Vijay Kumar Gaba

 From the queries I receive from friends and readers these days, one thing appears certain – these are most challenging times for small and HNI investors, especially those who decided to raise substantial cash in their portfolios last spring as the pandemic fear gripped the markets.

Many of these investors are not convinced about the sustainability of current stock prices and continue to expect a sharp correction is in the offing. Nonetheless, they find the daily rise in stock prices alluring and difficult to resist. In this intense struggle between their convictions, expectations, beliefs, fear of missing out (FOMO) on a secular rally (if their conviction is misplaced), and greed to make some quick money, some of them appear to have already surrendered to their fears (FOMO) and greed and invested in stocks which normally they would have avoided due to inferior quality of management, earnings and/or balance sheet.

I personally do not support –

(i)     A binary call on portfolio, i.e., mostly invested or mostly cash.

I like to stick to my pre-defined asset allocation, regardless of the market conditions. An opportunistic tactical allocation sometimes becomes necessary, but it does not exceed 10% of the standard allocation.

(ii)    Investing against conviction.

I find investing in ideas without conviction or with borrowed conviction totally avoidable. Empirically, I have found most investment endeavour that lacked conviction or were based on borrowed conviction, usually get wound up in an unpleasant manner.

(iii)   Allowing the sentiments of greed and fear to drive investment strategy.

Investment strategy of an investors should be driven by his individual circumstances – stability & security of income, health, savings, financial and social status (house, marriage, dependent children & parents) etc. Market movement driving the investment strategy is a certain prescription for disaster, in my view.

(iv)   Investing in poor quality for quick gains.

Just because the good quality stocks and bonds are have become expensive cannot be an argument for buying poor quality bonds or stocks. The events in stock and bond markets during 2017-2019 could be a good guide on how to conquer the temptation to make quick gains in stocks or earn few extra bps on bonds.

(v)    Bothering about relative return.

The rule is that if you are diabetic, the sweets in neighbour’s plate should not be your concern. The investment goals (returns) of an individual investor should be mostly pre-defined as per his investment strategy based on his risk profile. Benchmarking returns to some random index or other measure may be appropriate for professional investors (e.g., fund managers) whose remuneration depends on his performance. For individual investors it is meaningless. Remember, you have to pay your child’s college fee from the money you earn from investment. You cannot be happy losing only 2% when Nifty is down 12%.

So, my suggestion is that the investors suffering from fear or greed may urgently call their respective advisors and make an investment strategy for themselves, rather than floating uncontrollably between hope & desperation.

I would also recommend keeping investment strategy away from the realm of fiction. Being average is a great strength for an investor. Over 90% of Indian investors may be earning less than nominal GDP growth rate on their financial investment portfolio over a longer period. Chasing the returns usually seen in fictional success stories and few cases of extraordinary brilliance, could be dangerous to their financial health. Always remember you are riding an ordinary bicycle. You should not be competing with 1500tonne Lorries racing on expressways, for you might get crushed without anyone noticing.

 Delhi APMC’s Azadpur Mandi (wholesale market) is the largest fruit and vegetable market in Asia. Farmers and traders from across the country bring their produce to this market for selling. This Mandi is also one of the largest import and export hub for fruits and vegetables in India. A visit to this Mandi is always fascinating. From the lorry drivers travelling from all corners of India one can gather first-hand account of the socio-economic state of affairs in the country.

Azadpur Mandi is an ideal reflection of socialist and secular society. One finds very rich traders & commission agents and very poor laborers together struggling to pass through filthy and narrow by-lanes of the Mandi. Hindu, Muslims and Sikhs work, eat and live together here most amicably. The social and legal issues like child labor, drugs, labor exploitation, human rights violation, labor’s dignity etc. are mostly meaningless here; and no one seems to be bothered about these “mundane” issues here. Here one can get cheapest and tastiest street food in the city, which is enjoyed by the rich traders and poor workers equally.

Over last weekend, I met some large fruit and vegetable commission agents in the Mandi to assess the current business conditions and their assessment of the demand in next few months. The following is the summary of discussion.

·         For many of them, business is down 25-50% as compared to pre-Covid average. Moreover, full recovery is not expected even in next 3yrs.

