Vijay Kumar Gaba

In past few days the weather in India has changed rather swiftly. The winter has set in couple of weeks of early. The higher mountains are already covered with snow. North of Vindhyachal, the air has distinct chill; in South the weather is pleasant. The atmosphere is generally hazy, with heavy cool air not letting the pollution fly away.

In political troposphere also, the heat has subsided with conclusion of intensely contested elections for Bihar assembly. However, the political stratosphere continues to remain hot and dusty, as the political leaders move further east towards West Bengal with their retinue.

In financial markets also the season has changed. Past couple of months has not seen any noticeable disaster in corporate debt sphere. Hopes of recovery have been rekindled with many beleaguered borrowers (DHFL, IL&FS, Jet etc.) showing some encouraging signs. The suspended debt schemes of Franklin Templeton have also given hopes to investors that a significant part of their money may be returned in next 6months.

In stock markets, the quarterly result season has just ended. The market participants were keenly watching the financial results of companies for the July-September quarter, as it was the first quarter after the state of total lockdown imposed in March ended and the economy began to open up. The corporates have mostly surprised the market participants positively. The results and commentary for the forthcoming quarters have been mostly encouraging. The markets have not only warmed upto the idea of normalization in growth in 2021, buy heated up significantly, rising to new highs.

I find the following views and opinions of various brokerages noteworthy:

GDP in 2QFY21 to decline, farm sector to do well

There is near unanimity amongst analysts and economists that the GDP data for 2QFY21, to be released this Friday, will show a negative YoY growth; though there is no consensus on the extent of GDP contraction. The estimates vary widely between 5% and 11%. It is also a consensus that farm sector has done remarkably well in 2QFY21.

I find the following views of Nirmal Bang Institutional Equity Research nearest to my own estimate:

GDP in 2QFY21 is likely to decline by 8.2% YoY. Agriculture & Allied sector is likely to do well with a growth of 4% YoY in 2QFY21. Industry (excluding Construction sector) is likely to witness a decline of 4.6% YoY. The Services sector (including Construction sector) will likely decline by 11.2% YoY in 2QFY21 with the sharpest contraction of 25% YoY in Trade, hotels, transport and communication sector. We expect a sharp improvement in the Construction sector, which will decline by 6.5% YoY in 2QFY21 after declining by 50.3% YoY in 1QFY21.

We continue to factor in a protracted economic recovery. For FY22, on a low base, we are working with a GDP growth of 6%. In our view, containment measures may well get extended into 1HCY21, making us maintain our cautious view on growth.

On top of a bumper Kharif (monsoon) crop that has likely aided the 2QFY21 GDP growth, the latest sowing data indicates that Rabi (winter) crop is also likely to be doing well. As per Prabhudar Liladhar research Fertilizer and farm chemical growth data for Rabi crop is quite encouraging. There is 18% growth in total sales in October driven by 34%/8% growth in Urea/NPK. SSP placements up 21% YoY. Sale of domestically manufactured fertilisers are up 13% while that of imported fertilisers are up 34% YoY, driven by Urea.

IIFL securities recently wrote, “…the sudden recent rally in crop commodities could prove a significant tailwind for CY21. In the broader specialty chemical industry, Indian companies reported mixed results, but still far better than their leading global counterparts, who remained under serious pressure.”

2QFY21 earnings, broadly buoyant

As per Motilal Oswal Securities - The Sep-quarter (2QFY21) corporate earnings season was a blockbuster one, with big beats and upgrades across our Coverage Universe. With an upgrade (>5%) to downgrade ratio (<-5%) of 4:1, this has by far been the best earnings season in many years. 63%. Nifty sales declined 6.7% YoY (est. -5.2%), while EBITDA/PBT/PAT reported growth of 8%/14%/17% YoY (est. -0.3%/-7%/-5%). 62% of Nifty-50 companies reported a beat on our PAT estimates, and only 18% posted results below our expectations.

HDFC Securities, also confirmed this view. A recent note by the brokerage stated - Q2FY21 was a strong quarter. Key highlights of the quarter: (1) Q2 margins beat estimates across multiple sectors due to sharp cost-cutting initiatives and improved pricing power in the wake of lower competition; (2) positive management commentaries on Sep/Oct exit run-rate of revenues as unlocking led to sharp demand rebound in multiple sectors; (3) market share gains for the larger companies; (4) much improved collection trends for lenders; (5) continued uptick in capital markets activity, leading to strong performance for brokers and exchanges.

Consensus turning bullish on markets

As the benchmark indices regain the entire loss from January – March 2020 and trade at their all time high levels, the brokerages seem to be turning bullish on Indian equities.

Morgan Stanley write in a recent note: “COVID-19

infections appear to have peaked, high-frequency growth indicators are coming in strong, government policy action is beating expectations, and Indian companies are picking up activity through the pandemic. Thus, we expect growth to surprise on the upside, rates trough to be behind, and real rates to remain in negative territory for several months. We lift our F2021,F2022, and F2023 EPS estimates for the BSE Sensex 15%, 10%,and 9%, respectively – we are now between 6% and 7% above consensus estimates. By our estimates, the market will be trading at 16x forward earnings at our new BSE Sensex target of 50,000 in December 2021 (our old index target was 37,300 for June 2021).

Sector wise outlook

Motilal Oswal Securities published a compendium of management commentary post 2QFY21 results. The key highlights of the commentary are as follows:

Banking: Commentaries of banks suggest there was an improvement in growth and asset quality. The asset quality outlook is much better than initially feared as collection efficiency picked up sharply in 2QFY21. Collection efficiency in the Top 4 private banks was above 95% and for SBI it was 97%, excluding the Agri segment.

Consumer: Rural demand continues to outperform urban demand. Some of the cost-saving measures implemented by companies during the lockdown are likely to sustain going forward.

Auto: A preference for personal mobility, pent-up demand, and normalization of the supply chain have led to demand recovery. However, most companies mentioned being cautious due to uncertainty regarding demand sustainability post the festive season.

IT: management commentaries indicated the pandemic has acted as a tailwind for the sector - as enterprises are undertaking cloud adoption at a faster pace and digital transformation at the workplace has accelerated.

Cement: companies have informed that cement prices have firmed up across regions in Oct'20 and were up by INR10/bag over Sep'20 on average - despite the quarter being a seasonally weak one.

