievements in past one year. Last week too it issued multi page color insertions in national Dailies. The listed achievements included (a) laying foundation stone of an expressway planned a decade ago; (b) water pipelines in some villages; (c) electricity polls in some villages; (d) city gas distribution in Varanasi; (e) community health center in a village; (f) a TCS BPO; (g) cleaning and renovation of few ghats in Varanasi; (h) improvement and upgradation of few roads, etc.

It would be interesting to see if the government would like to take credit for Mukesh Ambani becoming richest Asian during its tenure!

Pain of professional investing

Since past couple of weeks, markets participants have been quite actively discussing the worrisome dichotomy in market, i.e., outperformance of benchmark indices (Nifty and Sensex) over broader market. Nifty has in fact outperformed most of the EM indices in past couple of months.

The outperformance of benchmark indices is giving an optical illusion of "all is well" in Indian markets, whereas most of the investors are experiencing serious loss of value in their respective portfolios.

After 4yrs of bull market (August 2013 to July 2017), it is normal for the broader markets to underperform and market breadth to stay negative during the course of the correction. What has surprised the market participants, in past 8weeks in particular, is that the move has been totally in opposite direction, viz. Benchmark indices have gained ~4%, while the small and midcap indices have fallen over 10%. Market breadth in this period has been very poor.

This dichotomy has created some peculiar problems for investors. For example:

(a) The portfolio investors who hold a large proportion of stocks outside Nifty universe are not able hedge their portfolios by shorting Nifty.

(b) Sectoral portfolio construction has become difficult as there are no discernible sectoral trends. The divergences are mostly based on market capitalization weight.

(d) Concentrated portfolio in top Nifty stocks has outperformed, but given the valuation premium over mid and small cap, the risk has increased significantly.

(e) In past couple of years, maximum money has been raised by mutual funds and PMS that aim to invest in mid and small cap stocks or stocks from specific theme or sectors. Most of these funds are underperforming the benchmarks, making investor jittery.

Ideally, these short term market aberrations should not bother an "investor". To the contrary, these are opportunities for investors where they can buy good stocks at bargain value. However, this time more investors are worried than ever. The reason, in my view, is meaningful institutionalization of the equity investment in past couple of years.

The asset under management (AUM) of mutual fund, PMS and other institutional investors has grown substantially in past couple of years. But most of these professional investors (managers who invest money on others' behalf) are in a fix.

They are given supposedly long term money to manage but get evaluated on month to month basis, and in some case even day to day basis. Their remuneration depends on their quarterly "trading" performance and net new money collected and not on the basis of new investment idea discovery.

These investors are therefore under tremendous pressure to generate return on "monthly basis" rather than creating wealth by investing for long term.

The following viral message on social media captures the true essence of the point I am trying to make here. (Please note that I have no means to verify the authenticity of this. I am reproducing it just to highlight my point without any comment on the performance or appropriateness of the strategy of the concerned fund house)...to continue tomorrow

Friday, July 13, 2018

Challenges investors face this morning

Thought for the day

"When things begin to go bad, the perception of people makes it worse."

—James Mirrlees (Scottish, 1936-)

Word for the day

Eggbeater (n)

A helicopter (slang)

Malice towards none

India beats France to take 6th spot on economic ladder.

Can Croatia also beat them to take their first FIFA cup?

First random thought this morning

The government has accepted net neutrality. It has also virtually accepted decriminalization of Section 377 of IPC. It is on the verge of bringing legislation to make Triple Talaq illegal. It is reportedly considering moving Supreme Court for banning the regressive practice of Nikah Halala. Though it has so far dithered on the issues like banning marital rape, but there are some voices of dissent to this view within BJP.

Notwithstanding the opinions freely expressed by various individuals within BJP and government, the legislative business so far has not indicated any regressive or bigoted stance of the government.

Challenges investors face this morning

Defying the recent global trend, the benchmark equity indices in India have risen close to their all time high levels recorded in late January 2018. The broader markets though have not kept pace with the benchmark indices and have underperformed by 12-15%.

If we consider YTD performance of markets, my strategy of focusing on large cap strong balance sheets, discretionary consumption, IT and Pharma and underweight financials & consumer staples has mostly worked well.

Considering almost NIL return in benchmark indices, my 25-30% tactical cash position (that has returned ~3% absolute YTD) has also worked well fro me. (See here)

In view of the benchmark indices trying to get past their previous all time highs and breaking into new territory, I have got recently lot of queries from readers. Most of the readers want to know if I am considering any change in my investment strategy!