·         The demand for fruits and vegetable from hotel industry is down significantly. Curbs on travel and gatherings have impacted the demand. Their feedback from hotel industry indicates that growth in corporate travel and attendance at social functions may not return in next couple of years at least.

It is pertinent to note that the ratio of per person fruits and vegetables used in food preparation in hotels is usually 2x of the quantity used at home.

·         Marriage attendance that used to be in excess of 1000 is structurally down to 200-300. In the view of most traders, the fat big Indian weddings may not return for few more years, if at all. People are now becoming very comfortable with small gatherings. Virtual participation of outstation guests through live telecast is becoming more of a norm.

·         As per few estimates, in pre Covid period over 2lac outstation students were living in Delhi to take coaching for various examinations. These students were mostly living in paying guest accommodations and guest houses. The number is now estimated to be down to less than 25000, as online coaching has become popular. The demand for fruits and vegetables for catering to these students (canteens and dhabas) may be structurally down.

·         Many corporate and other institutional canteens are still closed or working at lower capacity, as workers and students are preferring to carry home cooked food due to hygiene reasons.

·         A huge part of the credit extended by Mandi traders to the retail merchants and street hawkers in pre Covid period has turned bad with no hope of recovery.

·         Many traders expect the low attendance in wedding, work from home (WFH) and Learn from home (LFH) etc to reflect on demand for textile, footwear, food, jewelry, cosmetic, travel, and fuel demand etc.

Overall, the current mood is despondent and the future outlook is not so optimistic either.

By the way, if you are overwhelmed by the “Aarthiyas are crooks and main force behind the latest farmers’ agitation” narrative, it would be worthwhile to visit Mandi for couple of hours to balance your views.

Promoting tourism has been a key priority of the Indian government since former Prime Minister Rajeev Gandhi started the famous Bharat Utsav programs in various countries in mid 1980s. As per the headline numbers, India has seen some steady growth in number of tourist arrivals in past 20years. The share of India in international tourist arrivals increased over 3x from 0.37% in 2001 to 1.24% in 2018. The share of India in international tourist arrivals in Asia Pacific region has increased from 2.22% in 2001 to 5.05% in 2018.

India ranked 34th in Travel and Tourism Competitiveness Index, improving significantly from its rank of 65 in 2013. Tourism contributed 5% share to India’s total GDP in 2018-19.

From pure statistical purpose, we may seek some comfort from this data. However, if we consider the rich historical and cultural legacy, treasure of architectural marvels, and geographical diversity of our country, this data appears pathetic. It reflects on the poor tourism infrastructure, poor perception about security and safety of foreign tourists, and lack of control over unscrupulous elements who abundantly fleece foreign tourists. This is in spite of the notional Atithi Devo Bhav (Guest is God) campaign.

The data looks even poorer, when we consider that almost a fifth of the international tourists coming to India are from neighboring Bangladesh. These people usually visit India to meet family or for pilgrimage. Another 23% of tourist come from US and UK. Foreign tourists from the top 10 countries accounted for 67% of the total foreign tourist arrivals in India in 2019. Among the foreign tourists, 57.1% tourists visited for leisure, holiday and recreation, 14.7% for business purposes, and 12.7% was Indian diaspora.

The international tourist arrival growth has slowed down in past three years noticeably. As per the recently released Economic Survey for FY21, —

“9.18 The tourism sector in India had been performing well with Foreign Tourist Arrivals (FTAs) growing at 14 per cent to 10.04 million and Foreign Exchange Earnings (FEEs) at 19.1 per cent to US$ 27.31 billion in 2017. However, the sector underwent a slowdown in 2018 and 2019 before declining sharply in 2020. The Foreign Tourist Arrivals (FTAs) in 2019 stood at 10.93 million compared to 10.56 million in 2018. In terms of growth, the growth rate of FTAs declined from 14 per cent in 2017 to 5.2 per cent in 2018 and further to 3.5 per cent in 2019. Foreign Exchange Earnings (FEEs) from tourism stood at US$ 30.06 billion in 2019 as compared to US$ 28.59 billion in 2018. In terms of growth, the FEEs declined from 19.1 per cent in 2017 to 4.7 per cent in 2018, picking up slightly to 5.1 per cent in 2019.”

