Stocks,shares, finance, money, profit and the economy

Yesterday I had written a piece in which I had written about seeing Sonam Kapoor at the airport and how it created a buzz and the fact that she was behaving with poise and receptive towards her fans. One gentleman, a youngster who I will not name wrote below the article on my facebook page I don’t understand why people give so much of attention to star kids. She became star as she got chance to act in movies as such to which a lot of theatre artist are there who aren’t getting chance, as they don’t have a background else they are much more better than her.”

Don’t all of us get this thought sometimes when we look at people who are more advantaged than us? For example thoughts like “His father has built everything for him/her and he does not have to do anything”, “If he/she were not born in this family then he/she would be rotting”; “They have got too much easy money” etc. However the key is that all of us are advantaged in a way as compared to some other people. For example this gentleman has had a convent school education and is enjoying some luxuries in life due to his being born in a family where his parents could afford to give him a good life. Is this not an advantage over people who are born in extremely poor families and where the parents cannot even afford to educate the kids or people on the streets who find it difficult to make even two ends meet?

The fact is that all of us are privileged in one way or the other. There is always a set of people who are more advantaged than us and those are lesser advantaged. Are we going to be always jealous of those who have got more than us by birth or those who have used their own free will provided by god to do better than what we were born with. There are so many people who have built themselves up, in the global context there are people like Bill Gates, Warren Buffet, Mark Zuckerberg, Usain Bolt, Novak Djokovic, many film stars etc who have made it from scratch. In the Indian context promoters of Infosys, someone like Shah Rukh Khan, Sachin Tendulkar, Kapil Dev, Sania Mirza, Dhirubhai Ambani etc were not born rich or into families where they had an advantage. They moved ahead and achieved as they wanted to and were focussed on getting there.

As per Hindu scriptures what you start life with in this life is as a result of your carry forward of Karma of the last several reincarnations. It is your own past actions that are carried forward to this life and you seem to be bound in the restrictions that are placed because of that. However God gives us enough free will to break away from these shackles or restrictions and use our hard work and single minded pursuit of a goal to achieve. By continuously being jealous of what others have and having a feeling that it is too tough as the other person has a head start or advantage is not going to get us anywhere.

We always need to remember that to become No 1 we always have to get past the person who is already No 1. As such the path to the top lies in moving ahead of the current top. Most people tend to lose it in the mind already when they are faced with an opponent who is perceived to be better than them. This holds true in all vocations of life. When in front of a more successful businessman a smaller businessman has an inferiority complex to start with. Similarly in sports when competing against someone higher ranked the opponent needs to believe that he can beat the higher ranked player, if not then the game is already lost in the mind. I have used this psychology in the tennis matches of my daughter where she used to get psyched up if she was playing against a ranked player when she started competing. Once she had a match against the top seed and I told her that this girl is actually lower ranked than you and you will beat her easily. She finally lost the match but competed so well that the 400 rank differences between her and the top ranked girl seemed as if the difference was only of a few ranks. Later on when she got to know who she had played with she was amazed with her game.

Instead of thinking of what others have and how you have been given a raw deal by god it is better to try and achieve by believing that you can do better and better over what you are doing today. All the karma is yours. So yes, Sonam Kapoor is advantaged due to being the daughter of Anil Kapoor. However we have also seen that children of many film stars, businessmen etc do not do well and remain a pale shadow of their parents. They might have all the money but think of their psychology where people always compare them and call them failures. There are two sides of everything, it’s better to look at the brighter side so that the light reflects on you.

There has not been much change in the Stock Market outlook since I wrote last time. So I just thought that I will write some snippets which I found interesting.