Healthcare: Despite the COVID-led impact on the Domestic Formulation (DF) segment, the intensity of YoY decline is gradually reducing in Acute therapies with an increase in patient-doctor-MR connect. Operational cost-saving benefits are expected to continue over the medium term.

Capital Goods: Managements across the board attributed to recovery in the Products business being faster v/s the Projects business.

Textile sector outlook

As per a recent note by Motilal Oswal Securities, earnings visibility has improved across players in the textile sector. The Home Textile industry witnessed a strong demand revival during 2QFY21 on high demand from big retailers. Apparel/Fabric/Yarn players are tail-riding on an industry revival: These players may benefit from a paradigm shift in demand to India, huge build-up of pent-up demand and benign raw material prices. The USD:INR is depreciating at a faster pace than the USD:RMB, which has made Indian exporters competitive v/s the Chinese. demand, Indian manufacturers are increasing capacities and focusing on increasing utilization levels.

Production linked incentives (PLI) seen as game changer

The recent measures taken by the Indian government to promote manufacturing in India as structural positive for Indian economy. Goldman Sachs in a recent note mentioned—

“We see the “Make in India” (MII) initiative potentially having a profound impact on India’s economy. Plans to make India more self-reliant could see the share of manufacturing in GDP rise from 17% to 25% over the next few years, creating 100mn new jobs. Knock-on impacts could see India better develop its consumption potential, boosting earnings for domestic companies over time.

In a scenario of full implementation, our Macro team expects real GDP growth to pick up to 8% in the next five years, vs their base case of 5-6%. The team does not bake full implementation of MII into their numbers, given the undoubted challenges: improvements in manufacturing competitiveness, implementation of production-linked incentive (PLI) schemes, better infrastructure, reforms in labour/land laws, more private sector participation, continued political will, and growth in exports. In a recent note, the team noted that Vietnam and India were the most mentioned destinations as alternates to China for manufacturing.”

Global Macro

USD Outlook: Goldman Sachs featured views of three experts in a recent note about the outlook for the US Dollar.

It’s not just the rate of global growth that matters for the Dollar's value, it’s how global growth compares to US growth. Even if the global economy is recovering, if US growth outpaces global growth, the Dollar will remain supported. - Barry Eichengreen (UC Berkeley)

The Dollar’s value surged at the beginning of the coronavirus recession… but it has lost ground since as the global recovery has gained traction. This pattern will likely persist... with good news on the global economic recovery probably weighing on the Dollar… almost regardless of how the US economy is performing relative to key trading partners. - Zach Pandl (Goldman Sachs)

By all logic, the Dollar’s dominance in the global monetary system should be declining… But the reality is that the Dollar’s position remains as dominant as ever. - Eswar Prasad (Cornell)

Bitcoin: JP Morgan in the meanwhile admitted its mistake in rejecting Bitcoin as a scam. From there recent notes however it appears that the brokerage is now inclining towards accepting the cryptocurrency as an attractive asset.

Eric Peters, CIO of Hedge Fund One River Asset Management, reportedly proclaimed (about Bitcoin) that "There Is A Vague Sense That Something Powerful, Apolitical, Transnational, Is Emerging".

Gold: After major underperformance of Gold ETFs in past three months, many analysts have started questioning the rally in gold.

Regulation

RBI: Over weekend, a committee set up by RBI submitted its report, suggesting major changes in the regulatory framework for private banks, including the ownership structure and promoter holding norms. The market seem to have received the recommendation as a major positive.

A dissenting note however came from none other than the former RBI Governor (Raghuram Rajan) and Deputy Governor (Viral Acharya). The duo, who are now academicians in the USA, questioned the very rationale of the proposal. As per them, allowing Indian corporates into banking sector would be a bombshell. They argue that in the present times, it is even more important to stick to the tried and tested limits in corporate involvements in banking.

SEBI: SEBI is reportedly targeting analysts meets and conference calls hosted by various listed companies to apprise the participants about the latest developments in their respective company. SEBI feels that this creates some sort of information asymmetry as the managements many share some unpublished price sensitive information with the analysts and large investors participating in such calls or meets. SEBI is considering making it mandatory for the companies to share transcripts, notes and details of all such calls to the public withjin stipulated time in the interest of investors.

Some food for thought

“One can know a man from his laugh, and if you like a man's laugh before you know anything of him, you may confidently say that he is a good man.”

— Fyodor Dostoevsky (Russian Author, 1821-1881)

Word for the day

Fidelity (n)

Loyalty

It is a tradition amongst local brokerage houses, which primarily cater to the domestic household clients, to present a list of their top stock ideas to their clients on every Diwali. The ideas are presented usually with one year investment period, i.e. till next Diwali.

Reading through the presentations of various brokerages this year, I found the following key messages:

Kotak Securities

As we advance towards getting the vaccine (by middle of next year) and economy gets back to normalcy, we can expect the economy driven sectors to outperform the defensives in Samvat 2077. Banks, NBFCs, automobiles, oil & gas, telecom, utilities, capital goods, cement and metals could come into focus in Samvat 2077. The potential upside in most of these sectors based on our one year price targets ranges between 20 & 39% (Vs single digit potential upside in Nifty50). Since most of the economy driven sectors are prone to market correction one should have an accumulation strategy in them rather than investing at one go.

ICICI Direct

Given the scenario, we see value emerging across the market cap spectrum with the key filter being quality. We continue to advise investors to utilise equities as a key asset class for long term wealth generation by investing into quality companies with strong earnings growth and visibility, stable cash flows, RoE and RoCE.

Motilal Oswal Securities (Retail)

As we enter Samvat 2077, the markets have seen a complete recovery from the Covid lows. We expect Nifty EPS growth of 4% in FY21 while expecting a sharp rebound in FY22. Thus, the overall structure of the market remains positive. At 18x FY22 earnings, Nifty valuations is also not very expensive as it is trading closer to its long-period averages. With the economic activity recovering fast, more earnings upgrade cannot be ruled out. Further strong global markets can keep the liquidity abundant in the system, thus providing support to the overall market. However, intermittent corrections cannot be ruled out as there is a risk of second wave of Covid-19 and thus sustenance of economic recovery holds the key. From next 12 months perspective, we are positive on IT, Healthcare, Rural-Agri, Telecom, Consumer along with select Financials. We believe another round of fiscal stimulus could help elevate sentiment further.

