Monday, December 31, 2012


One of the problems with crime in India is the quality of legal help available plus the timeliness in getting it. Legal aid is supposed to be free and every district is supposed to have one. Publicity is not given to those and many of them would be like unmanned railway crossings. None of the big law firms will do any pro bono or free work. No issues. However, they can today get enough interns round the year. They can take turns in each city to keep a legal aid cell manned. And their expertise can come in helpful. Often, cops refuse to register FIRs. If big name law firms back a Legal Aid centre, this can be overcome. People who are at the receiving end should have a helpline that is manned by quality. This should go a long way in helping the public. Timely and proper legal help can help to bring justice in a speedier way.

Sunday, December 30, 2012

Overpriced stocks may dampen 2013

My Column for Deccan Chrnoicle - 30-12-2012. A peek at 2013-- The year 2012 surprised the faithful flock of investors. A 20 per cent return was delivered twice over during the year in the backdrop of so many worries and global turmoil. The first two months and the last two months rewarded the brave with handsome returns. Global investors gave a resounding vote in favour of Indian equities, investing a record amount of nearly $24 billion in equities. Even when our economy was growing at nine per cent, we did not get this kind of inflows. Perhaps the rule of restricted choice made India the best choice in this distressed world. At the end of it, we have a market near 20,000 points on the BSE. The general opinion on the street is positive, unlike the previous yearend. Each year, people generally get wiser with one more year of experience under the belt. This is true for all, except for folk like us who invest in the stock market. For us, each year is ‘different’ because we have discovered a new reason to be in the market. We have come to a turn where all the quality stocks are extremely pricey. Investing in them now, is unlikely to give us any returns that will help us beat inflation. If there is going to be a rally in the market, it has to be solely on account of the cyclical sectors rallying. We also head into the last full budget of UPA 2, which means that the first six to eight weeks of 2013 could give us a lot of returns based on expectations. If one is unsure about which stock or sector to bet on, the wise thing to do will be to tank up on the index. Going by my logic of quality stocks being expensive, it means that the rally should mainly happen in metals (beats reason, but it could rally), PSU Banks (we are never short on hope), infrastructure (blinded by passion rather than reason) and capital goods (we never learn). We spent the whole of 2012 waiting for the RBI to cut interest rates. Will RBI do it in 2013? The noise on the street says, yes. We could witness a cut in the first quarter itself. If so, it will give a boost to the market and the banking stocks will again rally. It is interesting to note that most of the ‘diversified’ large cap funds have 20 per cent or more in the banking stocks and we also have half a dozen banking sector funds. And the government has promised to infuse Rs 15,000 crores more in to PSU banks to make them have a modicum of respectability. If interest rates are cut and the bond prices rally, there is cheer for the fixed income investors. If there is a one per cent cut, I would then exit half my positions in fixed income and shift to equities. Maybe I will start the move now itself, without waiting for the actual cut. This is because the equity markets would rally in anticipation rather than wait for the event to happen. Similar to Rip Van Winkle, the UPA 2 woke up sometime this year. They have pushed through a half-baked FDI policy for domestic retail and have promised a massive vote-catching direct cash transfer. All of this gives an impression to the market of a government that is committed to ‘reforms’. The year 2012 ends with equities back in fashion (albeit with a dramatically reduced domestic retail participation), gold in negative territory for the first time in eight years and fixed income remaining rock steady. This year also taught us the importance of staying invested in equities, unless one is a master at timing the markets perfectly. Gold, whilst intrinsically worthless, continues to reflect the fear of governments and the strength of the dollar and has to be a small part of a large portfolio. For the retail investor, there would be some opportunities to make some loose change from flipping in some PSU IPOs as the government will push some disinvestment through at some discounts to market pri-ces (not saying that market prices are right or wrong, but there could be some upside in the issue pricing) and the government-owned investors pump in moneys. Budget expectations would start, with infrastructure, government-owned oil companies, fertiliser companies, etc, would hog the limelight. Usual suspects like housing, finance, banks, real estate etc would also have their moments under the sun. As per Chinese calendar, 2013 is the year of the Water Snake. It sounds dangerous, but not poisonous. Have a great year

Saturday, December 29, 2012

A High risk trading opportunity??