Personally I find these statistics as a massive opportunity. Given the tourism potential in India, the share of income from tourism sector in India’s GDP could be increased materially from the current less than 5%. This would however need some serious effort from all. We would need to inculcate the right values to our children from primary school level. Honesty, Truthfulness, Cleanliness, and Respect for Women are some of the quintessential traits required for attracting larger number of global tourists.

As an ardent traveler myself, I find the lack of proper sanitation and overwhelming crowd of intimidating touts as the most discouraging factor. Pertinent to note that in the diabetic capital of world there is no public toilet worth use on 300kms road from Haridwar to Gangotri.

 In past couple of years some state governments have announced reservation for local residents in private sector jobs. Some other states are also considering to implement similar provisions. Given that the word “reservation” itself is not liked by a large section of Indian population due to legacy reasons, this trend has evoked strong reactions from the businesses and job seekers from other state who fear losing out to the local population in these states.

Many issues like, Right to Equality, likely productivity loss due to lack of competent people, likely higher wage cost due to limited supply of qualified people within particular state, etc., have been raised by the concerned people. Concerns have been raised about flight of businesses to other states, further worsening the regional inequalities.

In my view, it is a very good idea, of implemented pragmatically. If the state governments work with the private entrepreneurs to develop the education, skill and training ecosystem in their respective states and provide fiscal incentives to businesses for giving preference to local people for their incremental job requirements, this stipulation could materially promote the regional equality and employability of youth. This shall also reduce the cost for businesses as they could move away from expensive concentrations like NCR, Bengaluru, Mumbai, Chennai, Hyderabad and hire good people at relatively lower cost. The investments being made in transportation infrastructure, Bullet Train, Economic Corridors, Dedicated Freight Corridors, Regional Airports etc. shall support efficient relocation of businesses to hinterlands.

 The finance minister seems to have reinvigorated the animal spirits of Indian entrepreneurs and financial market participants. The Union Budget for FY22, is perhaps the most celebrated budget after the “Dream Budget” presented by the then Finance Minister P. Chidambaram in 1996.

This is also perhaps the first time when markets have cheered higher fiscal deficit. This ought to be taken as a sign of rising assertive India, which is fully aware of its importance in global order and refuses to be bogged down by unreasoned views of global rating agencies.

The market also cheered the fact that after dithering for six years, this NDA finance minister has picked up the threads from Vajpayee led NDA.

The finance minister has spoken about “privatization” of a majority of CPSEs, instead of “disinvestment of minority stakes”, as was the case in NDA-1.

The massive thrust on infrastructure building to ward off the impact of economic sanctions imposed in the wake of 1998 nuclear tests and bursts of dotcom bubble etc. was the hallmark of Vajpayee government. His government gave up government monopolies on Coal, Ports, Airports, Mobile Telephony, Roads, Power, Oil & gas exploration etc.; and introduced schemes like SEZ to encourage domestic investments. The incumbent finance minister has also ignored the fiscal slippages due to pandemic induced lockdown and focused on investment in infrastructure building.

It is widely expected that this Budget could unleash third round of Economic Reforms (Reform 3.0), after 1991-1994 and 1999-2001. It is therefore pertinent to evaluate whether the incumbent government has learned lessons from the earlier rounds of reform and adequate precautions are being taken to ensure that collateral damage of reforms could be minimized. For example—

·         Opening of Indian economy to global competition in early 1990s, led to redundancy of numerous small and medium sized Indian producers. This led to a surge in bad loans in the financial system and eventually led to failure of gigantic institutions like UTI, ICICI, and IDBI etc. High interest rates, higher inflation and sharp depreciation in INR during 1991-1998 were also partly associated with the reforms.

·         Massive investment in infrastructure building during NDA-1 regime resulted in massive demand-supply match. The investment resulted in accelerated growth during 2003-2008 period, but led to bankruptcy of many infrastructure projects (power, roads, airports, telecom, Oil & Gas etc.) due to lack of demand and strained finances. Schemes like SEZ were implemented without adequate regulatory framework, and was eventually reduced to land grabbing exercise by unscrupulous entrepreneurs. A part of the present day stress in banking system could be attributed to the projects initiated in early 2000s.

