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

In the first three articles I talked about the Mutual Fund industry in brief, the various kinds of schemes and what these schemes stand for. Now I will be talking about what the investor should expect out of their mutual fund investments and why they should not rely on everything that your MF company contact or the distributor is telling you. The reason for this is simple. The livelihood of most of these people is dependent on making you invest or keeping you invested. This might not be suitable for your financial goal in the ultimate analysis.

The one line that most Fund Managers or others who come to sell you MUTUAL Fund schemes will try to sell you is that it is time in the markets that is important and not timing in the markets and if you remain invested over long periods of times you will make strong returns. However in my view this statement is hogwash. Timing in the markets is as important as the time of investment. This does not mean that you keep on putting money and removing it at very short intervals of time. However the markets follow cycles and if the investment is in line with the cycle of investment then the overall lifecycle returns will be stronger. The typical distributor or sales person in a mutual funds will give you long term return picture with the help of spread sheets, however statistics hide more than they reveal. The schemes that will be tried to be sold to you will typically be the schemes that have done well in the immediately preceding period. The important thing for investors to evaluate is that the factors that made those particular funds do well in that time period still exist or the circumstances have changed.

The other important thing that investors need to keep in mind is that the performance of schemes depends on various factors. The two instances where investors allocated their money hugely into thematic funds and then lost out over the last few years have been Infrastructure Funds and PSU Funds. In the bull market of 2003-2007 the economy was doing very well and infrastructure stocks were the favourite of every one. Each and every mutual fund was coming out which infrastructure funds and by giving the example of the funds that had done well were garnering huge money. However whenever a particular sector becomes very fancied and the valuations of the companies in the stock markets become very high it is important to avoid that segment of the market. Spreadsheet analysis cannot take this into account. The broad benchmark that investors can keep is that whenever the returns from a particular theme fund are twice that of the overall market it might be good to book profit in that fund.

Similar was the case of PSU Funds and Mid cap funds. In the case of PSU’s we had a cycle of strong rerating of the PSU’s when the economy was doing well and government interference in operations was coming down. However the reverse has been true over the last three years. In the case of mid caps, which has always been one of my favourite investment themes also there are cycles of underperformance and outperformance. Although a mid cap fund manager can continue to do well even when the overall cycle is not doing well via their stock picking abilities it cannot be true for all mid cap schemes. Now, when do mid caps do well in general. My experience over the last several years of monitoring mid cap stocks has been that mid caps outperform large cap stocks when the interest rates are coming down and as a result of which the economy has started to do better. A higher economic growth and easier cost of funds are the feeders that mid caps require in general. This is the reason why we see that globally where interest rates are low and cost of inputs are low mid caps are continuously outperforming large caps. Even in the case of mid caps if investors keep a discipline they can make strong returns. Even in the case of mid caps if investors see a situation where the mid cap scheme that they have invested into gives a return that is 100% more or twice that of the Nifty or Sensex they should reallocate some money to large cap schemes. The reason for this is statistically proven. If you take any 5 year horizon the top ranked mutual fund scheme will outperform the market index by around 7-8% on an average. If you have already made twice or thrice that of the returns of the index in any one year it makes sense to reduce risk.

The other important thing to take into account is that whenever the media is talking the most about any one thing then in all probability that is overvalued. My experience suggests that very high valuations i.e 40-50x price to earnings ratio, irrespective of the logic never sustains and the valuations will ultimately revert to mean. We have seen this happen in the case of Technology stocks in the year 2000 where everyday the technology stocks would move up by 10% and most stocks were trading at price to earning ratio of 50-100 times. The same thing was visible in the case of capital goods stocks at the end of 2007 where the valuations of most stocks had gone up to levels of 50-60x price to earning ratio and today most of these stocks trade at valuations of 10-15x price to earning ratio.

In general avoid the hot themes and stick to diversified mandates which gives the flexibility to the fund manager to allocate between themes. However it is also important to see whether the FM has been able to do this in the past. Every FM has periods of strong and poor performance however if better periods dominate then that might be the Fund Manager for you.

More about how to invest right in the subsequent articles.

