Vijay Kumar Gaba

Thursday, June 13, 2019

Keep it simple

Some food for thought

"Rapine, avarice, expense. This is idolatry. And these we adore."

—William Wordsworth (English Poet, 1770-1850)

Word for the day

Esprit de l’escalier (n)

A perfect comeback or witty remark that one frustratingly comes up with only when the moment for doing so has passed

First thought this morning

Legendary Bill Gates in a tweet yesterday said, "I’m always amazed by the disconnect between what we see in the news and the reality of the world around us. As my late friend Hans Rosling would say, we must fight the fear instinct that distorts our perspective."

Unfortunately, this phenomenon is universal, not limited to US only.

In our case, while the media focuses on totally frivolous issues. Life threatening diseases like cancer, diabetes, obesity, have become epidemics. Water scarcity is at alarming level in many parts of the country. We are staring at yet another subpar monsoon. A new education policy is in the making that will impact the life of millions of children. But no one is debating these issues.

Instead they are making brouhaha over the recent Pakistan TV advertisement using IAF pilot Abhinandan as a prop is a point in case.

For records, I found the advertisement creative, controlled, funny and highly ambitious. Ideally, the creative minds on our side should have responded with a funnier and more impactful campaign. Instead our hysterical media celebrities and Twitter warriors took the mantle upon themselves and turned this into a ugly battle of national pride and popular sentiments.

Keep it simple

Former CEA Arvind Subramanian has resuscitated the debate over accuracy and authenticity of the national account data released by CSO. In recent past many economists and other experts have raised doubts over the methods and processes used by CSO in estimating and forecasting national income data. (You can read the paper submitted by Mr. Subramanian here)

The primary argument is that post change in the methodology in 2012, CSO might have been overestimating the GDP growth. This overestimation may have led to many policy distortions, especially tighter monetary policy that checked the demand and actually impaired the growth.

As per the paper, the high GDP growth numbers were not corroborated by a number of independent data like Cement & Steel sales, 2W sales, growth in exports and imports, Railway freight, tractor sales, IIP etc. during FY13 to FY18 period. While these numbers had shown a positive correlation with GDP growth during FY01 to FY12.

The paper cautions that an overestimation of GDP, essentially means distortion of many key statistics that are calculated using estimated nominal GDP as denominator.

For example, If nominal GDP growth is over-estimated it would mean that India’s tax performance (including the new GST) has been more impressive than currently believed. On the other hand, it would also mean that many important fiscal ratios (deficit/GDP and debt/GDP) are worse than currently believed, because the denominator in these ratios is nominal GDP, which could be lower than currently measured. It would also mean that the decline in financial savings that has caused much alarm is smaller than feared.

Without questioning the appropriateness of, or motive behind, the study in question, I feel that it is like someone seeking divorce from his/her spouse after 50yrs of happy and healthy marriage just because the spouse had an affair during college days. We all are ware that CSO methodology and processes may be inadequate. But that has been the case all along.

Moreover, Mr. Subramanian, while at the helm as CEA, not only approved the same statistics, but also actively marketed it to the unsuspecting citizens and the government it was duty bound to give right advice.

Regardless, of the CSO methodology, processes and GDP growth numbers released by it, and totally ignoring the league table of GDP growth data for various countries especially China, I suggest the following:

(a) Interest rates should purely be a function of demand and supply for credit. To smooth out the bubbles or fill in the gaps, the monetary regulator may temporarily manage the overall or sectoral supply of credit through various means, but it must leave the price of credit to be determined solely by market forces.

(b) Fiscal deficit should be measured against fiscal revenue only. All capital expenditure that results in creation of productive assets should be excluded from these calculations.

(d) Production (Value addition) GDP and expenditure GDP should be calculated separately by two independent agencies, so that any material mismatch is highlighted immediately.

(e) Qualitative data, like number of cancer patients, school drop outs, child mortality, air quality, student teacher ratio, patient doctor ratio, citizen police ratio, crime rate etc should also be given reasonable importance in data dissemination by government agencies.

Wednesday, June 12, 2019

JOMO vs FOMO

Some food for thought

"To begin, begin."

—William Wordsworth (English Poet, 1770-1850)

Word for the day

Delphic (adj)

Oracular; obscure; ambiguous

First thought this morning

The newly elected Member of Parliament from city of Bhopal, who is incidentally facing some serious criminal charges, refused to sit in an NIA court saying it is too dusty. I am not sure whether the court premises were actually dirty and not suitable for human use, or the newly elected MP just wanted to inform the court of her newly acquired constitutional privileges.

