Our Moon Has Blood Clots- A book review -

“When I saw Nehru for the first time in Lal Chowk, I was a refugee in my own state. Sixty years later, I am a refugee in my own country.”

This sentence from the book “Our Moon Has Blood Clots” gives a brutal paraphrase of the Kashmiri Pandits’ plight. Rahul Pandita, a Kashmiri Pandit lived the first fourteen years of his life in Kashmir is now a journalist and an author, living in New Delhi. There is a dearth of writing and reporting on what happens in Kashmir and no one is sure about the veracity of news that comes out of there. This book deserves to be widely read to give us a perspective on what the conflict is all about.

This book narrates the plight of the author’s personal journey from a Kashmir whose tranquillity and peace has been broken permanently by fanatics who believe in Kashmir not being a part of India. The narrative is useful to piece together the gradual movement that started with terror on the dawn of independence and has accelerated in a way that it looks impossible to halt the cry for separation. There is enough anecdotal references in the book that date to as recent as 2012, which shows the total dominance of the faith driven populace who do not wish to be labelled as Indians. Unfortunately, this vision also includes the annihilation of people who do not share the faith.

Violence and brutality has been the weapon used by those who seem to think that Kashmir is Pakistan rather than India. Right at the dawn of independence, they started by targeting everyone who did not have allegiance to Islam. Whether it was Sikh, Hindu or Christian it made no difference to those who unleashed violence of the worst kind in the name of Islam. Killing, raping and looting commenced right in 1947. After the first few years, the only Hindus left were the Kashmiri Pandits. The ethnic cleansing by the fanatics continued through and the second and final wave commenced in 1990 which saw the Kashmiri Pandits departing en masse.

The story draws on the author’s life of growing up in an environment that was certainly not friendly, but one which was tinged by a hope that ‘things will revert to normal’. The story captures the people who after being friends and neighbours with you for so long, suddenly turn around and gang up on you. I shudder to think of what the author must have gone through when the first revelation strikes him at a cricket match where the entire audience whips up Pakistani flags and cheer an Indian loss. Perhaps, that is everyday life out there.

The story also tells us about the apathy and in some cases, the complicity of the political rulers as well as the local police and administration in shooing away the ‘infidels’. It surely sets us thinking about whether there is any hope in the future of a Kashmir that will be India. With the passage of time, each incident seems to imply that our enemies across the border are leaving no stone unturned to ensure strife and militancy in Kashmir. The fact that some part of India has to be under curfew for the hanging of someone like Afzal Guru, tells us what the situation in Kashmir now. The author also captures the slow and unhurried life in Kashmir before the rot set in. It is clear that the religious divide is an imported problem.

The loss of home and homestead and then the treatment of the Kashmiri Pandits in ‘refugee’ camps is mind numbing. Here are people who stayed in the lap of nature, in houses with ten, twenty, thirty rooms and are forced in to tin sheds with no running water or sanitation. The writer talks about how even in the rehabilitation efforts, the money has been skimmed off almost entirely by the politicians. After being deprived of a home (the fanatics simply occupied their homes and some of them had the decency to get some signed documents by throwing a pittance as sale price), the Pandits are struggling with absolutely no support from the state or from any of the political bodies that talk about oppression of the Pandits in Kashmir.

It is remarkable that all this suffering and oppression has still not made him bitter or spiteful. He still exudes hope that perhaps one day he could ‘return’ to his home. The section where he describes his visit to his own home as a visitor brings out the irony of the Kashmir that has become a home to the fanatics. In a way, the book is a telling commentary on our rulers and their lack of interest in resolving this problem. A must read for all Indians.

February 11th, 2013

Experts choose 10 stocks -

http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/ten-stocks-that-can-return-upto-50-in-2014/articleshow/28778582.cms

These are expert views -

Has 4 real estate stocks

And a few overhyped and overpriced stocks- Britannia, Cadilla, HDFC Bank-

If you ask the experts about how much money they have personally put in those stocks, one will know the truth

Yes, 50% may come back in 2014. Remaining 50%?? God help you.

You can make a small fortune this year- If you put a big one now in these stocks.