In general Contra funds have disappointed investors over a period of time with their below average performances. The first Contra fund in the mutual fund industry in India was launched by SBI Mutual Fund when I used to work there and I managed the fund for several years. Looking at the performance of the fund at that time a number of other AMC’s like Kotak, Tata, Lotus etc launched contra funds which have not done very well. Infact the inspiration for this article came after I looked at the performance of SBI Contra Fund which stands at the bottom of the heap today. The key reason for this non performance has been non adherence to the basic philosophy of a contrarian.

In simple language a Contra Fund will do the following kind of investing

  1. Stocks that are not fancied by the markets at this point of time, however the under ownership has been carried to such a level that even a little positive news flow can create a significant price movement. Such a trigger could be imminent now over the next few weeks and as such this sector or stock will be bought by the contra fund manager.
  2. Stocks that have deep value in them at this point of time. The stock might not have performed in the near term due to some adverse news flow, industry/company specific events. However the valuations have come down to such levels that the Contra fund manager will buy and keep a part of the portfolio in such stocks. These stocks might not do well in the near term but will create huge alpha over the longer term.
  3. Stocks that were bought under category 1 & 2 but have now started outperforming. Since the contra fund manager is a patient fund manager he will not sell early. He has waited for these stocks to start performing and as such the aim will be to capture at least 80% of the up move in these stocks as they are the ones which are driving performance in the near term.
  4. The Contra fund manager will also do market capitalization contra investing. He will not only buy large caps as they are doing well today and ignore mid caps and vice versa. Whichever category becomes underowned he will invest more in that segment.
  5. The Contra fund manager will monitor market and trader behaviour, identify bubbles and try to move out of them earlier than others.

Now let’s see if SBI Contra Fund is following this philosophy. If one looks at the portfolio it is clear that this is not happening and this is reflected in the performance of the fund where the current category ranking as per value research are as follows.

  1 Year 3 Year 5 Year
SBI Contra Rank 53 19 21
Total No of Funds 53 26 21

 

The reasons for this are very clear to see. If we see the holdings of this fund in the Top 10 holdings there are 3 stocks that are from the most fancied sectors of the last one year i.e. Technology and Consumer stocks. Now if these stocks were bought when they were not fancied and were held on under category 3 of stocks as discussed above they should have been sold as of now as the stocks and the sector outperformed the most and this sector has been the most overweight sector of fund managers for some time now.

The fund continued to hold on to its allocation to financials despite the fact that the negatives for the sector had built up significantly after the strong move in the year 2012 and the early part of 2013. This goes against the tenet of a contra fund manager. The contra manager is not bothered about sector allocations in the indices; he is targeting and managing the fund as per a different philosophy which requires that the churn in a contra fund is greater than other funds. This has clearly not happened and the fund manager has worked on a static strategy with improper sector allocations and timing.

The Fund Manager has not changed the portfolio in accordance with the impending event i.e. the elections, falling inflation, the initial groundwork done by the outgoing government in granting clearances to a large number of stalled projects and the possibility of economic revival. The allocation to Capital Goods sector is abnormally low with the highest allocation to Larsen and Toubro at 2.7% of portfolio. There is a time when a segment of the market becomes hugely overvalued and the other hugely undervalued. The Contra FM has to be on the job to monitor these trends to adapt the portfolio.

The FM has made hardly any major overweight allocation to the Automobile stocks where there have been significant triggers in terms of lower input costs, cut in excise duties and low consumer loan interest from banks which are just focussing on consumer loans at this point of time. The contra FM cannot buy the stock or sector which is doing well as on today, he has to be proactive.

I will not take the effort of putting the entire portfolio of the scheme out here but anyone who sees the portfolio will clearly see that the FM is not clear on what he wants to do. The tail of the portfolio has continued to grow with the number of stocks that have an allocation of around 1.5% or below standing at around 20. It seems that the FM starts buying, gets confused or changes his mind but still keeps on holding the marginal allocations. When I used to manage this fund my total holding across the fund used to be 20. The Contra FM has to take bold contrarian calls as per the name of the fund.

The portfolio hardly has any meaningful allocation to mid cap stocks where there is clear value today. As a Contra FM you cannot be a trend follower, you need to set the trend.

In conclusion the entire portfolio of the fund is a hotch potch of stocks. The FM seems to have no clarity on what he wants to do and that is the reason why this fund stands at the bottom of the heap.

I am writing after a long time as there was little I found that I could add subsequent to what I had written the last time. As expected we are in the midst of a preelection rally, which I had expected to move to around the 22000 Sensex and 6500 Nifty levels. These levels are just around 2-3% away from where we are today.