·         Both rounds of reforms resulted in two very popular governments not getting re-elected.

We shall have to see that the government does not lose sight of the severe stress in unorganized sector and burgeoning household debt.

I also found the following points in budget that may need closer scrutiny of investors:

·         Most of the development programs announced and funds allocated are for a period of 5-6 years. This effectively means that the government is resorting to long term plans, as was the case in (now scrapped) Planning Commission era. The only difference is that NITI Aayog the body that replaced the Planning Commission, may not be holding wide and deep consultation with State Governments on various issues, even though the number of central schemes transferred to the States has increased materially.

·         It is now many years since FRBM targets have been violated. It may be time to scrap this law and work out a more practical legislative framework. It would be prudent to stringently control the Revenue Deficit rather than bother too much about fiscal deficit in this phase of growth. Borrowing for investment should not be considered a problem so long servicing is not an issue.

·         The government continues to place very high reliance on high rate Small Savings for financing the fiscal deficit; while the sourcing from very low cost external debt is minimal. The appropriateness of this strategy needs to be evaluated.

·         Allocation for Information Technology and Education in FY22BE is less than the FY21BE. Similarly, allocation for Health in FY22BE is less than FY21RE; and allocation for Scientific Departments in FY22BE is less than FY21BE.

This does not sound congruent with the core ideas of the budget.

·         Corporate Tax collection target for FY22BE is lower than the FY20 actual collections. This needs to be corroborated with projected 14.5% rise in nominal GDP.

·         It is proposed to pre fill IT returns with details of income from salary, interest, dividend and capital gains from listed securities.

The government must make sure that it remains a facility for the tax payers and does not become a source of harassment. For example consider this. IT department will take data of capital gain on listed stock from Stock Exchanges. This data will be based on gross trade prices. In case of frequent traders the charges (brokerage, STT, Stamp Duty etc.) may be more than the amount of gain itself. Obviously, tax payers will have to correct the pre filled amount in the returns. If department runs a variance check, a large number of returns may be pointed oout and this could potentially lead to harassment of tax payers.

 “Progress lies not in enhancing what is, but in advancing toward what will be.”

—Khalil Gibran (Lebanese Thinker Poet, 1883-1931)

Allaying all fears, the finance minister presented a brave budget. She took all Covid-19 blows on (fiscal) body and refused to yield to fiscal pressures. She prudently refused to indulge in allurements of raising resources through additional taxation. The Budget for FY22 is continuation of various measures announced during 2020 to support the economy. The recognition of the need of new economy (ecommerce workers, startups, e-learning, new education techniques etc.) and willingness to let go the control over even strategic CPSEs are signs of pragmatism. This is perhaps the only budget in independent India that does not propose to make any change in income tax rate structure.

It is now upon the administrative ministries, departments and state governments responsible for executing the proposals. Like Rishabh Pant, who went to Australia with a poor record of recent execution, the performance of these executing organs of the government in recent past has not been encouraging. It is to be hoped that the execution will improve materially in next 15 months and Indian economy shall emerge winner.

The stock market celebrated the budget ebulliently. This is despite the warnings by RBI Governor and CEA (Economic Survey) that stock market appear disconnected from the real economy.

Six core ideas of the budget

1.    Health and Wellbeing of citizens - Preventive healthcare, better sanitization and clean water

2.    Physical & Financial Capital, and Infrastructure – investment in building physical and financial infrastructure.

3.    Inclusive Development for Aspirational India – Recognition of the needs of new economy

4.    Reinvigorating Human Capital – Modern education policy

5.    Innovation and R&D – National Research Foundation to research ecosystem in country

6.    Minimum Government and Maximum Governance – Aggressive disinvestment; administrative reforms; easier and transparent tax administration

Key development proposals

·         Rs 64180cr to develop capacities of primary, secondary, and tertiary care Health Systems, strengthen existing national institutions, and create new institutions, to cater to detection and cure of new and emerging diseases.