This article appears in the latest issue (10Jan 2013)of Moneylife. A RISKY PROPOSITION The tail end of the year is seeing some heightened interest in equities. Starting the year at around 15500, the BSE Sensex added 3000 points by mid February. After this it went in to a range bound coma, with all economic indicators turning negative. What is interesting is the revival in the market momentum post mid November of this year, in anticipation of the UPA 2 waking up from its slumber and trying to push through a slew of reforms. Whilst all the global indicators seem to indicate a kind of economic slowdown, the markets are indicating something quite contrary. Our markets seem to indicate that the worst of the economic slowdown is behind us and that corporate earnings are on the rebound track. Moodys, the global rating agency have upgraded the outlook from negative to stable. The sell side broking houses, are also saying that the worst is perhaps behind us and advise putting money in to the markets. In fact, of the various opinions I have seen, the ‘worst’ case seems to be a level of over 20,000 on the BSE Sensex for 2013!! The rally of our markets in 2012 was bereft of domestic or retail participation. Amidst the global gloom, we had record inflows of FII money to the extent of nearly twenty billion dollars! And in the full year, we hardly had anyone telling us to buy. At best, in the beginning of the year, we all put a kind of fifteen to twenty percent gains, if any, on the indices with a low probability. And this gain happened in the first five to six weeks. After that, when UPA 2 decided to wake up from slumber, the market gathered momentum (just as we were all waiting for the BSE Sensex to go to 14000 or below so that we could buy) and is now threatening to enter in to new territory in 2013. So, should we jump headlong in to the markets? I am not talking about things like “there are always some pickings in the markets if you look” kind of answers. I am wondering about whether the markets as a whole are buy worthy at this point and can one be sure that we are entering a bullish phase? For me, there is a big disconnect between economic outlook and corporate performance expectations. One of them or both of them are wrong. Unless there is a strong recovery in the economy to be on a seven percent plus growth in FY 2012-13, the stock prices are clearly running ahead of expectations. Many people opined a few weeks ago that our markets were at their historically low “P/E” levels. Alas, they did not bother to figure this out in co-relation to the interest rate environment, which continues to be stubbornly high. Similarly, inflation refuses to budge, with the government doing nothing to improve supply. The government announcement to move to direct cash transfers (which would in turn imply that subsidies to producers would go, letting them earn free market prices), reduce disparity in petrol and diesel prices, disinvestment (even if it to LIC), retail FDI ( a symbolism if anything), bringing back Mr Chidambaram to the Finance Ministry etc are all factors that have been influencing a bullish undertone. At the same time, people are saying ( I have no idea about the basis for these conclusions) that the worst in corporate earnings is behind us and that earnings are bound to go up from here, making the markets attractive. As far as I am concerned, the markets are trading at close to 16 times FY 2012-13 earnings. Given that interest rates could fall by around one percent or one and a half percent in the next twelve months, this implies a corporate profit growth of over twenty percent each year over the next five to ten years. If I assume inflation to be at five percent, this implies a real earnings growth of fifteen percent and perhaps a top line growth that is equal. This implies a GDP growth rate that is higher than eight percent or so, assuming some earnings growth will come from fall in interest rates and some kind of productivity improvements. We also have the paradox of consumer spending driven stocks (FMCG, Pharma etc) being at unaffordable valuations leaving no margin of safety and cyclical stocks in metals etc at interesting levels. Similarly infrastructure stocks are weak. Private sector banks are dear and PSU Bank stocks look interesting based on published numbers. So, what should one do? My call is to go for now with the momentum with eyes open. However, unless we have a discipline to trade, I would keep away. In terms of discipline, it is important to keep what we call as ‘stop loss’ limits. These should be strictly adhered to. For me, this market is clearly not a convincing buy. However, I also believe that there is a trading opportunity given that coming February will be the last full budget by the UPA 2 and will go all out to please. There is also a high probability of the RBI being pushed to drop interest rates lower. So, there is a clear window of opportunity (with risk of losing money if not careful) to make some money if we trade with a lot of discipline. Clearly we are in unsafe zone and best to tread with caution.