The election wave towards the BJP is becoming stronger as reflected in the latest opinion polls. The growing wave towards Narendra Modi is not attracting a lot of allies which should ultimately lead the formation to near the majority mark going by the current trends. This augurs very well for the economy and the stock markets.

Just prior to expiring the UPA government took some good steps in terms of clearing projects and reducing the excise duties on a huge number of manufacturing items. The reduction for autos is particularly significant and should lead to a positive tick up in automobile sales.

The CPI inflation for the month of January also came in at a very benign level as expected by me, however it surprised the markets. What will be of greater surprise to the markets will be when CPI falls below 8% in the middle of the current years as against RBI’s target of January 2015. This will be positive for taking interest rates down in the economy. The other significant data point that came out yesterday was the CAD at just 0.9% of GDP. Normally the 4th quarter is the best for CAD and as such the overall CAD should now be more near $ 35 billion and much lower than the most optimistic of estimates till a couple of months back. As such the two bugbears for the economy and stock markets i.e inflation and CAD are falling faster than general expectations now. 

In terms of international news flow, occurrences like Ukraine etc are just buying opportunities in a fledgling bull market. Italian and Spanish bond yields have now fallen to all time lows and the European crisis seems to be quite distant now, from being at peak just 18 months back. A similar thing will happen in most emerging markets over the next 18 months. The current leadership at the US FED clearly believes that incremental money printing has lost value. As such we should see the imbalances inducing QE’s come to an end by the last quarter of 2014. This augurs well for overall inflation outlook.

As I pointed out at the beginning of the year, calling gold prices was difficult as everyone had turned negative. Prices have rallied 10% and gold bulls are back. However the fundamental case for gold still does not exist and post consolidation we should see another downmove.

I will be brief in this article but put out some very relevant graphs which give an indication of what lies ahead.

USD/INR- The rupee has shown a significant technical move and broken out from a triangle in a similar manner to what happened in Sept/Oct 2012 as seen in the chart below. Target range 59-60.

inrbreak

 

DAX BREAKOUT/NIFTY BREAKOUT- Whenever breakouts happen on monthly charts after a phase where similar tops have been made couple of times in the past the subsequent moves tend to be quite strong over the next 6-12 months. This is reflected in the DAX monthly chart given below and likely to repeat in the Indian Markets.

daxmonthly

NIFTY MONTHLY-

niftymonthly

Overall we are on the verge of a strong sustainable upmove in the Indian markets. Subsequent to reaching a level of 22000/6500 we could see the markets consolidate till after the elections before starting a bigger move upwards.

 

Over the last few weeks and months huge amount of media has been generated on this topic where lot of arm chair economists are using some ratios of credit to GDP, fixed capital formation and fuzzy data on the wealth management products in China in order to forecast that China is going to collapse and create a huge crisis in the world.
Now I will try to keep this article brief and simple to understand. It is true that China has sustained high growth due to two major factors; exports and fixed capital formation. It is also true that lot of the fixed capital formation which includes investment in marquee infrastructure projects cannot be justified in purely commercial terms. As such these combined with the non transparent wealth management products have created a crisis of sorts in China. The main reason for the emergence of these wealth management products in China and also the huge spurt in consumption and investment into gold has been due to the extremely low interest rates paid by the banks in China where the rates are regulated down to extremely low levels.
There are also issues related to the bank balance sheets in China where it is believed that these banks need to raise a huge amount of capital in order to sustain the kind of credit growth that is happening in China. It is also true that the banks will find it difficult to raise such huge amounts of capital if they propose to expand the balance sheet in the same manner as they have been expanding over the last decade. The next level of concerns come on the health of the provincial governments which have gone on a huge budgetary spending binge in order to outdo each other in term of growth. This has raised question marks on their balance sheets.
Now despite all of these it is highly unlikely that an implosion is imminent in China. While the probability that the Chinese economy will slow down significantly from the levels seen over the last 10 years, an economic crisis is highly unlikely. The reasons are simple and are as follows.

The Forex Reserves- The foreign exchange reserves of China are the highest in the world. At a level of $3.8 trillion is more than three times that of the next country in the list. Such huge foreign exchange reserves are a huge cushion against any crisis that unfolds internally as this money is theirs and can be used to address any crisis.