At the outset I would like to inform that I am seriously concerned about the massive rally in so called "quality" stocks that has made their valuations beyond my reasoning capabilities.

I can find no reason to support sustainability of their current price levels. Nonetheless, the market is indicating that we may see the current trend continue to extend further.

This puts me in the most challenging phase of investing, where—

(a) You are happy for your strategy is working well;

(b) You have almost no conviction in sustainability of returns in your investment portfolio;

(d) Alternatives to equity look even less attractive;

(e) Optically market is giving illusion of "all is well"; and

(f) Technical charts are telling you to buy crap.

The options before me this morning therefore are—

(i) To stay tightly wrapped in my cocoon and do nothing;

(ii) To play contrarian, sell quality at crazy valuations and look for bargains in lower rungs, fully aware that prices may correct further and perhaps dramatically;

(iii) Raise cash level beyond 30%; and/or

(iv) Go with the emerging consensus and rotate the portfolio within quality to overweight underperforming pharma and commodities.

I shall share my thoughts on this with the readers next week.

Thursday, July 12, 2018

If you find it tough, well it is!

Thought for the day

"The world's been pretty good at coming up with new ways of doing things."

—James Mirrlees (Scottish, 1936-)

Word for the day

Solecism (n)

A breach of good manners or etiquette.

Any error, impropriety, or inconsistency

Malice towards none

Honestly, with hand on your heart, "Did you bet for France in FIFA finals"?

First random thought this morning

Past four weeks have been overwhelming for Indian sports lovers. Soccer, tennis, badminton, cricket, hockey, gymnastic etc have seen major events. India earned some glory in cricket, hockey and gymnastic.

Nonetheless, millions of people have remained busy following numerous sporting events. People have been opening newspapers from backside. New soccer stars have become household names, while TV channels have remained submerged in Mumbai floods, Burari suicides, and rapes.

No one is discussing or highlighting any economic distress or failing monsoon. All seems well and stock market continues to rise.

If you find it tough, well it is!

At the risk of sounding irritatingly repetitive, I would like to reiterate that in past 7 decades we have focused too much on our weaknesses and tried hard to overcome these by importing technology, energy, intellectual property, capital, and consumption patterns. The root cause of many economic problems, e.g., current account deficit, fiscal deficit, energy deficiency, excessive dependence on external IPR & capital flows, etc. could be traced to this misplaced focus.

In my view, just by focusing on our intrinsic strengths, we can not only conveniently reverse the flow of trade to pre British era but also be successful in achieving our secular goals of sustainable and faster economic growth.

I have been suggesting that implementing the programs like the few illustrated below, we could improve the balance of payment substantially and structurally:

(a) Indians spend approx USD25bn annually on education and related overseas travel. Creating 5 Special Education Zones (SEZ) with liberal VISA, forex, taxation and real estate ownership rules, and allowing foreign institutions to freely set up campuses could potentially reverse this flow. Students from India, far-east, middle-east and Africa who find it difficult to get VISA for US/UK etc. or find that expensive could also benefit from this. Our politicians have often spoken about recreating Nalanda and Takshila. This in my view is the easiest way to do that.

(b) It is common knowledge that India holds tremendous potential for tourism. However lack of proper infrastructure and a holistic approach to harness the potential has traditionally constricted the growth of this sector. On the other hand Indian outbound tourists flow is rising. The government and hospitality sector entrepreneurs will have to think really big to reverse these flows and bring India on world tourism map. Developing some world class self contained international tourism centers, e.g., on lines of Macau, Bangkok, Dubai, Santorini, Las Vegas, etc. with liberal VISA, forex, taxation and real estate ownership could be the first step in this direction.

(c) Vindavan, Tirupati, Varanasi, Gaya, etc. all have potential to be as desirable, venerable and popular destinations as Mecca, Vatican and Jerusalem.

Converting these centers of Indian religion and culture into self contained special zones with international airport, adequate number of high star category hotels, and annual event calendar could add substantially to India's external sector.

For example, Vrindavan can have two annual events Holi and Janamashtmi, when more than half million foreign tourist can visit the holy town

(d) Considering the worsening demographic profile of rich countries in Europe and Japan, the rising need for healthcare assistants can be hardly emphasized more. Opening one world class nurse training institute in each state with special emphasis on teaching foreign languages to the trainees, may do the same wonders as ITeS did in last two decades.