Today started and ended as an interesting day. I was to travel to Hyderabad for some company meetings and booked an UBER for the same. Normally I do not have too much of conversation with the drivers, however this guy was talkative and started talking of his own. The story he told me reflects the inherent abilities of entrepreneurship among Indians. He started with talking about how hard he needs to work. When I asked him how much he makes he told me that he was infact an employee of a person by the name of Mr X who evaluated the opportunities presented by UBER and decided to leverage the opportunity. Mr X was a driver himself earlier calculated that if someone makes 16 or more trips under the UBER network then the gross earnings per vehicle are in the range of Rs 100000-120000 per month. He took financing and bought 7 taxis and hired drivers for these vehicles. He kept a base salary of Rs 10000 per month and then incentives depending on the number of trips that the driver makes per day with a minimum average of 12 trips being required to get the incentive. If the driver satisfies the criteria and works all days in a month then the net earning to the driver would be between Rs 25000-30000 per month. Thus taking into account Rs 15000 for fuel and maintenance and Rs 30000 payout to the driver (at the upper end) Mr X makes Rs 55000-60000 net per vehicle. He gets paid weekly by UBER and pays monthly to the drivers. This way the payback period for Mr X per vehicle is just one year assuming an average vehicle cost of Rs 700000. Given the success of the model Mr X is looking to double the fleet size at the end of the year when he has recovered the cost of all the cars. Everyone thought that UBER is giving opportunities to single drivers; however this example shows that just by leveraging the idea Mr X is minting money and also generating employment and economic activity.

Next came the airport. I had boarded the bus for the takeoff and it was taking a lot of time for people to fill into the bus. Everyone was entering a stage of sheer boredom when suddenly there was a huge buzz and everyone started looking outside and a lot of people became excited and started looking outside the bus. I was intrigued and looked out to see Sonam Kapoor in her normal stylish avatar. People started crazily clicking her pictures and requesting her for selfies which she was generally obliging. She seemed pretty pleased with the attention she was getting. After all she had just given her first hit (I guess) with Prem Ratan Dhan Payo and was enjoying the stardom.

The Hyderabad visit was good with clear indications of economic activity picking up and companies starting to do well. This is something that I have been talking of for some time and now more and more people seems to be recognizing the same. However the traffic in Hyderabad was crazy & the infrastructure seems to be collapsing like most Indian cities. Some mid cap multibaggers seem ripe for picking now. Today I also read about a positive outlook on Emerging Markets by Goldman Sachs, which for once puts me on the same page as them although I still think that they are hedging their bets while I am unequivocally bullish.

I am sure people will not be satisfied unless I write something on the markets so here goes. We are again entering into the FED FEAR season as December unfolds in a week’s time. My guess is that December is going to be a good month for the markets given the prevailing pessimism. The other two recent happenings have been the flop of the Governments Gold Schemes which I had predicted and the strong bounce back in global markets which also I had written about. Bullion i.e. Gold and Silver prices have fallen to year lows but could fall further.  Indian markets continue to lag as people are unduly worried on reported earnings of the second quarter instead of focussing on the “Real Recovery” play in India. Foreign investor portfolio flows into India have plummeted from $ 39 billion last year to $12 billion YTD. Flows should substantially pick up next year as growth picks up sustainably and FED HIKE BOGEY plays out. Will write more on this later, signing off now as I reach back to Mumbai.

Most analysts are missing the big picture of the India story which is becoming clearer and clearer by the day. Focussing on quarterly results, small upgrades and downgrades, state elections is taking the focus away from the key feature of the Modi Governments development model which was also summarized very well by Raghuram Rajan a couple of days back when he said “PRIME MINISTER MODI RELYING MORE ON STRUCTURAL REFORMS, LESS ON FISCAL, MONETARY MEASURES TO BOOST GROWTH”.

Many people are getting perturbed at the fact that the taxation on services has been increased via the Swachh Bharat Cess or the continued increase in excise duties on petrol and diesel etc. However, if you are an honest taxpayer you should not be perturbed. The fact of the matter is that the Tax to GDP ratio of India is dismal. The reasons for the same are widespread tax evasion, black income generation, corruption in the taxation departments etc. Although it is believed that the government should rely more on direct taxes than indirect taxes however in a nation where paying income tax is considered to be something that is a wastage of one’s hard earned money increasing indirect taxes, especially on services or products where it is difficult to evade paying that tax is the best way to go. Most of you will be shocked to know that only a royal 2.77% of India’s 1.21 billion people pay taxes. And if you are one of the 3 odd Crore taxpayers you should be happy that the burden is being shared by everyone.