·         Universal water supply in all Urban Local Bodies; and liquid waste management in 500 AMRUT cities. (Rs. 2,87,000cr in 5yrs)

·         The Urban Swachh Bharat Mission 2.0 (Rs. 1,41,678cr over 5years).

·         Voluntary vehicle scrapping policy Commercial vehicles 15yrs age and personal vehicles 20yrs age would need a fitness test.

·         Rs. 35000 allocated for Covid-19 vaccination. More to be allocated if needed.

·         Mega Investment Textiles Parks (MITRA) Scheme to be announced in addition to PLI.

·         A Development Financial Institution (DFI) with Rs20000cr initial capital to be set up. The institution to have Rs5trn loan book in 3yrs.

·         Proposal to set up National Monetization Pipeline. DFC to be monetized after commissioning in June 2022.

·         Award of 8500kms of road under Bharatmala project in FY22.

·         Private sector may be allowed to own and operate 20000 city busses under PPP mode.

·         Portability to be allowed between power distribution companies. Rs3.05trn for upgrade of power distribution infrastructure.

·         Proposal to launch a Hydrogen Energy Mission in 2021-22 for generating hydrogen from green power sources.

·         Private players to be allowed to manage and operate major Ports.

·         Proposal to consolidate the provisions of SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Government Securities Act, 2007 into a rationalized single Securities Markets Code.

·         Proposal to introduce an investor charter as a right of all financial investors across all financial products.

·         FDI limit in insurance sector increased to 74% from present 49%.

·         Asset Reconstruction Company and Asset Management Company to be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization.

·         Rs. 20000 cr allocated for recapitalization of public sector banks.

·         The limit of Rs50lac outstanding for action under SARFASI Act reduced to Rs20lac for large NBFCs.

·         Proposal to launch data analytics, artificial intelligence, machine learning driven MCA21 Version 3.0 with modules for e-scrutiny, e-Adjudication, e-Consultation and Compliance Management.

·         Clear roadmap for privatization of CPSE. Proposal to take up the privatization of two Public Sector Banks and one General Insurance company and IPO of LIC in FY22. Rs1.75trn to be raised from disinvestment in FY22.

·         Social security benefits will extend to gig and platform workers. Minimum wages will apply to all categories of workers, and they will all be covered by the ESIC.

·         15,000 schools to be qualitatively strengthened to include all components of the National Education Policy.

·         Higher Education Commission to be set up for standard-setting, accreditation, regulation, and funding of higher education institution.

·         National Research Foundation to be set up to develop research ecosystem in the country. (Rs50000 over 5years)

Direct proposals

Personal taxation

·         No change in tax rates and slabs.

·         Assesses above 75yr of age having only pension and interest income need not file return, if TDS covers their full tax liability.

·         Dividend income to be considered for advance tax only when announced. For FPI, TDS on dividend to be at lower treaty rate.

·         ULIPs Premium over Rs2.5lac in a year to be treated at par with Mutual Fund Investment.

·         Interest on contribution to Provident Funds on contribution exceeding Rs2.5/year to be taxable. (Wef 1-04-2021)

·         The additional deduction of `1.5 lakh shall therefore be available for loans taken up till 31st March 2022, for the purchase of an affordable house.

·         IT Returns to come pre filled with salary, interest, dividend and capital gain of listed securities.

·         Person in whose case TDS/TCS of Rs50,000 or more has been made for the past two years and who has not filed return of income, the rate of TDS/TCS shall be at the double of the specified rate or 5%, whichever is higher.

·         Proposal to increase safe harbor limit from 10% to 20% for the specified primary sale of residential units.

Business taxation

·         Further affordable housing projects can avail a tax holiday for one more year – till 31st March, 2022. Tax exemption to be notified for Affordable Rental Housing Projects.

·         For assesses carrying 95% or more transactions digitally, Tax Audit would be needed only if turnover exceeds, Rs10cr.

·         Eligibility for claiming tax holiday for start-ups extended by one more year - till 31st March, 2022.

·         TDS of 0.1% required on purchase transaction exceeding ` 50 lakh in a year, provided the supplier’s turnover exceeds rs10cr.