(e) Operating special incentive schemes for building global consumer brands may help in substantially enhancing the value of Indian exports. The government, for example, consider providing special incentives (tax rebates, promotion through government campaigns, etc.) for all locally developed consumer brands that are able to achieve more than US$500mn in merchandise sale in a year.

These projects also have the potential to generate large scale productive employment opportunity for local talent, besides contributing to economic growth and true globalization of Indian economy.

I acknowledge some of these suggestions may sound extremely difficult to implement in the current socio-political narrative. But then who said running a government in India is an easy task!

Wednesday, July 11, 2018

Budget tourists and assembly lines

Thought for the day

"Encourage your own curiosity; pursue the problems based on that."

—James Mirrlees (Scottish, 1936-)

Word for the day

Makebate (n)

A person who causes contention or discord.

Malice towards none

Why can't BJP just accept that AK is CM of Delhi and cooperate with him to improve life of the people living in Delhi!

First random thought this morning

Adi Godrej group is reportedly opposing the proposed acquisition of their Vikhroli land for Mumbai-Ahmadabad bullet train project.

So far the opposition to the ambitious project had come from farmers and opposition parties. This is the first instance an industrialist (that too someone who always sounded highly impressed by PM Modi) has opposed the pet project of the prime minister. This may signifies either of the following:

(a) Industrialists want everything but wouldn't give away even a small piece of land lying vacant for 100years for the development of the country. or

(b) Government has totally failed in convincing people about the need, necessity and importance of Bullet train project.

Budget tourists and assembly lines

The primary idea behind the activity of trading is to let everyone do whatever they can do best.

"Trade" thus allows the people use their scarce resources in most efficient way and exchange the output of their expertise with the output of others' expertise. Trade renders every one better off, as it facilitates the most efficient exploitation of scarce resources and enables production of goods and services at lowest feasible rates.

In an ideal world, the objectives of "Trade" are hence achieved when:

(a) All owners of resources, producers of goods and services, and consumers of such goods and services are allowed to freely trade with each other; and

(b) Everyone produces as per their specialization and everyone consumes as per their affordability.

If trade is restricted, optimum exploitation of resources would not be possible, and people will be forced to do things beyond their domain of expertise. This results in (a) irrational pricing of resources, goods and services; (b) economic imbalances; and (c) dissipation of scarce resources.

The erstwhile Soviet Block, which restricted trade with the western world, is a classic example of this phenomenon. India and China also followed largely restrictive trade policies till 1980s and suffered slower growth, poverty, and high inflation. Opening of Indian and Chinese economy may have significantly helped in containing global inflation through cheaper labor and resources.

Similarly, if people are allowed to consume more than what they can economically afford, the demand-price equilibrium of goods and services will get distorted leading to (a) abnormal pricing of resources; (b) avoidable wastage of resources; (c) poor sustainability; (d) frequent financial crisis; and (e) socio-economic inequalities.

The sub-prime crisis that rattled the global economy a decade ago is a classical example of this "eating more than you can digest" phenomenon.

I also see consumption of fossil fuel by Indians as a reflection of consuming beyond affordability. Had successive Indian governments since independence, focused on harnessing the abundantly available solar, wind, and hydel sources of energy, rather than over relying on imports of fossil fuels, the trajectory of Indian economic development could have been very different.

Similarly, constricting free trade in agri produce and making the farmers dependent on subsidies and loan waivers etc. is another trade distortion that may have seriously hindered India's position in global trade, besides introducing serious discrepancies (almost irreparable now due to political compulsions) in the socio-economic structure of the country.

The short point I would like to make is that to increase its share in global trade to a respectable level (say 5%) from the current ~2%, India needs to focus on its core strengths and expertise.

If someone asks me "what are the 10 key strengths of India" in socio-economic context, I would list the following:

Food
Languages
Religion & Mythology
Spiritual knowledge
Traditional arts
History & culture
Variety of beautiful landscapes
Hard working people with better than average IQ
Abundant sunshine and water flowing through rivers
Second largest pool of arable land

As a minister for trade and commerce, I would therefore focus on these strengths to increase my share in global trade, rather than simply importing crude oil and exporting petroleum products; or importing raw diamonds and bullion and making jewelry as per the specification and designs provided by foreign buyers; or providing a base to foreign manufacturers for assembling mobile phones or motor vehicles from mostly imported parts; or worst be contended with small number of low budget foreign tourists!