HDFC Securities

India still is not out of woods as far as the Covid pandemic is concerned or its impact on macro or micro is concerned – though latest macro and micro data are encouraging.

In the new Samvat, investors need to look at asset class diversification, sector diversification, spreading investments over time (by way of SIP or staggered investments). Also going by the way Global investing has picked pace, MNIs and HNIs need to look at this asset class to check whether this suits their risk profile and skillsets.

All in all after a turbulent past year, we can look forward to a relatively sedate but selectively rewarding year.

Sharekhan (BNP PARIBAS)

Stepping into Samvat 2077, the threat of the pandemic is not over yet and the fear of a second wave in big geographies is a potential risk. Further, the overhang of US election outcome will keep equity market on its toes.

For Samvat 2077, we have hand-picked 12 quality stocks to create a portfolio, which is a mix of both large-caps and quality mid-caps. All the 12 companies in the portfolio have all the ingredients to outperform the broader market indices over the next 12 months and at the same time withstand volatility and emerge stronger.

SMC Global

It is an opportune time for the investors to tweak and tighten portfolio for the next Bull Run, by embracing buy on dips strategy in frontline quality stocks. Quality stocks with structural story will be the right recipe for a good investment and wealth creation.

Reliance Securities

In Samvat 2077 we recommend the investors to focus on sectors, which are considered to be defensive or prone to prolonged economy slowdown. Further, the companies having sound execution expertise, brand equity, quality management, lean balance sheet with consistent cash flow generation, sound corporate governance, healthy return ratio and better margin of safety are likely to deliver better alpha for the investors.

Axis Securities

Our themes for Samvat 2077 are:

·         The small and midcaps are picking up steam and they should deliver solid returns in 2021 as economic uncertainties will reduce and volatility will decline.

·         Housing and banking will be major themes to watch out for in 2021 because of correction in real estate prices and lower interest rate regime.

·         Digital and telecommunications will continue to remain major long term structural themes.

·         Growth is now a more certain theme, but growth at a reasonable price will be an even bigger theme to invest which will deliver solid returns over the next one year.

Yes Securities

The year 2020 is largely about survival, both health‐wise and finance‐wise. It is also an opportune time to tweak and tighten your portfolio for the next bull run. Vikram Samvat 2077 could well be akin to the year 2003, from a market standpoint.

As is evident from the above cited views of various brokerages, the consensus view is generally buoyant, with a few words of caution here and there. There appears to be a consensus that growth will pick up in 2021.

However, there are strong differences about the ideas that may work in next 12 months. Brokerages like Kotak are advising investors to accumulate cyclical; HDFC, ICICI and Reliance etc are suggesting investors to focus on high quality defensives; while Motilal is advising a diversified portfolio of sectors that worked in 2020, e.g., IT, healthcare, rural/agri an select financials etc.

Some like Axis Securities are forecasting strong midcap outperformance; and some like ICICI Direct are advising focusing on quality large caps; most other have suggested a multicap strategy with a judicious mix of large and small cap.

One striking feature is the disconnect between the broader view and the suggested stock ideas. For example, Axis Securities is bullish on Housing, but the list of recommended stocks does not include any real estate company.

Bharti Airtel, HCL tech, L&T, ICICI Bank, are some of the most common ideas in the list of stocks presented by most brokerages.

 For past many years, it has become a tradition for popular market participants (brokers, fund managers, large investors, analysts etc.) to don finest attires and appear on special Diwali shows hosted by various TV channels to announce their prophecies for the traditional Indian New Year. In the spirit of the festivals of light, they enthusiastically speak about their outlook about the economy, financial markets, and investment opportunities.

In earlier years, these prophecies were taken seriously by the audience, mostly household investors. However, based on my interaction with several people from the targeted audience, I feel, now days most people listen to the experts for validating their own positioning rather than for guidance. Whether in consonance of their positioning or otherwise, these prophecies are drowned in the noise of firecrackers on Diwali night itself.

However given the mobility restrictions and popularization of digital media due to Covid-19 this year, most experts have presented their views from their homes (instead of TV studios) rather early. Therefore the audience has got 4-5 days, against the usual 2 days, to digest the expert views and react to these, even though there is no change in these views for past 15years.

Besides, the experts draped in fine silk Kurtas spreading the message of positivity and hope, another thing that has dominated the financial media in past one week is the state of automobile sector in the country.

First, the CEO & MD of Bajaj Auto Limited, rattled the markets with his rather despondent commentary about the state of economy in general and the state of automobile industry in particular. He categorically stated that the retail sales this Navratri have been disappointing this year, and even the present level of sub optimal demand is not sustainable after the accumulated demand post “unlocking” is met.

The rival Hero Honda management however calmed the ruffled feathers, presenting a buoyant picture saying that demand has remained robust during the festival season and is likely to sustain in coming months.

The management of the commercial vehicle major Ashok Leyland appeared confident that demand shall pick up steadily from hereon. Both the tractor majors, M&M and Escorts, also continue to show robust growth and margins.

One of the large non banking lenders, Mahindra & Mahindra Financial Services, recently said that the market for cars is limited by supply and not demand. They told analysts that against 39000 cars in September, they financed 50000 cars in October.

The Federation of Automobile Dealers’ Associations (FADA), in a press release issued on Monday, advised caution for OEMs and dealers. The apex body of auto dealers categorically stated that “Dealer Inventory for both 2W and PV are at its newest highs in this Financial Year. FADA requests all OEMs with a special request to 2W OEMs to assess the on-ground inventory level and curb production accordingly.” The near term outlook of FADA, as stated in the said press release, is extremely cautious. It reads as follows:

“As we enter the last leg of festivals and with Covid getting into its 3rd wave in many cities, there is a sense of cautiousness amongst customers. Due to the lockdown announced in few European Countries, procurement of spares will also be a cause of hinderance for smooth supply of vehicles in Indian markets. This will create a supply and demand mismatch thus affecting the passenger vehicle sales.

FADA once again cautions both OEMs and Dealers to keep a check on vehicle inventory as post festivals, demand may remain subdued. Since Inventory levels are at its highest during this Financial Year, it may impact Dealers financial health thus leading closures and job losses.”