·         TDS requirement on dividend paid to Trusts (REITs/InVits) in whose hand dividend is not taxable.

·         Provisions for Equalization Levy on ecommerce players rationalized.

Assessment Procedures

·         Time limit for reopening of assessment reduced to 3yrs from present 6yrs. Re-opening for serious tax evasion to be made more objective and system driven.

·         Dispute Resolution Committee to be set up for small assesses and Settlement Commission to be wound up. ITAT to also go faceless.

·         Time limit for completing assessment reduced to 9months from the end of relevant assessment year.

Budget at a glance

Besides other things one thing that the year 2020 has established is the need for global manufacturing to rebalance its over reliance on China. This need was being felt for past many years, but the following factored appeared to have reinforced this need in 2020:

(a)   Major global economies like US, Japan and India took some aggressive tariffs and non-tariff measures to correct the imbalances in their trade with China.

(b)   Pandemic induced mobility restrictions exposed the vulnerabilities in the global supply chain and prompted businesses to diversify their manufacturing more widely.

(c)    Geopolitical aggression shown by Chinese establishment is now increasingly perceived as potent risk for global supply chain. Political unrest in Hong Kong has may have also embellished this perception.

A recent survey conducted by UBS highlighted that “70% in the China CFO survey and 86% in the US CFO survey said they had moved or plan to move a part of their production out.”

Amongst Asian countries, besides Vietnam, Taiwan, Japan, Korea and Thailand, India is seen one of the preferred country for relocation of manufacturing facilities. India is seen o have lowest manufacturing costs amongst peer, but some skepticism remains about the ecosystem and administrative hurdles. Despite a strong commitment of the top leadership to encourage manufacturing base in India, the progress on the administrative level is perceived rather slow. It is important to note that low labor cost does not necessarily lad to overall lower cost structure, if the overall ecosystem (regulation, taxes, logistics, infrastructure etc.) is not favorable for manufacturing.

The events of Winstron, Narsupura (Bengaluru, December 2020) and Delhi (Violent protests by farmers, January 2021) are not good omen for this though. Rejecting these events as mere local politically motivated events might be mistake best avoided; because we are already in the midst of transition. The decisions are being already taken in board meetings. No one can deny that sometimes a newspaper headlines on decision day might impact a 30-40yr plan.

Global economy

The year 2020 witnessed the global economy contracting by 3.5%, the worst peacetime performance after the great depression. IMF has recently forecasted a “strong” (5.5%) revival in 2021 and “normalization” (4.2%) in 2022. Which essentially means the global economy would be growing at less than 1% CAGR over two years (2020-2021). This rather long pause in global growth means serious setback to the development goals of poverty elimination, climate change and inclusion. The fact that this “pause” in growth could only be achieved with trillions of dollars in fiscal and monetary stimulus, highlights that the legacy of global financial crisis (GFC) and subsequent quantitative easing might have materially weakened the growth drivers of the global economy in past few decades, e.g., development of human capital, globalization of trade and commerce, poverty alleviation, productivity growth, etc.

The new global survey of 295 economists from 79 countries, commissioned by Oxfam, reveals that 87 per cent of respondents, including Jeffrey Sachs, Jayati Ghosh and Gabriel Zucman, expect an "increase" or a "major increase" in income inequality in their country as a result of the pandemic. (see here)

In Indian context, IMF is now forecasting a contraction of 8.5% for FY21 and a growth of 11.5% for FY22. This implies, like global economy, Indian economy would also be growing at less than 1% CAGR over two years (2020-2021). This “pause” in growth over two years comes at the expense significant fiscal leverage (rs30trn stimulus), and massive liquidity infusion.

The latest Oxfam report highlights that the pandemic induced lockdown may resulted in massive rise in socio-economic inequality. While the formal sector workers mostly escaped unscathed or with small salary cuts; the job losses in informal sector were massive. “Out of a total 122million people who lost their jobs, 75%, which accounts for 92million jobs, were lost in the informal sector. The disruption in school schedules may result in massive rise in school dropout young population, further widening the socio-economic abyss.