Sunday, December 16, 2012

Trading the rally- Tiger by the tail

The government has managed to have its say in so far as the policy relating to FDI in retail is concerned. Our markets seem to think that this is a great thing and that this is perhaps a harbinger of things to come and that the ruling party will be able to push through everything required to make India a welcome destination for money from overseas. It is clear to all that our domestic finances are beyond repair (with expenditure constantly trailing revenues) and we need to attract enough of foreign capital flows in order to postpone our troubles. At some point, there will be a price to pay for sure, unless India structurally improves in a manner that export of goods and services will exceed the imports. The government is trying to focus on areas like restricting import of gold, which may plug some leak, but do not address any structural issues. So, the government is turning its attention to hang the ‘welcome’ signs to the foreigner to bring in his money. However, things are not so simple. If we look at the FDI in retail, the government approach is terrible. A new entrant will need to full fill a host of conditions and also seek each state government’s approval to open shop! General consensus is that at best this may bring in around ten billion dollars or so over three to five years. On the domestic front, the government is trying to bridge the fiscal gap by selling assets. This is a temporary solution. Once the government runs out of assets to sell, the problem re-surfaces. So, our problem of being financially ‘unviable’ (with revenues constantly falling short of expenditure) is an inherent one. The government is not investing in infrastructure that can help bridge this gap. Not that it is unwilling to, but is giving the impression that it cannot do. Roads, ports, power, logistics et all are the things required if India is to get a competitive edge in manufacturing or services. Simple labour arbitrage is not anything sustainable as wages will move towards each other (job losses in one country will move wages down, impose protectionism tariffs etc and job gains in the export nations will raise disproportionately). The world economies are also yet shaky. Europe is still troubled and it is possible that nations like Greece that were forced to accept moderation will go back to being profligate, causing yet another round of turmoil. The Euro zone is damp, US has to overcome its own fiscal cliff of moderating its finances and Japan is on the verge of contracting. So, domestic demand alone cannot keep us buoyant for long. We are going to feel the pain. The domestic politics of appeasement is also financially disastrous in the long run. There is a race to offer freebies to the populace by the Centre as well as the State governments. All of this fuel inflation. Supply side boosters are missing totally. Inflation is finally taking its toll on the consumer. We can see slowing demand in consumer durables, even whilst personal credit is growing. Interest rates could drop, but would not perhaps be significant enough to boost any demand. In this backdrop, our markets have turned bullish, on the back of record FII inflows in to the equities and debt segment. On top of that, the bulls point to the FDI victory in both houses of the Parliament as a sure indicator of the government pushing through reforms. As the government nears its last full year budget before elections, optimism is clearly visible. In this noise, it is important to keep a cool head. If you are a trader and want to trade this expected up move, do it with speed and caution. Speed because the market does not wait for you to complete your analyses etc., Caution because I do not see this move backed by fundamentals. The way to exercise caution is to have clear strategies for trading in terms of booking profits, having stop losses etc. Investment for the long terms can wait. Our markets are expensive at present levels and the run up in the last five to six weeks is clearly driven by liquidity and by very optimistic set of assumptions. It is very likely that the markets may be on tear for some more time, but given my conservative nature, I will keep aside. Quality stocks are expensive. The rally is driven by lesser quality names and at best, a trading opportunity.

Friday, December 14, 2012


The institutional fund managers, who are custodians of investor money have demonstrated their irresponsibility by subscription to the issue of the Tower company that closed today. The whole world is touting that it is expensive, but these guys think it is cheap. By keeping away, they could have got the stock far cheaper in the secondary market later, if they love the stock so much. These kind of investments give rise to suspicion about the integrity of the fund managers. Unless they have a personal interest, I cannot imagine anyone investing in this issue. Surely there are far better investment opportunities available in the secondary market. Perhaps it is time for SEBI to step in and have a separate disclosure about investment in IPO by the fund managers. As it is, the fund managers are the only creatures in the industry who do not have any qualifications or hurdles to be cleared to manage money. An investor needs to be KYC compliant, a distributor has to pass exams, etc. If SEBI thinks it should be bothered with investor protection, a good place to start with would be to look in to which fund managers invested in this issue and keep an eye on them.

