Vijay Kumar Gaba

Wednesday, February 27, 2019

Where India stanmds in Sino-US trade war

Some food for thought

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

—Anthony Burgess (English Novelist, 1917-1993)

Word for the day

Evenfall (n)

Twilight; dusk; the beginning of evening

First thought this morning

Indian Air Force avenged the Pulwama attack adequately. Penetrating deep into the Pakistan territory (not just PoK), our fighter planes destroyed JeM camps. The performance was meticulous, worthy of a force which is comparable to the best in world. All citizens must be feel proud and safe.

The early reactions to the strikes from various sections are noteworthy, as these reactions indicate to some important trends.

(a) Pakistan Army admitted the transgression, but denied any damage. They claimed that transgressing Indian Air Force planes were forced to shed "payload" in vacant land and run back. The adventurous attempt therefore has been successfully repelled.

This official reaction came much before any claim was made by any Indian official.

Obviously, Pakistan establishment is worried about its credibility and also preparedness of war, both economically and strategically. They are hence eager to preempt any adverse public opinion that might force them to retaliate without any preparedness.

Secondly, regardless of all the rhetoric, Pakistan is certainly not willing to escalate the matter further. Most voices in Pakistan media called for peace and dialogues.

(b) Almost every opposition leaders in India commended IAF for the successful operation, much before any official statement was made.

It appears that almost all of them were suffering from the guilt of challenging the authenticity of surgical strikes of September 2016. They used this opportunity to remove the label of "anti national" pasted on them by BJP and allied organization. To this extent, it is clear that BJP has been largely successful in setting the narrative and agenda.

(c) By making this overt operation, the Indian establishment has also made sure that the situation does not get escalated any further. The government has effectively calmed all the feathers that got ruffled post Pulawama attacks.

Chart of the day

Where India stanmds in Sino-US trade war

For past many months, the trade related disputes between two of the largest global economic powers have kept markets busy.

USA has announces several measures to reduce its trade deficit with China, including imposition of import duties on imports from China. The impact of the measures is visible in slowing Chinese growth and declining global trade. The exports of US to China have also suffered. The collateral is that the trade surplus of EU, Japan and Australia etc with China has further increased.

The financial markets have reacted wildly to each sign of truce and antagonism between the two super powers. Currently markets are running up, rather hard, fueled by the signs of thaw.

Notwithstanding the market volatility, as a small Indian investor, who is entirely focused on domestic assets, I find the following issues pertinent for examination.

(1) Would India benefit from escalation of trade war between US & China, or complete normalization of trade relation between US and China; or continuation of current state of indecision and tentativeness?

(2) If not resolved soon, would the trade conflict between China and US, remained confined to trade or escalate further into a geo-political crisis?

(3) If the trade war escalates, and both the parties harden their positions, will we have a cold war kind of situation again, polarizing the world again?

All our neighbors (Pakistan, Nepal, Bangladesh, Sri Lanka, Maldives, Mauritius, Myanmar) have shown their inclination to side with China. Under these circumstances, what would be in the best interest of India? Should India side with US, because of lot of legacy issues siding with China may not be an option, or stay non-aligned?

(4) In next few months, Europe might also see a new equation emerging. Notwithstanding, UK dithering on Brexit, a realignment of forces in Europe looks more likely. Under these circumstances, could we see support for China in Europe, especially from beleaguered economies like Italy and Greece?

(5) Would a full US China deal reinvigorate the struggling global growth, and bring back inflation and higher rates?

Given that I am no expert on global financial markets, international relations, global economics and most other subjects, I would be contended to rely upon the views of the "experts".

Intuitively, I feel the US China dispute is not about trade, which is only incidental. The real issue is whether China will be allowed an entry in elite global club or not.

Therefore, regardless of the outcome of Summit on Friday, the condition may not normalize, until US begins to consult China before invading a country like Iraq, the way it does consult with UK and France. At best the deal on Friday would be temporary relief till a new flash point gets triggered.

I would be examining these issues in some detail over next few months to assess the impact on my investment strategy.