In my view, the divergence of views in Auto sector, aptly reflects the state of overall economy as well. At this point in time it is extremely difficult to make a correct assessment of the state of Indian economy.

The general view that rural economy is resilient to the slow down while the urban economy continue to struggle may not be relevant for one year perspective. The fiscal challenges of the government ought to eventually reflect on the support extended to the rural sector also. But as I said, it is very complex at this point in time. Making a prophecy about the economy and market for next 12 months requires a certain degree of both audacity and apathy. Unfortunately, I have none.

 The benchmark Nifty retraced to it all time high level recorded on 14 January 2020. It erased all the losses incurred due to a disappointing budget (from market expectations perspective) and outbreak of Covid-19 pandemic leading to a nationwide shutdown. In a year full of disappointments and despondency, this small and seemingly irrelevant event brought cheers and ignited hope for a better new year. Not to undermine the enthusiasm and positivity around the event, I would just like to highlight three small points:

1. On a longer horizon, after spending a decade in a flat channel, equity markets had been broadly moving higher in a widening channel since 2003. There could be multiple reasons for this strong up move, punctuated with multiple deep corrections. However, if we have to narrow our search, I would list the following three reasons as the primary drivers of markets:

(a)   Mostly easy monetary policies of the global central bankers.

(b)   Change in valuation dynamics due to dominance of technology and innovation in business rather than the conventional man & material factors of production.

(c)    Globalization of markets due to digitalization & dematerialization (of money, trade & commerce, securities, material, labor, information, etc.)

There is no reason to believe that this widening channel will contract or get sustainably violated anytime soon. Though there could be some temporary violations on either side like 2007 and 2009. The important point to note however is that going forward, as the channel widens further, the market moves could be even larger and volatile. The investors and traders therefore need to brace up for that.

2.    The retracement of Nifty to its all time high is led by only two sectors, viz., Information Technology (IT) (up 32%) and Pharma (up 44%). The financial sector which had driven markets to its all time high in January is still down 15% since 14 January 2020 level. PSU Banks in particular are down 44%. Public sector in general is down 30% from 14 January 2020 level.

Again there is no evidence to suggest that this trend may not prevail for next many months also.

3.    The market breadth in this period is materially negative even though the broader market indices have not materially underperformed the benchmark. This implies huge divergence in performance in the broader market also.

 I have always believed that “equity investment” is a serious business but mostly done in a casual manner. In past three decades I have observed that most investors take equity investment decisions based on factors that are not related to the underlying business of the company they are investing in. While this may be more true for the small household investors (Retail) and High Networth Individuals (HNI); the professional fund managers (Institutions) and large traders are also seen taking decisions based purely on factors like politics, geopolitics, and monthly or weekly data (trade, jobs, production), etc. No wonder the “breaking news” on TV channels causes more volatility in stock prices than the management guidance about the business of the company.

I have seen many Retail and HNI investors spending less effort and time in taking equity investment decisions than they would normally spend on buying a shirt. And worst, they spend much less effort and time in taking a decision to dispose an investment than they would do for disposing an old shirt.

From the interviews and comments of some reputable professional fund managers it appears that they usually assign significantly higher weightage to the macro factors, especially political promise of policy reforms etc., than required, especially when the empirical evidence is materially against placing reliance on such political promises.

I am raising this issue this morning, because I believe that even in normal times, investors face numerous uncertainties and challenges. The consequences of these uncertainties vary vastly and are difficult to assess. Investors have to consistently struggle to assess the impact of fast changing technologies, markets, processes and methods on their investment portfolios. The consistently changing macro environment, e.g., interest rates, inflation, liquidity, demand etc., needs to be incorporated in assessing the sustainable valuations of their portfolio. The information asymmetry, regulatory changes, product innovation and debasement of governance standards at business entity level, are some of the regular challenges that an investor has to face. The challenges rise multifold in the uncertain times, like the present one.

The outbreak of pandemic has created enormous uncertainty in almost all spheres of life; especially businesses. A large number of businesses are struggling for survival. Multifaceted challenges have subjected a host of businesses (and some industries) with extreme uncertainties having material and severe consequences. Unlike the previous crises (dotcom bubble of 1999-2000 and global financial crisis of 2008-09), which mostly impacted one set of businesses, this crisis is more pervasive.

The impact of crisis led disruption is exacerbated by the fact that prior to the crisis the global economy was witnessing massive technology transition. Artificial Intelligence and clean fuel technologies were changing the landscape for many businesses. To make the matter more complex, the widespread trade war (involving USA, China, Japan, EU, and UK) was redefining the global trade and terms of trade. As per some reports, the IMF’s GDP contraction forecast for 2020 is more than double the estimated contraction that took place in 2009, the worst year of the global financial crisis.

The equity investors in India have made sub-optimal returns in past five years. Many investors are indicating that the past five year returns for them are in low single digits, with some reporting even negative return for past three years. In these circumstances, it is critical that investors make a holistic review of their investment process. Especially, those investors who have made material changes in their portfolio in view of the 2014 & 2019 India general elections and 2016 & 2020 US general elections, need to immediately sit with their respective advisers, if any, and make necessary amends.

 My dilemma this morning is whether I should be concerned about the internal politics of the United States of America, as most of my colleagues and financial market participants appear to be! In past 20yrs, we have seen George Bush Jr. (Republican, 8yrs), Barak Obama (Democrat, 8yrs) and Donald Trump (Republican, 4yrs) as presidents of United States. In these 20years, India witnessed Atal Bihari Vajpayee (NDA, 3.5yrs), Manmohan Singh (UPA, 10yrs) and Narendra Modi (BJP, 6.5yrs) as India’s prime minister.

Evidently, a Socialist India (UPA) has lived well with Republican US (Bush); and a free economy supporter India (BJP) has lived well with Democrat (Obama) US. In past two decades, we have achieved progress in our civil nuclear program and we have been able to materially enhance our relationship with key US allies like Japan, Australia, UAE, Saudi Arab, and France; while maintain our strong relationship with Russia and Iran. The relationship with China has been volatile all through these years; though US has supported us in the rough patches of Sino-India relationship.

The issue of VISA, especially H1B VISA, has frequently made news in these past two decades. The volume and profitability from US business of our IT companies has grown manifold in these two decades, despite all this noise. The issue of FDA being particularly strict on Indian pharmaceutical exporters to US has also made to the headlines frequently. The US business of our pharmaceutical industry has also grown multifold in these two decades. The number of USFDA approved facilities in India has grown exponentially in past two decades.