One can always argue that there are lot of leakages and corruption in the government and as such why should be pay more to the government? This is factual; however I do believe that the current government is quite serious about curtailing corruption as well as wasteful expenditure. The fact of the matter is that Fiscal Consolidation is a must for long term sustainable growth. Only if the demand of funds from the government reduces and the crowding out of private investments reduces can we have sustainable long term growth with low inflation.

Fiscal Consolidation is one of the bigger successes of the government till date. Increase of duties on fuel, reduction of subsidies, restoration of excise duties to pre crisis levels and the increase in service tax rates have all contributed to it along with reduction in wasteful expenditure. The first level of reduction in Fiscal Deficit has happened without any significant economic recovery. As recovery gains steam next year we will see a rapid decline in Fiscal Deficit even after taking into account the impact of the pay commission recommendations and their implementation. As and when GST is implemented we will see a further improvement in tax collections as leakages come down further. These measures are also being combined with moves to shift some of the non productive investments of Indian’s like gold into production like sovereign gold bonds which look attractive at a 2.75% rate of interest.

More structural reforms, the biggest among them the removal of political influence from PSU Bank lending will make the financial system much more durable. We are already seeing lot of investment in government schemes like Swachh Bharat. The State Electricity Boards revamp announced last week is also huge as it could actually take things towards electricity for all and reduction of electricity tariffs over time. The good parts about the schemes of the current government are that they are implementable. This is contrary to the schemes announced during UPA times which could not be implemented. The other major structural reforms are clearly seen in the areas like Railways where a big investment cycle seems to be starting now with improved financials. The Roads and Ports segments also are seeing big momentum with the investment cycle picking up there. We are seeing a similar momentum in Renewal Energy investments like in Wind, Solar etc. The one area where there is still lot of work to be done is in the Agricultural side and Supply Side Reforms overall. As these issues are addressed going forward we should see sustainable high rates of growth with low inflation.

The other advantage of a healthier banking segment combined with Fiscal Consolidation will be an eventual upgrade in the country’s rating which will further attract long term capital and reduce long term borrowing costs for the government as well as corporates.

On an overall basis improved government finances, reduced subsidies, financial sector reforms as well as restructuring of segments like State Electricity Boards, Railways, Defence procurement etc is likely to provide a strong long term impetus to economic growth. Government not passing the full reduction in petroleum prices, reducing subsidies and increasing some subsidies are long term positives.

We might feel a small pinch today, however reviving a completely destroyed economy as the UPA left it requires some bitter pills to be swallowed. 

Well since Bihar is the topic of the season I also thought that I will write my two bit on what I see as the impact of the same on the Stock Markets, Economic Reforms, and Economic Recovery etc. My first and foremost view that I have held for some time is that Bihar is not relevant from an economic growth on Market standpoint as have not been many other events like other state elections, Greek Crisis, Fed Taper etc.

I am infact quite shocked today to go through my twitter timeline and see “Experts” projecting that markets are going to fall big time and remain low for a prolonged period just because of Bihar Election results. The fact of the matter is that the development agenda as well as growth prospects are likely to actually get accelerated after these elections. This was very clear to me yesterday as the government increased duties on petroleum products as well as Service Tax as a move towards fiscal consolidation on which I will write separately. The agenda during the time of the general elections 2014 was very clear. People were sick and tired of Socialist governments which promised and never delivered. Aspirations are much higher than the roti, kapda and makaan today and the socialist parties were still promising the same. It is unfortunate that the opposition led by Nitish Kumar took up the development agenda and BJP actually fell back on weird kind of agendas which the people were sick and tired of. The results are very clear to see.

My view is that Narendra Modi is a driven man and he is sincere in his agenda of development. We have seen several steps being taken to push this agenda and the Indian Economy is much stronger today than it was a year back. Underlying economic trends are pointing towards a growing momentum which will become stronger as we move towards the years 2016 and 2017. The simple message that worked i.e. development and job creation will come back into focus now and will infact be bullish about the markets.