In the meantime, I shall be delighted to receive comments, views and opinions of readers on these issues.

Tuesday, February 26, 2019

Do we mind a war?

Some food for thought

"Who are you to condemn another's sin? He who condemns sin becomes part of it, espouses it."

—Georges Bernanos (French Author, 1888-1948)

Word for the day

Tabula rasa (n)

A mind not yet affected by experiences, impressions, etc.

First thought this morning

Till a few years back, "Kameti" (A kitty of businessmen) used to be one of the most popular source of financing for traders, cottage and micro industry in unorganized sector in many parts of the country. This very friendly source of funding was widely used for working capital, capacity building & expansion, and even meeting expenses of family events like marriage etc. In past few years, especially after demonetization, this source of funding has almost dried up.

The modus operandi of "Kameti" is very simple. 25-50 businessmen working in a micro markets would come together and commit a fixed monthly amount (say Rs50,000 and 40 people) to be a put in a pool. Every month there would be a meeting of all the participants. The participant(s) who need money for their business or personal purpose, would bid for the pooled money of Rs20lacs (Rs50000*40). The participant bidding the highest discount would take the entire pool less discount. The amount of discount is distributed equally amongst all the participants as "interest income". All the transactions are usually in "cash", and all the participants would generally know each other well.

The amount of discount (or interest) dynamically varied as per business cycle, and was determined in very transparent manner. In case there is no bidder in a month, the winner will be chosen by lot of draw and a pre agreed nominal discount would be applied (usually 1-2%).

In rare cases of a successful bidder failing in making successive monthly contributions, the rest of the participants would bear the loss in equal proportion. There were no willful defaults.

Like most other indigenous systems and traditions, I found this system also very effective and useful. From anecdotal evidence, I find this system to be the best example of Self Help Group - totally self regulated, based on mutual trust & empathy, transparent, flexible and dynamic. It involved no need for regulatory oversight and entailed no systemic risk.

First demonetization and now the new law on unregulated deposits, has virtually destroyed this very useful source of financing for small businessmen.

The only regulatory drawback of this system was that the "interest income" earned by the participants remained outside the tax net. But a pragmatic review of the system would have allowed tax exemption for the interest income from Kameti participation, as an incentive to MSME, provided such Kameti was approved by the local trade or market association. This interest is nothing but the compensation for the risk. If equity investors can get tax concessions for investing in "risky assets", why not these.

To those who believe that all cash is "black", I have all my sympathies with them. Nonetheless, businessmen could be motivated to gradually operate Kameti via an escrow account. All participants could contribute to this escrow account through digital transfers and the pooled money could be transferred to successful bidder's account, so on and so forth.

I am not naive enough to assume that this "escrow" account method would be equally useful and immediately acceptable to businessmen who still like to deal in cash. But the lure of tax exempted interest income will surely draw many people to this mode over a period of time, lessening the work load and risk for formal lenders, and lowering cost and inconvenience for small businessmen.

Do we mind a war?

Indian financial markets have totally ignored the war shenanigans and not reacted at all to—

(a) Massive troop movement: Reportedly over 10,000 additional troops are being moved to J&K).

(b) Pakistan preparing for war: Pakistan has reportedly declared war preparedness, vacating border villages, cancelling leave of forces etc. There are some unconfirmed reports of artillery mobilization also.

(d) Many friendly nations have extended explicit support in case a war does erupt. Israel in particular has been quite vocal.

(e) Prime Minister is threatening an adequate response to Pulwama attacks, at least thrice a day.

(f) Trade blockage has already started with withdrawal of MFN status, imposition of 200% duty; and "voluntary" refusal of merchants to export goods to Pakistan; boycotting of all Pakistani artists and sportspersons, etc.

This is not at all surprising. Similar escalations were seen in the aftermath of Kargil War (May-July 1999), attacks on the Parliament (December 2001) and Mumbai attacks (November 2008) and attack on Army base in URI (September 2016). On each of these periods of escalations, the market did not make any panic or unusual move.

What does this imply?

