Wednesday, May 29, 2019

Great expectations



Some food for thought
"Well, my deliberate opinion is - it's a jolly strange world. "
—Arnold Bennett (English Novelist, 1867-1931)
Word for the day
Decoration (n)
A badge, medal, etc., conferred and worn as a mark of honor.
 
First thought this morning
For past five days, mainstream media in India is busy dissecting the popular mandate for constitution of 17th Lok Sabha. A large part of the analysis is naturally devoted to analyzing the region wise, caste wise and religion wise vote share of the winning party, to find out what did actually work for it. Besides, three issues have garnered bulk of the highlight.
(a)   Number of members with criminal records is perhaps the highest in this Lok Sabha.
(b)   This Lok Sabha has highest number of women representatives.
(c)    The winners from Bhopal and Rampur constituencies are widely known for extreme religious views that may not necessarily be congruent with the principle of secularism as enshrined in the Constitution of India.
Most commentators have severely criticized political parties for selecting candidates for criminal antecedents. Many commentators have even ridiculed the voters for electing the winners from Bhopal and Rampur.
In my view, this criticism is meaningless and redundant. In a parliamentary democracy, the elected Parliament is quintessentially a reflection of Society. The constitutions of the parliement mirrors the contemporary constitution of the Society it represents.
The present Lok Sabha is an amalgam of criminals, reformers, bigots, liberals nationalists globalists, illiterate, highly qualified, young & old, suave urbanites and rustic tribals, et al. It is how it ought to be.
If some people want the Parliament to look any different, they should make serious efforts to change the constitution of the Society first!
Chart of the day
 
Great expectations
The Monetary Policy Committee of RBI will meet on June3 to June 6 for second bi-monthly review of monetary policy for FY2020. The market expectations, as reflected by the sharp fall in benchmark 10year yield, appears set to a 25-50bps cut in the policy repo rate. Taking a clue from the statements made after last policy meeting, some are even expecting RBI to break away from tradition of changing rates in multiples of 25bps and make an odd cut of 35bps.
The rate expectations are supported by downgrade in GDP growth expectations for FY19, persistent low inflation, poor sales number for auto sales, lowest manufacturing PMI data and core sector growth prints in almost one year, and BJP's promise to accelerate investment materially. It is pertinent to note that high real rates have been hurting economic growth for some time now. RBI and government must be under tremendous pressure to rationalize the policy stance to support the growth.
The expectations from RBI and/or new government include:
(a)   Material rate cut and faster transmission to support investment (both public and private) and lower borrowing cost for the government to help fiscal management.
(b)   Easing of monetary supply by inducting sustainable liquidity, to enhance credit availability, especially to farmers and MSME sector; and prevent the NBFC crisis from worsening. CRR cut of 100bps, larger OMO for bonds as wells as USD buying are some of the market expectations.
(c)    Revised framework for recapitalization and consolidation of public sector banks. RBI is expected to announce adoption of the recommendations of Jalan Committee made last year and release excess reserves for public sector bank recapitalization.
(d)   Sharp increase in public investment without compromising on fiscal discipline. RBI is expected to facilitate the implementation of the BJP's promise of raising infrastructure investment to 10% of GDP in next five years from the present 4% by structurally lowering the borrowing cost.
(e)    Measures to attract larger foreign inflows that shall also help in strengthening forex reserves to provide for a strong cushion against fall in exports due to expected global slowdown and potential FPI selling. Higher FPI limits for government bonds, larger USD swap window, NRI bonds rollover, etc are some of the steps market is expecting.
(f)    Pragmatic resolution of power sector NPAs.
(g)    Gradual strengthening of the regulatory framework for control of NBFCs and HFCs, without disrupting the status quo much.
(h)   Evolving an alternative mechanism for long term project financing, without crowding the banking system for
More on this tomorrow.

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Tuesday, May 28, 2019

Strategy review


Some food for thought
"Always behave as if nothing had happened, no matter what has happened."
—Arnold Bennett (English Novelist, 1867-1931)
Word for the day
Seriatim (Adv)
In a series; one after another.

First thought this morning
The recent fire accident in a coaching center in city of Surat in Gujarat is devastating and unpardonable. Administration in many cities have since ordered safety inspections of these caching centers.
It is unfortunate that it took loss of 20 precious lives for authorities to wake up to the potential magnitude of this problem. Millions of such coaching centers are operating in almost every town and city of the country. Everybody has seen this. Everyone knows about their conditions and callousness toward safety of students. Children of local politicians, government officers, and police officers also attend classes in these centers.
Most of these centers are right there on the main roads, blocking traffic and creating nuisance. Most of these are unauthorized and operate from residential areas creating nuisance for local residents.
And the worst part is that these coaching centers owe their existence to the inefficiency of the education system. Proper functioning of schools and institutions of higher learning should totally obliterate the need for these coaching centers.
In my view, the government must immediately consider implementing some radical changes in the whole education system, especially the institutional framework, curriculum, learning objectives, examination system, and teaching profession. Incremental changes to the existing system would be inadequate.
Chart of the day

Notes from my Diary
Post declaration of general election results there is a general sense of optimism in the Indian equity markets. Benchmark indices have scaled new highs. Broader markets have rallied even harder.
The sector rotation from consumption and defensives to cyclical was visible since couple of months. The shift has accelerated materially.
Bonds have rallied in the hope that the new government will continue to adhere to the fiscal discipline it has followed in past few years. INR has also appreciated as the outlook for inflows has improved. Recent correction in global crude prices may have also supported the rally.
I find it appropriate to revisit my investment strategy and investment objectives to check if any realignment is required.
I defined my latest investment strategy and investment objectives in December 2018 (see here). The strategy was reviewed and slightly modified in March 2019 (see here).
As per the above, my current portfolio positioning is as follows:
Current Asset allocation

Current equity investment strategy
My equity portfolio mostly comprises of quality mid cap stocks.
I am overweight on Construction, Capex, Real Estate, Healthcare, PSU Banks, Specialty Chemicals and select NBFCs. I am underweight consumer staples, except high income discretionary consumption like alcoholic beverages.
I have allocated one third of my equity allocation for active trading which is to be gradually increased further. I prefer trading in large banks and liquid cyclical.
I was not positioned for any significant market decline post elections.
Review
2019 YTD Financial, realty and infrastructure sectors have indeed performed best in the market. The outperformance has been rather stark in past one month. Pharma, IT, Auto and consumption in general have been notable underperformers.
In the year 2019 till date, Nifty has yielded more than 9% return. Most of this return is contributed by financials. Nifty Midcap 100 has yielded negative 1% return. However, in past one month, Small cap and midcap indices have outperformed the benchmark Nifty. I see this trend continuing.
I am therefore maintaining my investment strategy and outlook. However, given that the rates are widely expected to fall from the current level, and earning cycle is not likely to pick up in next couple of quarters, I am scaling down my return expectations from equities back to 18%. Overall return expectations now stand reduced to 14-15%.


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