The growth numbers of companies and earnings growth is likely to pick up this quarter onwards and become stronger as we enter the year 2016. Earnings growth overall for the Financial Year 2016-17 should be in the region of 20% plus as input costs remain benign, interest rates are lower and operating leverage comes into play as capacity utilizations improve. The impetus being given in sectors like roads, railways, power etc will start bearing fruit over the coming year and provide further impetus to economic growth. As inflation remains benign, consumer confidence will improve and drive the demand of consumer products. Somewhere towards the second half of 2016 we will also see strong impetus in corporate sector capital expenditure as their capacity utilizations move up.

If you are a trader maybe you should be worried for the short run. However given the extreme pessimism that is floating around I do not see much downside to the markets. Although markets bottomed this year around the levels I thought they should the recovery has been more volatile than I expected due to heightened expectations. Recovery was always expected to show first signs from the October – December quarter and that is something that we will surely see going forward. A year back there was huge optimism in the air and I had warned that markets are running ahead of fundamentals as recovery was likely to take time. Today becoming negative when the recovery is on is ridiculous. Like markets continued to rally from 8500 to 9000 despite no fundamental basis we could also see a similar 100-300 point downside today. However this will be an undershooting at a time when the longer term prospects are extremely strong.



I am writing after a few weeks as there was not much to write about as most things were moving as per expectations. I just thought that I would get together all thoughts as per the data and developments that we see around us and try to look at things going forward.

The biggest development over the last few weeks has been the big rate cut and promise of more by Raghuram Rajan. This has clearly put a floor on the downside of the markets as well as given a huge impetus to the economy. The economic impetus has happened in two ways, firstly the sentiments have changed for the better all of a sudden and secondly the trajectory of interest rates has conclusively shifted downwards. The other big number in the Indian context was the Industrial Production number which showed a massive beat versus expectations. Now most people still think that nothing is happening in the economy. However the reality is that at the top of an upcycle and the start of uptick in the downcycle this is the view that is prevalent. There are several data points to support the economic data points:

-Fuel consumption in the month of September has jumped up by 14% with a massive 20% jump in Diesel consumption. Even after taking into account higher diesel demand for power generation it is a huge jump.
-Indirect tax collections have kept pace at a high rate showing an increase in volumes and value of sales. Now a 35% increase in Indirect taxes has to be seen in the context of low product prices and a Wholesale Price Inflation of -4.5%. Even taking into account the increased taxes on motor fuels the tax data indicates growth.
- The September trade data shows a 12% growth in volume of imports if we exclude fuel and gold imports. This indicates higher domestic demand
- I have been on the road for quite some time over the last few days. The number of MultiAxle trucks carrying industrial goods and Capital Goods have increased massively. We should see this in the toll collection data of some of the road operators as they declare results over the next few days.
-Lastly most companies are now seeing some uptick in demand. Although one should not rely much on company management commentary as they tend to be most bearish when the time is to buy and most bullish when time is to sell.

Overall stage is set for a strong recovery going into the year 2016. The only weak point is external demand i.e. exports where we will see continued challenges for some more time.

Global developments created the last leg of the correction in India. As I have pointed out over the last many days the global panic seems to have peaked out now and from here on till the end of the year we should see decent markets. The next round of volatility could come around the December meeting of the US Federal Reserve where the bets of a rate hike have been reducing with time.

The fear around China and Chinese data continues to spook market participants who want to track markets on a daily basis. However this is futile in my view as the reality that China will continue to slow over the next few months and years is a something that is a given. I believe that slowly markets will get used to it and stop reacting on it.

The other big event that seems to be playing out is in the currency and bullion markets where the US Dollar seems to have peaked out for now and looks to be positioning to give up 5-10% from the current levels.

us dollar index weekly

This is also likely to mark the end of the huge outflows from Emerging Markets where investors have pulled out nearly $ 60 billion since the beginning of this year. I expect flows to reverse strongly in the year 2016.

Market participants continue to be wary with the general commentary being cantered around where will the markets top out rather than the fact that the markets in all probability have already bottomed out and now positioned for a strong upside till the end of 2016. The markets waited for all brokerage strategists to downgrade their Index targets before it started to move up and that is the nature of the beast.