As per Oxfam, "Only 4% of rural households had a computer and less than 15% rural households had an internet connection. Only 6% of the poorest 20% has access to non-shared sources of improved sanitation, compared to 93.4% of the top 20%.

Global Trade

IMF sees global trade rising by 8.1% in 2021, after an estimated 9.6% decline in 2020. The rebound is much weaker, as compared to post global financial crisis (GFC) rebound in 2010-2011. The recovery would look even insipid if we factor in poor trade growth during 8yrs preceding the pandemic (2012-2019).

In a recent update, ING Bank highlighted—

“With freight rates signaling capacity constraints in world trade, it’s likely that trade volumes won’t be able to rise much further – even to serve catch-up demand – when countries emerge from the second wave of lockdowns. Capacity may only come back on stream slowly as shipping liners wait until the global recovery is more firmly underway before bringing back inactive ships. Even then, containers being unavailable where they are needed will drag on volumes for some time. Capacity constraints mean that trade volumes won’t be able to rise much further even when countries come out of lockdowns

In the near term, limits to global trade growth are likely to be a modest headwind for GDP compared to the far more disruptive domestic lockdowns. More important will be higher freight rates and import prices building inflationary pressures over the course of the year.”

The present state of global economy and trade is therefore far from Blue Sky; even though the dark clouds may have dispersed for now. A bullish bet on sustainable global recovery to beyond “Pre Covid sub optimal levels” might be premature as of this morning, in my view.

A sharp rise in inflation, as presently anticipated by a section of global economists and investors, forcing monetary tightening; could however lead even the recovery to Pre Covid level, halting in its strides.

 Over the last weekend, I attended a lecture on the doctrine of Karma, read couple of books on philosophy of investment, and observed zillion of nuggets of investment advice, apparently written by highly successful investors and/or advisors, on my social media timelines. Admittedly, all this was quite befuddling for me. Everything, I read or heard caused an overflow of conflicting thoughts and emotions. I spent the entire Republic Day holiday in extricating the entangled thoughts. I am not sure, if I attained any degree of success in my endeavour. Nonetheless, I understood the following very clearly–

(i)    Like any other Karma, the process of investing in financial products is personal to every individual. No two individuals will have exactly same investment plan – strategy, goals, process and outcome. The similarities between religion (morality, ethics etc.) and investment end here.

(ii)   Investment advisory issued (free) to common public is mostly a redundant function, inasmuch as it does not take into consideration the individual circumstances of an investor.

(iii)  Financial investment is a tiny subset of the one’s overall life. The life path one sets for himself does impact the investment plan. But vice versa may not be true. If investment plan (strategy, goals, process and likely outcome) begins to drive the life (cart before the horse), it is a huge problem.

Doctrine of Karma

Karma is perhaps the most popular word of Indian origin that has been incorporated in global lexicon. This is despite the fact that the doctrine of Karma is intrinsic to Indian belief system of rebirth and salvation and does not fit the practice of Abrahamic religions (Islam, Christianity and Judaism) and most other traditional religious belief system across Africa and Latin America.

By most simplistic definition, Karma means Acts performed by a living being. The doctrine of Karma says, insofar a living being is engaged in the eternal cycle of rebirth, the condition of present and future lives is determined by his/her Karma of past and present life.

While performance (or otherwise) of Karma is completely individual, the common goal of all Karma, performed by all living beings is to obtain release (salvation or Moksha) from this eternal cycle of rebirth. Each one has to accumulate enough good Karma that will be sufficient to secure a release from this cycle of rebirth.

The doctrine of Karma is thus motivation to live a moral & ethical life. This also explains the pain, suffering and existence of evil.

Investment advisory

Investment advisory is function of formulating a financial plan for a person or group of persons. This involves, evaluating the financial conditions of a person, setting investment gaols, making an investment strategy to achieve these goals, and assisting the person(s) in executing the plan.

Investment advice thus is very personal service. It is less likely that an investment advice shall be equally relevant for two persons or group of persons. It is therefore very important that while accepting a “common” investment advice, one needs to be extremely careful. Let me explain this by way of an example:

A “common” investment advice is that by investing in an Index Fund (passive investment), one can earn a steady return over a much longer period of time. Nifty has given CAGR of ~9% over past 30years. These 30yrs have seen extreme volatility, many wars, multiple scams, global crisis, pandemic, many droughts, extreme political instability (and stability), etc. Even in USD terms, CAGR of Nifty over past 30yrs is close to 5%. This sounds very good.