Does the collective wisdom of market not believe in any probability of even a limited war between two neighbors? If that be the case, what this all brouhaha is that we are witnessing in media, both mainstream and social?

Is it safe to assume that we do not mind a war insofar it has no significant economic cost?

Is it also safe to assume, even a small engagement at border may surprise markets hugely?

Friday, February 22, 2019

2019: First strategy review

Some food for thought

"The first sign of corruption in a society that is still alive is that the end justifies the means."

—Georges Bernanos (French Author, 1888-1948)

Word for the day

Behemoth (n)

Any creature or thing of monstrous size or power:

First thought this morning

For past one month at least the newspaper readers in NCR area are being welcomed by 4-5 full pages of advertisements by State and Central governments. The faces of the Chief Minister and Prime Minister are displayed prominently in these colorful insertions.

These advertisements mostly relate to the "development" work done by the respective government in their tenure, new projects launches and/or the promises to launch new development projects. Besides, Delhi, the advertisements of the state of UP are also very prominent.

A recent series of half/full page advertisement in NCR editions of national dailies related to regularization of unauthorized slums/colonies in Delhi. Another full page advertisement highlighted the development works in prime ministers' Lok Sabha constituency of Varanasi. The claims included trivial municipal improvements like cleaning of drains, planting of saplings on roadsides, installing LED street light, etc.

I feel it is totally unethical and highly undesirable, for the following reasons:

(a) If development has taken place in an area, the beneficiaries of such development (the people of that area) would automatically know about such development work. They need not be "informed" via pompous newspaper advertisements.

(b) If the publicity of development (or promise of development) in one constituency is done at public expense, then all elected representatives should be allowed to publicize the work done in their constituencies at public expense too, for the sake of equality and justice; which is not the case at present.

(c) Such wide and blatant publicity of development in one constituency or area should be construed as "allurement" of voters of other constituencies where so called development work has not taken place. This is unlawful.

It would only be appropriate that Hon'ble Supreme Court and Election Commission take note of this practice and completely ban such publicity at public expense. Political parties and representatives may do so on their own expense subject to overall expense limit fixed by the Election Commission.

Chart of the day

2019: First strategy review

In mid December I shared my investment strategy for 2019 with readers (see here). Since then markets have seen lot of turbulence. Some popular stocks taking a decent beating and many credit funds have also witnessed write downs. Some readers have asked, if I am reviewing my strategy in this light.

In this context, I would like to state the following:

(a) I have reviewed my strategy in light of the recent developments. I am fully satisfied with the following, and consider absolutely no need for any change in the strategy:

(i) 15% allocation to gold.

Gold has been one of the best performing asset this year so far.

(ii) 15% allocation to debt, entirely in the accrual products till benchmark yields cross 8% mark.

(iii) 70% allocation to equity, with 30% in tactical cash to be invested in April 2019 or 9200 Nifty level whichever happens earlier. Within equity allocation, the strategy to focus on mid cap stocks, with decent solvency ratios and operating leverage also seems right as this segment has already seen decent correction and valuations look much better as compared to December 2018.

Incidentally, the market sentiment has turned excessively fearful. The smallcap (Nifty Smallcap 100) has given up most of the gains and is now flat for past 4yr. Midcap is returning 5% CAGR and Nifty is returning 6.8% CAGR.

I had mentioned my sectoral preferences as "large PSU banks, pharma companies with domestic focus, construction companies with stretched balance sheets, which are most likely to survive, and real estate ancillaries like cement, tiles, sanitary, plywood, electric fittings etc."

I have reviewed this in light of 3#FY19 results and do not see any need for change in the stance.

I shall be looking to buy stocks from these sectors over next 2-3months.

I would like to reiterate that I am not at all worried about the post election political situation in May 2019. Any major correction in market due the election outcome would be a great trading opportunity in my view. I would not be averse to using leverage to take advantage of this trading opportunity, if it does present itself.

I am mindful of the possibility of a significant global market correction. My strategy of holding gold, pure short term accrual debt instruments and a substantial amount of tactical cash in equity allocation is a reflection of this caution.