Indian Rupee and Company earnings

THE RUPEE DEPRECIATION AND EARNINGS IMPACT

(This article published in latest Moneylife) The Indian rupee should normally depreciate at around six percent per annum against the big currencies like the US Dollar, Euro etc. I am simply using the difference between the inflation in India and the inflation in those nations. Just to give a backdrop, the US $ was worth Rs.7.50 in 1970. If I took an average inflation differential of 6% annual between India and the US (naturally, India with the higher inflation figure), the dollar should mathematically have been worth around Rs.92 by end of 2013.At a 5% differential, it should have been around Rs.61. In reality, the rupee has been cushioned to a large extent by the inflow of foreign currency through foreign remittances, FII and FDI inflows etc. If we look at our foreign exchange trade, we are consistently net importers. So we are always short of foreign exchange. We have survived due to these not trade flows that have propped up the rupee. Interestingly, if I take the 2002 average rupee to dollar rate of 48.23 and apply a 3% per annum depreciation, the rupee should have been worth around Rs.66 to the dollar by end 2013. I do not say that my method is the best or the only method, but I trust this. Purchasing power does not make sense to me, when our per capita is so poor and the day to day expenses are all globally price linked thanks to open economies. Subsidies if any come through only in petrol, diesel and kerosene. And the demand for and supply of foreign exchange is the other key determinant which can impact the rates. For the rupee to be stronger, we need to have an economy where more people want the rupee as opposed to foreign currency (exports plus remittances plus FDI/FII greater than imports & other outward flows).

This slide in the rupee can be used as an additional determinant in deciding an investment strategy.

The universe of listed in India can be broken down in to:

i) Operations in India, no imports and no exports- 100% domestic;

ii) Operations in India, net regular importer – Import intensive;

iii) Operations in India, net regular exporter- Export intensive; and

iv) Global operations- net foreign exchange earner- Global earners.

Given our expectations of foreign exchange flows, if we expect rupee to weaken over the near term, it makes sense to pick up those companies that are net earners of foreign exchange and vice versa. This is not to rule out fundamental analyses, but the foreign exchange factor would be useful in our stock picking.

At the present juncture, there is not much to move the rupee except some FII flows. FDI flows would be impacted by policy changes. The forthcoming general elections and its outcome will definitely have a bearing on this. Right now, the government is trying to restrain demand for dollars by putting curbs on dollars and providing greater incentives for exports. A falling rupee should logically help exports or earners of foreign exchange. If we were to get policy decisions that facilitate FDI in a big way, then it would be best to bet on those who are net users of foreign exchange.

As a strategy, in the near term, I would bet on foreign exchange earners- IT sector stands out as one clear winner. Yes, competition would perhaps lower the dollar pricing power to some extent, but not immediately. The momentum is clearly with the companies now. On the other hand, net users of foreign exchange- whether in capital goods or in petrochemical based commodities would see some squeeze in their margins. The ability to pass on cost increases is never unlimited.

Whilst looking at a company’s annual report, there is a table that shows the earnings and outgo of foreign exchange. Here it is best to focus on trade or business related outflows and inflows. A one off capital goods imports or dividend outflow to foreign shareholders should not be looked at. Similarly, those companies that have a high amount of foreign debt, will have higher rupee outflows. There may be some companies that have global earnings and they would be better placed if they have foreign currency debt. I ignore dividend outflows because dividends are fixed in rupee terms. It does not impact the margins or pricing power in any manner.

There are companies in commodity exports. Unfortunately, many of them could be in gem and jewellery or rice exports which are really trading on the margin rather than producers. Mining companies could gain if they are exporters. My expectation for the near term would be to bet on IT, Pharma companies with large exports, some engineering companies that have consistently growing exports. There would be some positive surprises from these sectors.

This is simply an additional input for constructing your portfolio. Fundamental analyses based on earnings and Return on Equity remains the key selection criteria as far as I am concerned.