Monday, December 10, 2012

A liberal view of Direct Cash Subsidiy

The cash transfer scheme was first mooted by the UPA in 2005. The push came from the western world, which advocated direct cash transfers in order to overcome the shortfalls in the Public Distribution System (PDS). There is also a political angle to it. A government that is seen to be handing out cash can be perceived to be a benefactor and translate in to votes. A combination of both is the reason for the UPA government to push this scheme through. What it entails is to do away with the PDS. All products at free market prices and to those people who qualify for the ‘cash transfer’ (estimated at around one crore families) a periodic cash amount will be transferred to their bank accounts to enable them to buy essential stuff like food, fuel etc at market prices. In theory it sounds excellent. Free market means that no one has to do the complex PDS management and also help the nation to be rid of scams in ration distribution and control. We can also be rid of black marketing of essential commodities if cash transfers are adopted. To the actual recipient, this should be a good thing, in theory. No longer should they have to deal with the evil PDS chain. They can now buy freely from where they want. Similarly, for the government, a fantastic saving by shutting down the PDS, saving the costs associated with it (storage, distribution, procurement etc). Such kinds of programs exist in over 40 countries and were kicked off nearly two decades ago. By and large most have been doing well, except in a few cases, corruption has reared its ugly head there also. For instance, in small towns in India, it is not uncommon for the monthly pension payout to be subjected to a “toll” by the disbursing authority. India being India, corruption is endemic and embedded in the genetic structure. We will find a way to exploit every system. If administered properly, the end result would be a huge financial gain to the nation. The administrative mechanism (now proposed to be through the Aadhar scheme) has to be perfect. And it is going to be a task to ensure bank account opening. Without being negative about it, let us hope that the experiment succeeds. The scheme could take four to five years to be fully implemented. Hopefully, this would also mean that every citizen pays for every service or product. Electricity need not be given free, fertilizers need not be subsidised, and kerosene and diesel need not be separately priced. Corporate entities in the listed space would rejoice. Electricity projects need not get stalled because state electricity boards will now be able to meet commitments properly. The scheme rolls out in 51 districts in 14 states of the country on Jan 1, 2013, and will cover all the country's 640 administrative districts by end-2013. On paper, it sounds excellent, does it not? In reality, there will be more problems than solutions. People will take the cash subsidies; spend it on liquor, entertainment and mobile phones etc. Families will start to starve because they cannot now afford food at market prices, having spent the money elsewhere. And once people are addicted to cash receipts, each successive government at the centre and the state governments in conjunction will keep giving away more and more. In reality, corruption would tend to rise. The other issue is that the cash transfer, once given, cannot be taken away even if the person improves his standard of living. To take it away would be politically inconvenient and would lose votes. The other thing is that the scheme would have to be inflation indexed to provide for increase in food prices. A straw poll would indicate that women of the household would prefer subsidised food to getting cash in to the hands of the males, who would make a beeline for the liquor shop. The other thing is that coming close to the general elections of 2014, the scheme will be seen as a UPA or rather a specific Rahul Gandhi scheme (he is going to inaugurate the roll out ) and will ensure Congress voting by the masses. To this extent, such schemes generally can be construed to be a political tool for vote garnering. The other big risk is that the last mile reach through the banking system will pose problems. In the garb of overcoming that, the scheme might move to cash disbursement at designated locations, which will become a hotbed for corruption. If the scheme goes through, from the stock market perspective, bet on oil marketing, fertiliser, sugar, electricity, power generation etc. Forget the macro for now and see how it unfolds.