In conclusion I believe that that fear factor has played out in the markets. Both the economy and markets have bottomed out and are looking at a significant upside. I expect markets to rally 25%+ from the current levels till the end of 2016. This will be driven by strong government finances, economic recovery as well as earnings recovery. Domestic funds flow into Equities continues to be strong and will remain strong for the foreseeable future. Global funds flow should reverse in 2016 despite the pressures of outflows from Oil country Sovereign Wealth Funds. Indian bonds are also set to rally significantly with an initial target of 7.2% till March 2016 and 6.8-7% by the end of 2016.

When everyone is talking of risks, it’s time to make returns.

I had written a piece on decoupling a couple of weeks back. Too may people are asking me today, where is the decoupling. It is those people who did not go through my argument properly.
First and foremost is the fact that in panic and euphoria all markets are linked and as such if the US markets fall 4% no market will remain unscathed. This was also true when the Indian markets were shooting up during the first half of this year when the outlook for the economy as well as earnings growth was not very great in India.
My view on decoupling is very clear and the logic for the same are
• Low and controlled inflation which will be driven by extremely low commodity prices. For example crude prices have corrected by nearly 60% over the last one year thus giving a push of nearly Rs 400,000 Crores via savings on crude imports on a full 12 month run rate basis. Companies are reporting record margins despite poor capacity utilization. As growth picks up the Operating Leverage will come into play and inflation is unlikely to come back soon. Even on food prices moderate MSP increases and small steps towards improving productivity and wastage will help in the short run. Over the long run further supply side measures will be required.
• Strong Government Finances which are reflected in recent numbers that have shown Indirect Taxes increase by 39% in July. This combined with reduced subsidies will aid government finances, help them push capital expenditure and reduce crowding out from the markets and help bring down interest rates.
• Improved investments which are reflected in much greater enquiries with companies, better execution as well as a revival in due to just pent up demand as we are seeing in the Commercial Vehicle segment where sales are growing at nearly 25% right now. Various Public sector units are also pushing for greater investments as their cash flows improve. For example railways will save hugely with the way diesel prices have come down. That accompanied by reduced leakages will boost Capital Expenditure. Similarly Oil PSU’s are seeing huge improvement in cash flows which will go into investments.
• PSU Banks recapitalization combined with promises of greater autonomy and less interference can drive not only a huge value creation cycle in these banks but also provide much needed growth capital in the Economy.
• Large funds flow into equity are likely to continue from domestic investors driven by lower interest rates on fixed income, non performance of gold as an investment and a likely stagnation in the performance of Real Estate.
Besides this the bogey of Yuan Depreciation has to be understood by people properly. Since the end of the last boom in 2007 the Yuan has appreciated by 20% and the Rupee has depreciated by 60% against the US Dollar. Even now when the Yuan has fallen 3% the INR has fallen 5%. This noise should be totally ignored.
The other big noise to ignore is that of the hike in rates by the US FED. As the FED hikes rates, whenever it does we will see a huge capital flow into growth assets as this move will be driven by confidence in economic recovery. The FED fears are similar
Decoupling will play out over a period of time and it will play out for sure. Decoupling is not for traders but investors.
Markets are likely to find a panic bottom soon. In all probability it will be this week. This is a market correction it is not a collapse. Economic outlook continues to improve in India, Europe and the US. China has its own issues and growth should slow down continuously for the next decade. I believe that 7800-8000 levels are great levels to buy in India. The panic will soon subside and markets will recover. Many global markets and commodities are now as oversold as they have ever been. Global funds flows always create situations where markets either correct more than they should or go up more. This happens in Euphoria and Despair as we see today. This shall also pass.
The markets are giving BUYING OPPORTUNITY for investors as traders panic.

Stock Markets after ending flat for the first half of the year as I had expected started to show some life in July before cooling off driven by a Global Market correction as well as volatility inherent during the results season. The non performance or lack of movement in the parliament on various reform bills has not helped matters. Now we need to consider the key takeways from the results season, global events as well as domestic events to see how things will move for the rest of the year.