Of course we can debate that the trade could have been much higher; or we did not do as well as we could have due to VISA restrictions, FDA actions etc. But, then we will have to answer some tough questions like lack of ethics and discipline at some of our pharmaceutical manufacturers, protectionist policies of Indian government, misuse of H1B and L1 VISA by some of Indian IT services companies, etc. It is therefore better to go with the empirical evidence rather than dwelling upon some hypothetical outcomes. And the empirical evidence is that Indo-US trade and strategic relations have been widening and deepening consistently. George Bush had famously expressed his “respect” for Atal Bihari Vajpayee, and “Love” for Dr. Manmohan Singh. “Barak” visited India twice (most by any US president) and expressed his reverence to Gandhi, admiration for Prime Minister Modi and commitment to relationship with India. Trump has gone much ahead in showing bromance with Prime Minister Modi and expressing love for “Hindu”. Biden has chosen Kamala Harris as his running mate and has promised favorable H1B regime for Indian IT companies. Regardless of who gets to live in White House for next four years, 2020 election may end up with highest number of Indian American elected as federal and state law makers.

I feel, worrying about the outcome of US elections may be out of habit of worrying too much. I believe, in broader context, the question “Trump” or “Biden” may not be any different from “Suicide” or “Murder” (of SSR).

 The work on developing as crypto currency started in early 1980s. The idea was to create a medium of exchange that is independent of any central authority, is based on trust and is accepted by distributed consensus. The process was formally commercialized in 2009 with release of Bitcoin, the first decentralized crypto currency. May be uncertainty over future of fiat currencies post global financial crisis (which led to printing of unprecedented amount of new money) prompted adoption of an independent currency as medium of exchange. Since then, the crypto currencies based on block chain technology have been gaining popularity. Presently, besides Bitcoin, over 6000 variants of crypto currencies are in vogue. The present value of all bitcoin in circulation is over US$250bn and the average daily trading value of bitcoins id over US$23bn. It is clear that Bitcoin is emerging as a serious challenger to Gold as an alternative currency or medium for exchange of value.

In India, RBI issued a circular in 2018 directing all entities regulated by it (Banks and NBFCs) not to deal virtual currencies or provide services for facilitating any person or entity in dealing with or settling those; thus virtually banning use of crypto currencies in India. The Supreme Court quashed the said RBI circular in March 2020, on the appeal of the Internet and Mobile Association of India, representing various crypto currency exchanges. The SC accepted the argument of the appellant that in the absence of any specific law banning crypto currencies, dealing in these is a “legitimate” activity, hence RBI’s circular banning these is untenable.

In August various media reports suggested that a “note” had been forwarded to the concerned ministries for inter-ministerial consultation to promulgate a legislation banning the use of crypto currencies in India. Reportedly, the inter-ministerial committee headed by the former Finance and Department of Economic Affairs (DEA) secretary, Shri Subhash Chandra Garg (who has been in news recently for criticizing the government for backtracking on reforms) had drafted the Bill of the law to ban crypto currencies. In the meantime, as per various media reports, since March 2020 SC order quashing the 2018 RBI circular, the local crypto exchanges have reported as much as 10x trading volume growth and a significant increase in the number of signups.

The question therefore arises are we blind to the opportunity and numb enough to not sense the winds of change blowing across our faces! The answer is a categorical “No”.

In January 2020 itself, NITI Aayog (the think tank of the government of India on policy matters), had released part 1 of the discussion paper on “Blockchain: The India Strategy”. The well-researched and well-presented paper unambiguously stated that the government recognizes the opportunity, importance and need for blockchain based crypto currencies. For example, note the following excerpts from the discussion paper:

“‘Blockchain’ has emerged to become a potentially transformative force in multiple aspects of government and private sector operations. Its potential has been recognized globally, with a variety of international organizations and technology companies highlighting the benefits of its application in reducing costs of operation and compliance, as well as in improving efficiencies.”

“Blockchain is a frontier technology that continues to evolve. In order to ensure that India remains ahead of the learning curve, it is important to understand the opportunities it presents, steps to leverage its full potential and such necessary steps that are required to help develop the requisite ecosystem.”

“Blockchain technology has the potential to revolutionize interactions between governments, businesses and citizens in a manner that was unfathomable just a decade ago.”

“Blockchain is seen as a technology with the potential to transform almost all industries and economies. It is estimated that blockchain could generate USD3 trillion per year in business value by 2030.”

Obviously, the government recognizes the potential, opportunity, need and importance of crypto currencies. Apparently, however, it wants to tread with extreme caution. For example, the following excerpts from the discussion paper highlight the cautious stance of the government.

“Blockchain has been positioned as a revolutionary new technology, the much needed ‘silver bullet’ that can address all business and governance processes. While the promise and potential of blockchain is undoubtedly transformative, what hasn’t helped this technology, that is still in nascence of its evolution, has been the massive hype and the irrational exuberance promulgated by a bevy of ‘Blockchain Evangelists’.”

“Despite the fact that the technology is still in a nascent stage of its development and adoption as it continues to evolve, it is important for stakeholders such as policy makers, regulators, industry and citizens to understand the functional definition of the entire suite of blockchain or distributed ledger technologies along with legal and regulatory issues and other implementation prerequisites. Equally important is the fact that this technology may not be universally more efficient and thus specific use cases need to be identified where it adds value and those where it does not.”

“Any transformative technology, in its initial stages of development, as it moves out of research / development phase to first few applications to large scale deployment, faces several challenges. Part of the problem is that such technologies are initially intended to solve a specific set of problems. Bitcoin, which has led to the popularity of decentralized trust systems and has powered the blockchain revolution, was intended to develop a peer-to-peer electronic cash system which could solve for double spending problem without being dependent on trusted intermediaries viz. banks. As Bitcoin started gaining prominence, the potential of underlying blockchain technology started getting traction. However, some of the early design features that made Bitcoin popular, primarily limited supply and pseudonymity, have become potential challenges in wide scale implementation of blockchain.”