Elections - Buy or Sell? And some thoughts on savings & investments

BUY TODAY, SELL TOMORROW- MAKE HASTE It is that time of the year when everyone will suggest revisiting your portfolio and investment themes. However, I do not believe in this ritual that is marked by a change in the calendar. Why should it matter so long as things are going as planned? And if things are not going right, why should I wait for the year to get over or another one to begin? Investment strategies should be not change unless there is something wrong with what one is doing. Investment strategies can get aggressive (buying riskier assets like equities) or get passive (keeping money safe against erosion of nominal principal) depending on circumstances and events. If someone tells me to ‘rebalance' simply because it is that time when one throws away an old calendar and gets a new one, it does not make sense to me.

When one starts off on the journey to ‘invest’, I am sure that there is some inkling of risk and return. And I also maintain that ‘investment’ is the second stage in financial accumulation. The first stage is ‘savings’. The ‘savings’ allocation is free of risk and does not warrant any change unless there are dramatic shifts in inflation or interest rates. In this we will have several things like our provident fund and or PPF, bonds, bank deposits etc. We are simply building our first line of defence. We have kept for ourselves a fixed goal of reaching a certain corpus by a date. So this does not get disturbed.

After having crossed that, I am looking at real estate, equities etc. These are tactical allocations and whilst it is great to keep buying these as much as possible till as long as possible, economic and political events dictate higher or lower level of buying of these assets. Typically, one would have some portion of money that is waiting to find the right asset.

Buying assets for keeps necessarily means having to wait for a ‘right’ price. There is no formula for this as far as real estate is concerned. However, for equities, one can define and work out prices at which we can buy and prices at which one should sell. Neither prices last forever nor do markets generally move in a narrow range. Thus, it would be ideal if I could buy more when prices are low and less when prices are high. Alas, none of us are expert enough to forecast the market trends accurately. I generally advocate people to buy a select bunch of stocks at consistent intervals and keep accumulating them for ten to twenty years.

There are those of us who keep dabbling in equities without any specific thought. It is more of a ‘herd’ mentality. Many of us got enamoured of equities in 2008 and then swore off it in 2009. And finally exited in 2013 when the index looked very similar, without bothering about value or price.

I am sure history repeats itself. Very soon, we will see another build up in our markets as the general elections come closer. One likely scenario that is being painted by everyone is that we could see a government headed by Modi. Markets will make him out to be the panacea for all ills and everything in the stock markets will seem to get better once he takes charge. So, logically once should be expecting a new surge in the markets till the elections are over.

By that time, a lot of expectations would have been built in to the market. Next, the results will come. Results may be as per expectations. Now the markets will not run up much more. Markets will have to wait some time to see expectations being met and nothing can positively surprise. The risk of disappointment is higher. Let us call this Scenario A. There other outcome is that UPA could cobble together a third term. In which case, all the positive build up would lose steam and the markets would correct sharply and then get driven by what the UPA will do. As of now, if UPA 3 happens, the markets would be greatly disappointed. Let us call this Scenario B.

Scenario C would be a third front- Ugly from the stock market perspective and cause a huge fall.

So, in short, whatever be the scenario, it makes sense to sell off stocks on the day votes are getting counted or just a day before the polls, to cater to exit poll opinions.

This is simply a ‘trading’ idea. Markets are not predictable, but what I have outlined is my take on the probabilities. January 1st , 2014

Aam Aadmi Party- Today is an important day in India's history

Politics in India takes an interesting turn today. Aam Aadmi Party, the new hope on the horizon, takes control of the Delhi Assembly. There is a lot of hope and expectations from many. No one gave AAP a chance. The coming of age of AAP is clearly an indication of the level of frustration of the public with the corruption and mis-governance of the existing parties.

The coming to power of AAP, without a clear majority is interesting. BJP, the party with the most number of seats, is a sore loser and will be in the usual role of opposition. The Congress, with a handful of seats supports the AAP!! Interestingly, AAP is quite vocal against both Congress and BJP.

An interesting strategy from the Congress. Maybe they want to show how 'responsible' they are and how they are willing to listen to the people. In all probability, the Congress support may last till the outcome of the general elections. And if they do badly and BJP does well, they may continue the support. If they do better than is commonly expected, they could pull out.