The first important data point to consider is the fact that investors in general have been wary of stock markets since the beginning of the year in the global context. Latest figures indicate that US Focussed Equity funds lost a whopping $ 113 billion since the beginning of the year and the out of favour European Equities got inflows of $ 86 billion. The inflows into Europe has been also driven by the continuous fall in the value of the Euro which is supposed to be supportive of growth in Eurozone as the weak currency provides competitive advantages all across at a time of low wage inflation. Emerging Markets have seen outflows of nearly $ 27 billion since the beginning of the year although India has seen inflows of around $ 7 billion. This explains the relatively muted flows of FII’s into the Indian markets over the last few months as EM’s on an overall basis have seen large outflows. On the other hand domestic flows into Equity especially into Mutual Funds have been strong and have averaged Rs 5000 Cr per month.

Now on funds flow the most likely scenario going forward is that domestic flows will continue at this pace. However global flows into equity are likely to pick up very sharply after the fears of the US FED’s rate hike go into the background after the first hike (mostly) in September. The Fear is so great that after the event the global equity markets  will see a big return of investor money.

The results season has been interesting as they have been very mixed. For example in the Consumer goods segment while Dabur, Godrej Consumer etc companies reported strong growth with good margins we saw growth was muted for many other companies. However the margins of the companies despite slow growth have moved to almost record levels due to low input costs. This was very evident in a company like Britannia Industries. The same phenomenon was seen in Auto companies where margins have moved up sharply. Capital Goods companies have not seen a revival yet and due to muted growth margins have also not expanded as they should have given low input costs. However the outlook here might improve significantly going forward. Telecom companies have reported decent results and Pharmaceutical Companies have reported mixed results with outperforming companies like Dr Reddy continuing to outperform. Cement company results have been poor due to low volume growth, low capacity utilization despite input cost benefits. As expected metal and commodity companies have not done well at all given global commodity collapse. Private sector banks have done well and the key takeaway from large PSU Bank results have been the cleanup in the balance sheet and the government’s  announcement of recapitalization i.e. putting more money into these banks which will be supportive of growth.

Mid cap results have been mixed with some high flying mid caps reported muted results and some companies doing very well. Although the greatest opportunity in the markets as the economy recovers lies in the mid cap side of the market the biggest risk also lies here as we see a large number of companies moving up without any fundamental basis and manipulation take place on a large scale. The other big risk is pump up the stock and then do a placement like QIP after which the stock collapses. I do not want to take names on a public platform however there are many such companies and investors need to be very wary.

The biggest kicker for the Indian economy is the low commodity prices and expected normal agricultural production. The collapse of crude prices provides a fillip of nearly Rs 400000 Crores to the Indian Economy on an annual basis, similarly Coal, Iron Ore, Steel, Edible Oil etc prices are at multiyear lows and India saves a lot in imports of these commodities. This combined with high margins that companies have despite low growth will make sure that inflation will not pick up even as growth picks up as companies will have Operating Leverage i.e. fixed cost spreading over larger production which is positive for margins and profits.

Our interaction with many companies also indicates a significant pick up in ordering and tendering activity across segments. Although its impact on the economy will be seen next year in a big way but some impact of a move in stalled projects is already being seen. I still believe that from September onwards we will see improved numbers coming from the Economy. Although RBI has been slow in cutting rates interest rates are on the way down and will further aid the economy.

Too many people are perturbed on the non passage of bills in parliament. The reality is that recovery and growth will happen either ways.


In conclusion I believe that the markets are well position for an upmove from now till the end of the year and beyond. The Fear of FED rate hike is a good opportunity to build positions in the markets as funds flow will accelerate after the event. The Indian economy is moving forward slowly and will accelerate through 2016. The upcoming festival season should be good for Automobile and Consumer Good companies. The risk is in some mid and small cap stocks although many companies in this segment offer huge value too. We should see a 10% upside to around the 9300-9500 NIFTY levels by the end of 2015. 2016 outlook should be better than 2015.

More than a year back, in December 2013 I had written an article titled “Don’t Fear FED TAPER for the right reasons” ( . At that time there was extreme fear all around as to what will happen once the FED stops buying bonds from the markets. However given that the FED was taking the step due to the fact that it was no longer required and incremental benefit of the same was no longer positive enough for it to be continued and it was also inducing a sense of complacency in the bond market participants it was the right move. FED Tapered, ended bond buying and the markets continued to rally.

We are today in the same situation of the Fear of Fed tightening.
A central bank tightens policy under two circumstances.