But that is not the point here. The point is that the Prime Minister has emphasized on improving the 'Ease of Living" for Indian citizens. A lot of his colleagues in the Parliament and co-workers in the bureaucracy come from modest background. These people know very well the problems a common citizen faces in day to day life.

The Prime Minister just needs to tell his colleagues and co-workers to use their personal experiences and take some small measures to improve living standards of common people.

For example, the MP from Bhopal can move a motion in the Parliament to make Indian courts and jails suitable for human use. Cleanliness, proper ventilation, safe drinking water, clean toilets, separate place for lactating mothers, prayers, etc. may be made available to all people visiting courts or confined to jails. She also must fight for a separate legislation governing citizen rights to bail. Despite several Supreme Court judgments, subordinate courts have refused to accept the bail as a right of accused.

The prime minister himself ought to know well the problems of various users of railway platforms (passengers, vendors, porters, railway staff etc.). He may like to advise the railway minister to work towards improving experience of all users of railway facilities using his experience.

The MPs from smaller towns like Bareilly, Moradabad, Badayun, Kannauj, Begusarai, Dumka, Gumla, etc. must know the inadequacies, hardship and chaos, the citizens of these towns face every day. They must be advised to share their experiences with policy makers and town planners to make the life of common people in these towns easier.

Of course, this would be possible only if the elected representatives stay connected to their roots refusing to be ingested by privileged lifestyle of Lutyens' Delhi.

Chart of the day

JOMO vs FOMO

An unusually large number of global analysts and strategists have warned against an imminent "crash" in stock markets. Most global brokerages are suggesting that even if a rally does occur due to Fed cutting rates aggressively to support growth, the up move in equities may not sustain beyond a point.

As the Wells Fargo & Co's Pravit Chintawongvanich put it:

“Although stocks have rallied with lower rates, they may start to sell off (or at least have limited upside) if rates keep declining.

At some point the upside from “bad is good” is limited. An “insurance cut” scenario is already priced in, and would likely be positive for stocks; the Fed cutting more than one or two times by the end of the year would probably mean that the economy has significantly slowed and/or the trade war has escalated."

In India also, a number of analysts are finding the current level of markets unsustainable. I myself have been expected a deep correction for past many months. There have been some shallow corrections that have not sustained for long.

I therefore find it appropriate to take a deeper look at the current market conditions.

The last time benchmark Nifty traded below 9000 mark was 27 months ago on 10th March 2017. I am drawing red line at 9000 mark because it is close to ~18x FY19 fully diluted Nifty EPS of Rs488, which I intuitively feel is the fair value mark for Nifty given the present earnings growth trajectory and return ratios.

For past 27 months, Nifty has returned a yield of ~13% CAGR, whereas the broader market index Nifty 500 has returned ~10% CAGR. The benchmark 10yr government bond yields have averaged ~7.5% in this period.

My first thought on Indian markets is that no major move is likely in near term. I have always believed Mr. Market is a rather cruel person. It seldom obliges the consensus. Since a majority of market participants are presently positioned for a correction, they are less likely to get their wish.

Secondly, I find that Mr. Market might have already delivered the correction when no one expected it to happen. It is just that we are refusing to acknowledge it. Consider the following:

Since 10 the March 2017 when Nifty last traded below 9000 -

Only one third of Nifty 500 constituents have yielded 10% or more return.

More than half of the Nifty 500 constituents have yielded a return of less than the benchmark bond yields, and more than 40% have yielded negative return.

Sector wise, Pharma (-22%); Auto (-16%); Metals (-4%); PSU Banks (-6%); Other PSUs (-8%); have given negative return in past 27 months. Infrastructure sector has yielded a meager 4.7% CAGR.

Only IT, Banks and Energy sectors have outperformed Nifty meaningfully. But even in these sectors the gains have been highly skewed towards HFDC and Bajaj twins in financials, RIL in energy and TCS in IT sectors respectively. Adjusted for gains in these seven stocks gains in IT, financials and energy are also mostly in line with the Nifty 500 gains of ~10% CAGR.

I am therefore dissecting the markets into 3 parts - one trading at levels of 8000-8200 Nifty equivalent; second trading at levels of Nifty equivalent of 9000-9200 and the third smaller part trading at current Nifty level.

I shall focus on the first two parts and mostly ignore the third part.

Incidentally, recently some large brokerages have changed their stance on public sector banks and construction and capital goods. Cement is now almost a consensus buy. I feel it is not long when auto and auto ancillary also find place in many "Top Pick" lists.

I believe at present not investing is a bigger risk than investing and seeing some MTM loss on your portfolio.

I hate Joy Of Missing Out (JOMO) as much as I hate Fear Of Missing Out (FOMO).