BJP has ended up as the biggest loser in the Delhi game. First they wanted power. Upset at AAP being the reason for their not getting a clear majority in Delhi, they now look at AAP as a bigger enemy than Congress!!

For citizens across the country, AAP brings forth new hopes.

AAP, however, is perhaps surprised by its own success. A few slogans against corruption and the involvement of citizenry has left them without a proper workable manifesto. The manifesto they now have is quite lame- slashing power bill etc. They need to articulate some economics quite soon. And realise that governance is more important than merely talking about governance.

Everyone will be keenly watching this experiment. And has given a new hope to hardened sceptics like me, that we could have a government that does not include the congress and the BJP. Both parties are virtually the same, though the BJP states that the Congress had a longer tenure to ruin the nation.

Unfortunately, in the last five years, BJP has done absolutely nothing. Just boycotted parliament. Nothing remedial has been suggested. The campaign speeches of their leaders, including Mr Modi, have merely been anti-Congress, anti-dynasty lectures. Nothing about what they intend to do has been spelt out. And the infighting at the top is not over at all.

I write this, presuming that Aam Aadmi Party is accepting the proposal to rule Delhi.

The way AAP has gone about consulting people at this stage, perhaps is an indication that they will do so when it comes to any big issue. That is welcome and refreshing.

2014- Some thoughts on preserving money

2014- HOLD YOUR HORSES

2014 does not look very exciting, from an investment perspective. The focus of the world seems to be more on what is referred to as ‘tapering’ and what the implications are. In India, the tempo will build up to the coming general elections in the middle of the year. The global economy looks as shaky as before, except for the surge in liquidity everywhere.

2013 is ending with our stock market indices at near all time highs. However, the indices hide the fact that the markets have become extremely polarised. High quality has become unaffordable from an investment perspective and poor quality stocks are now catching up. The mid caps are still way behind their highs. Banks are sitting on record levels of doubtful credit and ways will be found to change the label.

PSU stocks seem to have found more scepticism as the government seems to be helplessly torn between populism and inactivity on the economic reform front.

Politics has become very predictable. Irrespective of what happens at the centre, there is unlikely to be any big change in the economic outlook or policies. If the UPA goes and NDA comes, we can expect no better. Every reform measure has been opposed by the NDA in the current term and should they come to power, do not expect anything different. It is only the ‘expectation’ of change that could provide some altitude to the markets.

As 2013 draws to an end, the inflation linked bonds are being launched. A welcome initiative, but with a lot of ifs and buts about the tax implications a full throated endorsement to invest is not possible. It may be good for those in the non tax-paying bracket. The moot point is whether they have money enough to invest. A small asset allocation to the bonds would be useful, should there be an undesirable coalition that will push inflation through the roof. Should a third front take charge at the centre, expect mayhem on the financial markets.

I would keep my liquidity intact. I do not see many great investment opportunities in equities at the present juncture. I would keep my eyes peeled for any event based price action that could bring some good stocks to a buying level. The stock markets did not do much, if we measure point to point. However, the volatility threw up a lot of opportunities. If one had discipline to have a laundry list of stocks to buy, at prices that provided some safety, 2013 provided many opportunities in quality stocks and some select mid caps.

Gold had a terrible year, though Indian investors were cushioned to a large extent by one of the sharpest annual depreciation in the rupee.

2014 is going to be interesting. The Chinese New Year in 2014 will herald the beginning of the “Year of the Horse”. The stock markets clearly personify that. We all know that one horse will win, but no one knows at the start about which one it is going to be. If we look at corporate earnings, the first two quarters of 2013-14 have been the worst in over a decade. One way to look at it is that things can only get better from here.

Foreign exchange earners are going to be the preferred choice for 2014. IT for sure looks good. Avoid the trap of falling in to commodity exporters or rice, jewellery etc. Capital goods are best avoided, though there could be a selling opportunity once the new government comes in to power. I clearly do not see government finances being able to afford populism and development expenditure out of its budget. Our fiscal position is not all that great and the impact of government freebies is going to be severe in the years to come.