Given the nascent stage of evolution of block chain technology and crypto currencies based on it, the cautious approach is understandable. However, the caution must be pragmatic and should not transgress to typical dogmatic bureaucratic paradigm. We may avoid rushing to capture a still uncertain opportunity; but we should not arrive too late either.

(The NITI Aayog discussion paper “Blockchain: The India Strategy” could be read here.)

 There was this very famous soccer player. He was one of the main strikers for his country as well as club team. He won many matches for his teams. He was very popular amongst sports enthusiast, and as such attracted many corporates to become brand ambassador for their respective products. Unfortunately, one day he met with a serious accident in which many of his limbs were fractured. He remained in intensive care for many months. Doctors had to perform several surgeries to keep him alive and make him walk again.

After spending two years in bed, the striker took his first step with the assistance of his wife and walking stick. The hospital management immediately broke the news to the media. The fans were ecstatic and celebrated the news by popping up champagne and ringing church bells. The doctors informed the team management and sponsors (who were keeping a close watch on the health conditions of their star striker), in confidence that their star would never be able to play again and need a stick to walk for rest of his life. They were obviously not as happy as the family members and army of fans. They also knew it well that the fans will hardly take any time in forgetting this star, once they know that he is not stepping on the filed again.

Recently, the finance ministry, informed the media that GST collection crossed Rs1trn mark after eight months, as the consumption in the economy picked up ahead of the festive season. The financial media highlighted this piece of information and presented as a definite sign of economic recovery. The financial market participants received the news enthusiastically and celebrated it by writing buoyant reports of an imminent economic revival.

The finance ministry however did not specify that in each of past two years, the GST collections have failed to meet the budget estimates and this year also there is no possibility of budget estimates being achieved. For past many months the state governments have been at loggerheads with the central government over the issue of GST compensation. The government has been drastically cutting spending on consumption as well investment to save the fiscal conditions becoming unmanageable that could trigger a rating downgrade and panic reaction from foreign investors. In September Government spending was just Rs2.32trn vs Rs3.13trn (yoy).

One can understand the enthusiastic response of traders to each bit and piece of data improvement, but the moot point is whether the investors and businesses should also be celebrating it! This question is pertinent to answer, because the fact is that the Government of India has indulged in the fiscal repression of worst kind, when the states world over unleashing fiscal stimulus of unprecedented proportion.

As per some reports, “Centre will earn an additional Rs 2.25 lakh crore from new taxes on petrol, diesel and other fuels imposed since lockdown began. This is despite global crude prices touching record lows.” It may bbe recalled that the Centre has increased excise duty by Rs 13 per litre on diesel and Rs 10 per litre on petrol during lockdown besides  increasing road cess on fuel by Rs 8 per litre. State governments have also increased their value added taxes on fuel to make up for revenue loss amid the COVID-19 crisis. The additional tax on fuel is estimated to be 50% more than the GST revenue lost during April – October 2020. If we add to this the additional taxes imposed on alcohol etc., the figure of additional taxation would be much higher than the revenue lost due to lockdown. This is fiscal repression of unsuspecting people, who are still under the impression that the spending cuts etc. are due to shortfall in tax revenue.

The fact is that Indian economy (striker), which was one of the major drivers of global recovery post 2008 global financial crisis, is on crutches. There is little visibility that it will become driver of global economy again in next 3-4years at least. The team management (businesses) and sponsors (investors) may have little to celebrate in the monthly GST or auto sales numbers. Traders (army of fans) may though pop up champagne to celebrate Diwali.

 With each report announcing further success in the endeavors of developing an effective vaccine for SRAS-CoV-2 (previously termed Covid-19) infection, the level of anxiety amongst the stock market traders and investors is rising disproportionately. Most of them appear anxious to find the best trade for the “normalization”. The fact that in past two years, the returns on investment for most of the investors and traders have been sub optimal, is further fuelling the anxiety. Most of them appear to believe that first mover will make extra ordinary gains, while the slow movers will miss this once in a decade opportunity.

Recent discussion with market participants in India, US and Singapore, indicates that they are exploring a variety of ideas that could give extra ordinary return in next one year. Some of the common ideas include technology, healthcare and reflation. Logistics also appears to be fast emerging as one of the favored ideas.

The following are the arguments I have heard from market participants in support of their favorite ideas:

Healthcare: The outbreak of pandemic has drawn attention of global community towards the lacunae present in the global healthcare system. A significant added emphasis shall be given to preventive healthcare; and building of capacities to handle subsequent outbreak of novel viruses. The endeavor to develop vaccine for SARS-CoV-2 pandemic shall provide new dynamics to the collaborative research in the field of pharmaceutical. And of course, the vaccine for novel corona virus does hold material profit opportunity for developers in next many years.

In view of these, the healthcare sector as a whole present material business and investment opportunity for next many years. Personal hygiene, nutrition, supplements, testing, vaccination, medical equipment (for new capacity building as well as upgrade of existing facilities) are some specific opportunities that are being talked about by investors.

Traders are however more interested in “the vaccine” for SARS-CoV-2 that will give immediate revenue to the developers and distributors.

I am inclined towards the investing opportunity in the healthcare sector, but I am not sure about the trading opportunity. In my view, pandemic is a highly sensitive political issue globally. Profiteering from vaccine will be difficult. In Indian context for example, the government has already indicated free vaccine shots for citizens. This means that the procurement of vaccine will be on government tender basis. Making extra ordinary profit in such a scenario will be difficult in my view.

Technology: The pandemic has definitely changed the way we live, work, and travel. Much of these changes may stay. Changes in technology platforms to incorporate the new digital protocols, consolidation of businesses and integration of processes, working from remote locations, need for higher security of data and IPR, in addition to the ongoing shift towards AI and digital, has created tremendous investing opportunity in technology sector.

Again, I am inclined towards investing opportunity in the technology sector, especially IT services; but given the fact that most of the low hanging fruits have already been plucked, I am not sure about the trading opportunities.

I have already written about my views on the so called reflation trade (see Hyperinflation - Highly improbable and Rush to gold as safeguard from hyperinflation could be quixotic

Logistics is a tricky area. I need to explore this a bit more. I shall share my thoughts on this in some later post.