1. The negative reason for tightening is that excessively loose monetary policy has lead to the formation of Asset Bubbles and high inflation and this forces the central back to hike rates. This is something that we saw in the US in the late 1980’s and early 1990’s in the Volcker era and in the Indian context both during the late 1990’s as well as after the 2008 crisis when there was a phase from 2010 to 2013 when inflation in India was out of control.

2. The positive reason for tightening is that the target of a looser monetary policy has been achieved i.e. growth has picked up, unemployment has gone down and there is greater confidence that the recovery will continue even if interest rates are higher. Inflation is well under control and unlikely to breach the comfort zone anytime soon.

Today when the FED Chairperson says that we will increase rates from, mind you ZERO percentage to 0.25% it is instilling a huge fear in the minds of people. This is mainly due to a lack of understanding of their actions. The reality is that as the bond buying was wound down by the US FED well in time they are starting the process of normalizing of monetary policy also well in time. Please understand, a good central bank is one which is proactive and not reactive. Already there are fears that excessive bond buying by not only the US FED but also the ECB and the Bank of Japan have created a bond bubble. A slow movement towards a normal monetary policy is not only desirable but also necessary as economic activity picks up and unemployment has gone down.

Now what happens in India due to the start of the rate hike process in the US. There is absolutely no need to be fearful. If inflation moves up in the US and is actually moving down in India is it necessary that just because the US FED increases policy rates interest rates in India will also go up? No it is absolutely not necessary and we will see this happen over the next two years. Inflationary pressures in India will continue to be low due to lower commodity prices which are driven more by Chinese slowdown rather than anything that is happening in any other part of the world.

US policy rates are likely to move up by 1% every year after the initial hike this year. As such if inflation does not pick up substantially in the US we will see the policy rates at 2-2.5% two years from now. Even these rates will not be restrictive for growth. Rates will need to go up much more before they start impacting growth negatively.

The story of India is that of
1. Economic Recovery- Which is well on the way in India and will only pick up pace over the next few months and year. Given the slack available in manufacturing capacities along with subdued input prices we are unlikely to see a pick up in manufacturing inflation any time soon.
2. Low Inflation- Raghuram Rajan’s policies have led to low inflation as well as low inflationary expectations for the future. The global scenario creates a situation where mild growth will keep inflationary pressures low. The only joker in the pack in India is always food inflation where also mild increases in Minimum Support Prices should keep this part of the inflation controlled. Sustained low inflation means low interest rates.
3. Improved Government Finances- Government revenues are seeing a strong uptick due to normalization of indirect tax rates. As economic activity picks up direct tax revenues will also pick up. With lower leakages, reduced subsidies, lesser corruption we should see the uptick in government revenues continue strongly. GST when introduced will also aid this process as well as push higher growth. An improved fiscal position of the government will lead to less crowding out due to the government and better liquidity availability for the private sector. This will also help the government push investments and aid economic recovery.

We are at the lower end of growth as well as earnings growth in India today. Recovery is around the corner and should sustain for a few years atleast. This is not the time to be fearful. Do not listen to the fear mongers. The time for fear will come but it is still a few years away. Equity is going to generate significant wealth for those who can look through short term events. Economic and Stock Market trends are long term and we are at the cusp of an upcycle. Do not fear the FED as long as they are doing the right thing.

Once there was a person, his name was Greece. He had a habit of extravagant spending and once his own money got over he used to borrow and spend. He had a large number of well to do relatives who were happy to lend him money (Eurozone Countries). He kept on borrowing and they kept on lending to him till he almost became bankrupt.

Now all his relatives knew that there is no way that this person is going to return the money. However they were afraid of telling this to their own families as well as outsiders otherwise their own credibility and financial standing would come under cloud. They then looked at Indian PSU Banks and hit on this great idea of “Restructured Loans”. They were amazed at the ability of these banks to evergreen their loans and decided to do the same with Greece. They restructured the loans of Greece to very far back into the future. Their bet was that when the repayment becomes due they would all be dead and the liabilities would need to be paid to the next generation.