Tuesday, December 4, 2012

Close down the PSUs

The PSUs in India are a sad lot. They handle some of the key sectors and compete for manpower at a fraction of the salaries that private sector offers. Given this, they either attract very motivated persons or those who use the easy route of corruption that PSUs offer. Came across a newsletter that makes for very sad reading: Apparently, someone has filed a PIL asking why PSU’s are hiring from IITs! In effect, the litigant says that PSUs should offer equal opportunity to all college graduates and not give any preference to any institution. In other words, an engineer from IIT is the same as one from any private engineering college from the back of beyond. So, even if the PSUs want to have any kind of decent quality people, the Indian system will not. Our legal system also is under stress. The PIL was filed over a year ago. No response yet. All the more reason that we get rid of our PSUs without delay. Improve efficiency and let the government pay attention to law and order. Why should the government be in the business of business?


A view on the FISCAL CLIFF The "fiscal cliff" is a term used in discussions of the U.S. fiscal situation to describe a bundle of momentous tax increases and spending cuts that are due to take effect at the end of 2012 and early 2013. In total, the measures are set to automatically slash the federal budget deficit by around $600 billion or approximately 4 percent of GDP between FY 2012 and FY 2013, according to the Congressional Budget Office (CBO). The abrupt onset of such significant budget austerity in the midst of a still fragile economic recovery has led most economists to warn of a double-dip recession in 2013 if Washington fails to intervene in a timely fashion. (The above is a succinct summary from the Council on Foreign Relations (CFR) USA) The US has a ceiling for debt that cannot be breached without legislative action. The grim financial position led to an unprecedented credit downgrade, with the US losing the prestigious triple A rating. To cut this $600 billion, it involves an expenditure cut of nearly $400 billion and hike in revenues by around $200 billion. At this juncture in time, when the US economy is poised between recovery and recession, the impact could be catastrophic. Raising taxes, removing tax breaks, reducing defense expenditure, reducing healthcare, reducing unemployment benefits and other unpopular decisions would have a deep economic impact too. Healthcare cuts would impact drug companies; defense cut would impact fortunes of defense equipment suppliers and so on. The other thing that will surely play a role in what action America takes, is the recent disaster caused by hurricane Sandy. The impact on US would surely be shrinkage in GDP (with worst case estimates being a four percent drop in GDP!), job losses and drop in corporate profits (a combination of higher taxes and falling demand). More moderate estimates peg a half percent decline in the GDP of the US during 2013. IMPACT When the US sneezes, the world catches cold. Within US, there would be higher unemployment, lesser corporate earnings and reduced economic activity. Coming on the back of a none-too exuberant 2012, the outlook for 2013 will be adversely impacted. Reduced imports by the US will have impact on all economies in the world. Global money flows would be uncertain as US corporations will be bent on preserving cash rather than investing in growth. It would have a cascading impact on global growth and across the world, economic growth would be dampened. The Euro zone and Japan would be particularly vulnerable given their fragile economic situation. What would it mean for India? Difficult to guess at this stage, except to guess that it would be another negative factor for capital flows. US centric Indian companies would face some squeeze on their businesses. One possible impact could be lower oil prices, if US demand contracts. That could be the silver lining on the cloud for India. As far as our markets are concerned it would mean increased volatility in our equity markets, making the case for higher asset allocation to fixed income. MIDDLE OF THE ROAD? Many global experts opine that it would be impractical or impossible to achieve the fiscal measures that are prescribed. In the US, it is likely that a half way approach would be taken to ensure growth in the economy. Instead of trying to slash the budget deficit by the prescribed four percent, the real cut may be between one and two percent. This would mean only a partial cut in expenditure and a calibrated hike in taxation rates. Perhaps a more gradual road map would be laid out for fiscal consolidation. This would mean that the US would have to resort to higher borrowings. After the experience of the Euro zone with higher borrowings, it would put pressure on US credit ratings again. The US would perhaps benefit from the confidence of the global investors (who keep seeing their options declining day by day) who would still perceive US as a relatively safe harbour in a storm. Many possibilities exist and from here, we cannot really take an informed view. All it means is that the world’s largest economy is going through turbulence and the impact will be felt across the globe. And given the fact that most economies are driven by big business interests, I would put my money on the US not wanting to sacrifice growth. Fiscal discipline and consolidation can wait.