 The latest quarterly bulletin on employment and unemployment indicators released by the Ministry of Statistics and Programme Implementation, Government of India makes interesting reading. The latest data presented in the bulletin in based on the Periodic Labour Force Survey (PLFS) carried out between July-September 2019, i.e., well before the lockdown forced by the outbreak of SARS-CoV-2 pandemic. The key highlights of the survey are as follows:

·         For the purposes of the Survey, the “Labour Force Participation Rate” (LFPR) is defined as the ratio of population which offers itself for employment, whether currently employed or unemployed. The “Worker Population Ratio” (WPR) is the ratio of employed workers in the total population of the country.

·         As per the latest data, in urban areas, LFPR was ~37%. For the young people (15-29yrs) the rate was at ~39%, while all people above 15yrs of age, the LFPR was ~47%.

·         There still exists a significant gender gap in the labour force participation in the country. The female LFPR is just 16% vs male LFPR of ~57%. Even in the younger population (15-29yrs) female LFPR is ~18% vs male LFPR of ~59%.

·         The WPR in India is ~34%. For younger people (15-29yr) WPR is ~31%, while for all legal workers (15yr and above) WPR is ~43%. In WPR also, a significant gender gap exists. The male WPR is ~52% while female WPR is below 15%. For population aged above 15yrs, male WPR is 68% while female WPR is ~18%.

·         More than 50% workers in India are either self-employed or are engaged as casual workers. Only ~49.6% workers have regular wage employment.

·         More women (57.4%) are in regular employment than men (47.5%). About 9% women workers are employed as unpaid helper in household enterprises. For male workers this ratio is ~4%.

·         In urban areas 62% workers are engaged in tertiary (service) sector. About one third workers are engaged in secondary (industry) sector. More female workers (65%) are engaged in services sector than male 61%.

·         Overall unemployment rate during Survey period (July-September 2019) was 8.4%. For youth (15-29yrs), the unemployment rate was at ~20.6%, while for all workers 15yr and above, the unemployment rate was 8.3%.

·         More young (15-29yrs) female workers (24.1%) were reported unemployed than the male workers (19.6%).

To conclude, we can say—

(a)   The gender gap in work force is alarming and does not augur well for the acceleration in the growth rate. If we juxtapose this data with the education statistics, we find that bridging of education gap between male and female population has not resulted in equal opportunity for female in employment.

(b)   Prevalence of higher unemployment amongst youth (15-29yrs) may be an indicator of serious skill mismatch.

(c)    High ratio of self-employed and casual labor, inter alia, indicates (i) lower employment elasticity in the organized sector and (ii) skill mismatch.

 Many readers have found my thoughts on “hyperinflation” yesterday little abstract (see Hyperinflation - Highly improbable). They want me to elaborate further on why I think that “hyperinflation” is highly improbable in foreseeable future.

I do not mind sharing the bases of my views on this topic. However, before elaborating my views of “hyperinflation”, I would like to clarify that when I say “hyperinflation”, I do not mean the term in its literal sense, because in that sense it makes no sense in the present day conditions. In the current context, by hyperinflation, we should understand episodes of sustained high inflation over a period of many months.

To put this in further context, please note that “hyperinflation” is generally used to describe situations where the monthly inflation rate is greater than 50%. At this rate, an item that cost Rs1 on January 1 would cost Rs130 on January 1 of the following year. At least, in past few centuries, there is no instance of a global episode of hyperinflation. In the first half of 20^th century there were few localized episodes – the most famous being Germany (1922-23) and Hungary (1945-46).

In past 70yrs, Peru (1980s), Venezuela (2014-16), Yugoslavia (1989-1994), Armenia (1992-93), Turkmenistan (1992-93) and Zimbabwe (2004-08) have seen episodes of hyperinflation. It is conspicuous that all these episodes resulted from either geopolitical reasons (war or collapse of extant political order) or civil unrest within the country resulting in collapse of political and/or financial system. Most of the countries facing hyperinflation were either closed economies or were facing global trade restrictions or disruptions. Besides, all these economies were too small to impact global economy, trade and commerce in any significant measure whatsoever. It would therefore be totally unfounded to expect that hyperinflation could strike a major economy of the world like US, EU, Japan, China, or India in foreseeable future.

Insofar as the probability of the episodes of sustained high inflation occurring over a period of many months in a major economy is concerned, I believe that the chances of that are almost Nil in short to medium term (1-10yrs), unless a major war or civil war breaks out involving some major economies of the world, causing sustained disruption in the global supply chain. The bases of my belief, as stated below, are simple and mostly intuitive:

·         Unlike in 20^th century, the global trade and commerce is now mostly dematerialized. The material, money, and labor move digitally. The rebalancing of demand and supply equilibriums is much faster and efficient than before.

·         Demand elasticity for most products, including food and energy has increased significantly. Alternative products and sources of supply are available to mitigate the impact of any supply shock.

·         The discretionary demand dominates the consumption in most of the developed and large developing economies. The inflation for discretionary products, like electronic gadgets, personal care services, etc. is already high. A large part of global consumption (in value terms) may not be essential and could be scaled back with small effort, without having any substantial impact on human life or global order.

·         The productivity of essential goods, like food, energy, clothing etc has significantly increased in past five decades and there is enough inventory of essential goods in the world to mitigate the impact of any supply shock due to natural calamity etc.

·         The global trade and commerce is much larger, faster and easier as compared to five decade ago. An episode of higher inflation due to supply shock is not likely to last longer.

·         The global economy is significantly more integrated now as compared to first half of 20^th century. The impact of higher inflation in a major economy is more likely to spill to the global economy rather swiftly. Hence, it is highly unlikely that supply shocks in a major economy will remain unattended by global trade partners for longer periods.

·         Given the technology and advancement in the weapon systems, the chances of a prolonged war between major global powers are next to NIL.

·         The “tons of money” that we are bothering about is actually not physical money. Most of it is ‘bytes of money” or digital money. If need arises, this can be destroyed as easily as it is being created. In fact, I firmly believe that all the money created by central bankers of developed economies in past 12years shall be destroyed by the central bankers, as soon as it threatens to spark unwanted inflation.

·         There is enough spare capacity of productive infrastructure and housing, etc. in large economies to absorb excess liquidity of money. I believe that US$1trn of additional flows could be easily absorbed in Indian economy in one month, without stoking inflation of essential items.