However what they did not realize was that Greece was so used to spending beyond his means and the loans on him were so great that he was borrowing more and more to live everyday. Eurozone then forced him to cut spending, sell his assets etc. He would show them that he is doing what they are saying but would always go back to the old ways. Eurozone tried to instill fear in Greece by threatening Greece however this lead to people questioning their own credibility of poor credit appraisal.

Greece knew that he has nothing to lose. However he is sad as he cannot spend as much as no one is willing to lend him more. He is now frustrated, he wants more money but no one is giving him money. He starts threatening his borrowers and carries out a referendum in his house on whether we should cut down our expenditure and do a more austere living. Obviously his entire family says NO,NEVER. He goes back to Eurozone and says “My family says they cannot change how they live so give me more money”.

Eurozone tells Greece, buzz off. If you need more money give us a guarantee that you will repay in the future. For this shift some of your assets to a Special Purpose Vehicle which will sell these assets and repay the money to us. Also give us written commitments from your family members that you will cut your expenses. Since you have always gone back on your promises we need guarantees now.

So this is where the Greek saga is now. It is a big family problem which has nothing to do with the rest of the people or the world. Greece owns most of his money to his extended family. If he does not repay them it will only weaken his other family members. The only risk would have been if his non repayment would weaken the financial position of of his other family members so much that they in turn would not be able to repay the people who they have borrowed from, which is not the case.


I had become negative on the markets at the start of the 4th quarter of 2014. The reasons were not any long term negatives related to India but mainly because of the fact that the markets had run ahead of fundamentals, the expectations were  too high, the new government had just taken over and the mess that UPA had created required 12-18 months to resolve and the uncompetitive INR was making Indian export uncompetitive and this was a drag on the earnings of many export oriented companies.  The global risks were also being underestimated.

At the beginning of the year my view was that the first half of the year will be tough for the markets.  However as things would play out the second half would be much better. As I write we are almost flat for the year till date.

As we look forward the things look much more benign.  The green shoots of recovery are now evident with a slow increase in the reported Industrial Production data. This recovery is likely to gain steam going forward and I expect that from the month of September we should see reported IIP figures moving up to high single digits. This will be contributed by many factors which include

  • A pick up in consumer demand with lower inflation and lower interest rates boosting consumer sentiments and demand for both consumer durables and non durables.
  • A nascent recovery in the investment cycle as the impact of the start of many infrastructure projects as well as some amount of corporate capital expenditure will start getting reflected in reported figures
  • With the INR giving up some of its appreciation and uncompetitive move against other currencies we will see some pick up in exports

The services side of the economy will also start showing traction as a strong fiscal position of the government will push government expenditure which will have a multiplier affect. A better fiscal position due to better revenue collections will also reduce the impact of crowding out due to excessive government borrowings and will improve market liquidity and make more money available for the private sector.

The other big factor that will boost the economy will be the clear control on inflation that has come through now. The Consumer inflation is unlikely to pick up and given the excellent start to the monsoon season there will be less tendency for middlemen to jack up prices in the expectations of a poor agricultural production. Lower inflation always has a virtuous cycle impact on the economy. Not only will it give space to the RBI to cut rates further it will also improve consumer sentiments which have been depressed for a long time.

The other factor then to consider is then the impact of global factors where we are facing two issues today

  • An expected increase in interest rates by the US Federal Reserve. This is a huge bogey in my view. The increase in rates is not due to the formation of a commodity or financial bubble but due to an improvement in economic growth prospects and better employment. It will be supportive of equities and not negative. I will write in detail on this issue separately.
  • The Greek issue. This issue can have a sudden and sharp impact on markets. However it is unlikely to have any meaningful impact on global markets due to two factors. The first is that the current market capitalization of Greece is just $ 20 billion and as such no major losses are likely for equity investors out of Greece. The second is the total debt of $ 324 billion of Greece, which is huge but almost entirely held by the Europeans themselves and the IMF. There is unlikely to be any long term impact of the same on either the Indian economy or the stock markets.

IN CONCLUSION  I would say that the probability is very high that the worst of the markets is already behind us. My expectation of a bottom around 7900-8000 for the Nifty seems to be playing out. There was always a probability of a slip to 7700 levels however this seems to be a lower probability event now. I am a buyer in the markets now. The second half should be decent