Look for companies with no debt, steady domestic market and reasonably clean management. Do not increase allocation to equities or re balance etc simply because the year is changing. Asset allocation should also be a function of relative price to value of assets. Do not spend time worrying about ‘tapering’. It is more important to see whether the company we choose will make more money or less money and with what level of certainty.

MUTUAL FUND ROUTE TO EQUITIES- DO NOT IGNORE SIP ROUTE

Investing in equities has always been a matter of considerable debate. We look at the indices and draw quick conclusions. For instance, we saw the BSE Sensex at 20,000 in 2008 and in 2013 we are still there. So we conclude that equities did not give us returns. This happens to us because this is a measure from one fixed point in time to another. It also assumes that we simply put money in to equities in one go and wait. This means that we are being subjected to the vagaries of market timing. If we were great at market timing, we would have bought at 8,000 index and sold at 20,000. Alas, we are not blessed with this as foresight. It is only in hindsight that we can draw these conclusions.

There are two methods of investing that I like. One is to keep target prices for buying my stocks and buy when the stock hits that price. It may happen or it may not. Also, it is possible that the stock may still seek lower levels.

Given that markets keep fluctuating, the much talked about SIP or “Systemic Investment Plan” is probably a good way to invest in to the markets. Let me take two of the oldest equity schemes that I think are well run and see. One is Franklin Blue Chip Fund and the other is the HDFC Top 200.

Let me give below some numbers;

.......................... 1 year ..... 3 years ...... 5 years ....... 10 years ..........

Point to point return

HDFC Top 200 3.01......... 0.88 ......... 21.30 ........ 20.76 ...........

Franklin Blue Chip 3.14......... 2.74 ......... 20.53 ........ 18.68 ............

BSE Sensex 7.51 ........ 2.12 ......... 17.97 -------- 15.20 ............

(These are annualised returns, in percentages. I have taken 1st December 2003 as start date)

It does look like the last three years, we have not got much return and that both the funds could not match the index returns in the last one year. So, can we say that mutual fund investing is pointless or equity investing is not all that hot?

Now for the same periods, let us look at what SIP (monthly on the 1st of each month, we invest equal amounts) would have delivered:

SIP Returns

For the latest ----------- 1year ....... 3yrs --------- 5yrs --------- 10yrs ............

HDFC Top 200 13.34 ------- 7.28 --------- 10.78 --------- 15.74 ............

Franklin Blue Chip 14.16 ------- 8.63 --------- 11.55 --------- 14.27 ............

NIFTY ETF(Benchmark) 17.57 ------- 9.42 --------- 10.03 --------- 11.30 ............

(Annualised percentage returns for equal amount SIPs starting December 1st )

Does this not change the perspective radically? The main problem has been our paying too much attention to the noise and trying to put money in to the market when everyone is buying? We tend to just put money once or twice when the noise is the highest and then suffer because our timing was wrong?

Whilst this strategy cannot deliver big returns, it also prevents big losses. The important thing is to have the discipline to keep on going at it. Treat the SIP amount as expenditure rather than a decision point each time. And I would urge long time frames- ten years or longer. As I keep saying often, investing in equities should be with money that you do not need in a hurry.

Whilst opting for an SIP, I would prefer to keep away from thematic funds or sector funds. I would rather focus on diversified equities. There is also an option to pick on the Exchange Traded Funds on the Nifty or the BSE Sensex. The advantage of the ETF is the fact that it is an automated process and does not have a fund manager bias in stock picking. Also, as the size of each fund grows larger and larger, beating the index gets harder.

The other obvious advantage of the mutual fund return is the tax break on the returns. So whilst comparing it with bank deposits or fixed income, keep this in mind.

One interesting data thrown out from the table above is that the ETF in the Nifty ( the only index based ETF with a ten year history) seems to have done better in the recent period, besting the mutual funds in the three years and lesser time frame. Whilst it is too early to conclude, it could be because in the earlier days, it was easier to beat the index with a smaller corpus and now with the two funds having grown very large, the impact of small winners is not high. So, going forward, maybe the passive ETFs on the broad indices may be the best option.