Now consider the following:

(a)   Nifty witnessed 18 corrections of over 10% in these 30years. These corrections ranged 10 to 60% from the peak level before correction. (See the chart from latest CLSA report below)

If a person had the investment plan period of less than 30yrs, there was a decent chance that he would have made much lower returns. For example, If someone invested in Index ETF in April 1992 (Nifty 1281) and redeemed his investment in September 2001 (Nifty 854), he would have lost over 30% on an nine year investment. Similarly, investment made in Nifty ETF in January 2008 (Nifty 6279) would have yielded just 1.5% CAGR if redeemed in March 2020, a good 12years later.

I appreciate that taking peak and bottom level of indices to state my point may not be appropriate. But it does not change the point. Investment in financial products is not like Karma. One wants to see the outcome of investments over a finite period, usually not as long as 30years.

We do not invest in stocks, with the idea that the profits will come, if not in this birth, may be in next birth; May be I would die before enjoying the fruits of my investment, but my grandchildren will certainly enjoy it. This may be an eventuality. But this is usually not the plan.

Therefore, while investing in an index fund, I must be mindful that only that part of my investment should go in Nifty ETF which I would not be forced to redeem in case of an emergency or contingency, especially if this emergency happens to be a macroeconomic event that might cause a sharp temporary fall in equity prices.

(b)   One must realize that protecting the savings from inflation is one of the primary goals of financial investments. In past 30years (and even in past 10years), India’s average consumer price inflation rate has been above 7%. Adjusted for this Nifty 30yrs CAGR may be under 2%. Does not look glamorous by any imagination!

The short point is that “common” (free) investment advice might be applying the doctrine of Karma to financial investment also. It may be assuming equity investment to be a perpetual endeavour, lasting for generations. Unfortunately, it is not the situation in most cases. People usually invest in stocks for generating some additional income (dividend plus capital gains) in foreseeable future. Their investment plan needs to be prepared accordingly.

I received lots of comments on the yesterday’s post (Investing lessons from down under). Most commentators agreed with my view that a good portfolio must be a balance of consistent compounders and emerging businesses; whereas few expressed strong disagreement. Unsurprisingly, amongst those disagreeing were both types of investors – those who prefer to stick with consistent performers; and those who prefer emerging businesses with a potential of abnormal returns in short to mid-term.

I find myself totally disinclined to argue with any of the commentators, since I strongly believe that investment is essentially a personal endeavour. Each investor will have a different strategy based on his/her personal circumstances, requirements, and aptitude. The widely followed investment strategies are basically templates. Individual investors customize these templates to make an investment strategy most suitable for them.

I however would like to discuss one thing that stuck me hard while reading these comments. I found that most commentators (I believe they all are investors) are not sure about the primary goal of financial investments. Upon enquiry, I received the following answers:

·         Wealth creation (40%)

·         Become rich (25%)

·         Higher profit (25%)

·         Others (10%)

I wonder if these are correct definitions. What I have read in management books is that “goal” of a financial plan must be quantifiable and definite to the extent possible.

·         “Wealth” itself is a vague term. Various people define it in different ways. There are many who even refuse to consider “wealth” as a pure financial term. “Wealth Creation” is even more vague.

·         “Become rich” is even more vague. “Richness” in financial terms, is purely a relative term. It may have entirely different connotation for persons living in Mumbai and Madhubani. This goal is certainly not quantifiable.

·         “Higher Profit” is also a relative term and could be infinite. It could mean higher than alternative avenues of deploying savings. It could also mean higher rate of return than a targeted person or institution.

In my view, the core of investment strategy is to define a definite quantitative goal. Some examples of these goals are as follows:

(i)         Preservation of capital in real terms (inflation adjusted)

(ii)        Return on investment of 10% more than the nominal GDP growth

(iii)       Return of 5% in USD term, since I am saving for my child’s US education