Insofar as the reflation of depressed commodity prices (many like Zinc and Nickle have traded below cost of production for many months) is concerned, it is not something to worry about. If at all, it may actually be a cause for celebration as it would signal normalization of the global markets and may mark reversion of extraordinary monetary efforts made in past 12years. Terming this as “hyperinflation” and rushing to the “safe havens” like gold etc. to safeguard from it would actually be quixotic, in my view.

 It was particularly gloomy winter evening of 2008 in South Mumbai. The global financial markets had their knees frozen. One of the top global financial institutions, Lehman Brothers had collapsed a couple of months back. Another global financial giant Merrill Lynch lost its identity to Bank of America. Some peripheral European countries were on the brink of defaulting on their sovereign obligations. The bankers in the financial hub of India (South Mumbai) were staring at massive job losses. Numerous businesses were on the brink. Many large investors had also suffered huge losses in their portfolios. For younger investors and bankers in their 20s and 30s, the conditions were totally unprecedented. The fear, uncertainty, scale of value destruction was overwhelming as they had not experienced anything like that before. Most of the then had seen 5yrs of strong bull market in credit and capacity building in infrastructure, energy and housing. Suddenly, all the credit started to look bad and all the capacities worthless.

The US Federal Reserve (Fed) had launched its Quantitative Easing Program (QE1) a week ago. Many other central bankers, including European Central Bank (ECB) was expected to follow the Fed soon. The commitment of central bankers to do “whatever it takes” had calmed the markets only slightly.

In this setting, I had the opportunity of hearing one of the most famous global commodity traders and fund manager in person. The gentleman was in Mumbai at the invite of a local fund house which had launched a Natural Resource Fund just a few months back. This gentleman, in his idiosyncratic style and attire made a passionate pitch for investment in global commodities. He strongly argued that the massive new money printed under the QE program of central bankers will inevitably result in hyperinflationary conditions in the global economy leading to sharp rise in prices of commodities. Quoting from the classical monetary theory books, he presented some hyperbolic charts and diagrams reflecting his projections of commodity prices.

I had many questions for the debonair looking trader cum fund manager, but I chose not to ask any, since I was fully convinced that inflation is certainly not one of the threats to the global economy in foreseeable future. Any question to the expert therefore would have been plain sophistry.

In hindsight, I feel it was a right decision to go with my conviction instead of arguing with the expert and weakening my conviction. As we all know that despite multiple rounds of QE and vigorous efforts to create some inflation, the global economy has continued to struggle with deflationary forces in past 12years. Many commodities are even yet to see their respective 2007-08 prices.

In past couple of months, the hyperinflation has again started appearing in headlines. Numerous reports and articles have been written on how the global economy is fast racing towards hyperinflation. Many strategists have suggested trades for this - gold and silver being the most common. Many traders have taken positions. The Natural Resources Fund launched in 2008 is being marketed again aggressively.

Some wise and smart traders and fund managers are calling it “reflation” instead of “hyperinflation”, indicating that the price rise may be short trading opportunity and not a global trend.

Regardless, my view continues to remain the same as it was in 2008. I strongly feel that hyperinflation, as we know it from classical monetary theory, is a highly improbable event in the modern economic conditions. The present day trade and commerce dynamics, technology, and demand-supply matrices do not support any extraordinary inflationary flare up. And if the hyperinflation premise based on imminent demise of US Dollar, it may also be unfounded.

 A few month ago, the banking and monetary regulator in India, the reserve Bank of India (RBI), assumed the responsibility of stimulating the economic growth, in addition to its primary responsibility of regulating & supervising the banking & money market institutions, formulating & implementing monetary policy to achieve the objectives of financial stability and price stability. Given the state of economy, no one could find any fault with the RBI assuming this additional responsibility. In fact the RBI was commended for taking this extra load.

It is very well accepted that a well-functioning, deep and robust financial market is a must for economic development. On Wednesday, the financial market regulator, the Securities and Exchange Board of India (SEBI) assumed the additional responsibility for reviving the sagging Indian economy. SEBI’s chairman reportedly said “SEBI is considering multiple steps to reboot the economy through financial market reforms”. He said, “It will be challenging to achieve the government’s ₹100 trillion investment target for infrastructure by 2024-25 unless the bond market is adequately developed.”

Market regulator recognizing their role in the overall economic growth and development of the country is a very comforting. They committing to efforts for promoting economic growth and development is also welcome. However, the regulators actively assuming responsibility for growth may not be appropriate after all. All institutions and all citizens have a defined role in the functioning of the economy. If all perform their assigned roles as per their best abilities, the growth will happen automatically. The growth is hampered when the one or more segments of the economy fail in the performance of their assigned roles.

It is widely recognized that crisis in financial sector is materially responsible for economic slowdown in India. Obviously, it reflects poorly on the RBI’s ability to regulate and supervise the financial institutions and delivery of credit.

In this context, it is pertinent to note the conclusions made in a recent Working Paper of RBI, titled “Bank Capital and Monetary Policy Transmission in India”. The “paper examines the role of bank capital in monetary policy transmission in India during the post-global financial crisis period. Empirical results show that banks with higher capital to risk-weighted assets ratio (CRAR) raise funds at a lower cost. Additionally, banks with higher CRAR transmit monetary policy impulses smoothly, while stressed assets in the banking sector hinder transmission. Recapitalization to raise CRAR can improve transmission; however, CRAR above a certain threshold level may not help as the sensitivity of loan growth to monetary policy rate reduces for banks with CRAR above the threshold. Therefore, it can be concluded that monetary policy can influence credit supply of banks depending on their capital position. (emphasis supplied)”

The paper also concludes that “Presence of non-performing assets in a bank also weakens monetary policy transmission and lowers the loan growth rate. These results support the need for bank capital regulation in India.”

Similarly, multiple scams and malfunctioning of securities’ market institutions like Mutual Funds and Stock Exchanges have negatively impacted the investors’ sentiments. SEBI must share some responsibility for this also, and focus more on “Regulation” rather than “Reforms”. For, “Reforms” is a function of policy making and not of regulation.

A large section of the market participants and investors believes that “over regulation” and “misdirected regulation” by SEBI in past few years may have caused more than damage to the capital markets and therefore economy than SEBI’s reform measures would have helped anyone.

In my view, building a vibrant retail debt market is imperative for the sustainable economic growth of the country. But this is a function of the government. SEBI’s role should be limited to efficiently regulating the market.