Sustained trade surplus despite a huge relative appreciation- China has sustained huge trade surpluses despite a huge relative appreciation of the Yuan. The Yuan has been stable to appreciating right through the entire emerging market currency crisis. Even in the Non Deliverable Forwards (NDF) markets the Chinese currency has been very stable. There has been no huge outflow of money out of China and most foreign investors have stayed put. This reflects confidence in the Chinese currency and Chinese assets and does not support the theory of any imminent crisis in China.

A high savings rate- China has a savings rate which exceeds 50% of GDP and is by far the highest in the world. The investment rate in China is also the highest in the world and has stood around 5% below the savings rate over a long period of time. This shows all the investment in the economy can be funded out of domestic savings. With such a huge domestic saving rate it is unlikely there will be any big crisis in the near term.

A sustained low inflation- Inflation in China has sustained low single digits for long period of time. This has been despite runaway credit growth which would normally lead to inflationary pressures. China has kept on increasing supplies at a brisk pace to keep pace with demand unlike in India where the supply response has always been missing and any uptick in demand leads to a spike in inflation. A strong supply response is positive for the economy. However excessive supplies lead to losses and pressure on bank and corporate balance sheets. This is something that China is experiencing today.

A strong Fiscal Position of the Central Government- Over the last 10 years China has had a Budget Deficit which has averaged around 1.5% of GDP and the Government Debt to GDP stands at just 26% which is one of the lowest among large economies of the world. As such both on the current account and the fiscal account China are very well positioned. Any losses from provincial governments or due to the wealth management products of State owned banks can easily be funded via the budget by the Chinese government if push comes to shove.

In conclusion, my advice to everyone will be that do not believe the doomsday forecasts being put out by analysts on China. There might yet be a crisis in China but not in the next few years.

MARKETS

Stock markets all over the world and more so in Emerging Markets have corrected since the beginning of the year due to fears about the next round of currency crisis as well as concerns on China. This has led to huge outflows from Equity Funds. Emerging Market Equtiy Funds lost $ 18 billion since the beginning of the year as against $ 15.6 billion for the entire year 2013. Valuations have come down to reasonable levels and 15 straight weeks of outflows is a record with the previous record being at 14 weeks of outflows in the year 2002. This is a perfect contrarian indicator for a market bottom. The CBOE Volatility Index also touched a bull market high of 23-24 last week and has corrected subsequently.

Markets might still correct somewhat but a big downside looks unlikely and the worst of the EM selloff seems to be behind us. A preelection rally in India is also imminent. Overall markets look constructive for the near to medium term.

 

Over the last few days as we have seen a selloff in several EM currencies there has been renewed talk of an acronym “Fragile 5” coined by Morgan Stanley. India being part of this group of countries which includes Turkey, Brazil, South Africa and Indonesia is one of the most absurd things that I have seen over the last several months. India is much better off than each of these countries as I will elaborate going ahead. This is despite the follies of the current UPA GOVERNMENT.

Turkey- Turkey has been one of the leaders of the current Emerging Markets sell off. Its currency plummeted over 15% since the beginning of the year before their central bank acted a couple of days back by taking overnight rates up from 7.75% to 12%. This has created some stability in their currency, which in all probability will be short-lived as increasing interest rates to control your currency is one of the worst ways to improve the value of the currency.  Turkey has a big political crisis which includes a corruption scandal going on. In India we have already gone through these scandals 2 years back.  They have a widening Trade Deficit as compared to a contracting one for India at this stage. Trade deficit for last year was $ 100 billion up nearly 20%.Turkey has forex reserves of $ 150 billion, GDP of $ 790 bn and a CAD which is touching 6% of GDP.

Brazil – Brazil has been facing problems related to increasing inflation, slowing growth as well as the contagion impact of the crisis facing its biggest trading partner Argentina. Brazil ended 2013 with the highest CAD over the last 12 years at $ 81 billion which is 3.66% of GDP. Brazil does have Forex reserves of $ 360 billion which the Central Bank has conserved without too much of direct intervention. However Brazilian Companies have nearly $ 500 billion of external debt with another $ 400 bn as investment by foreign investors into that company.  Brazil also has extremely anaemic GDP growth which has largely averaged between 0-2% over the last 10 years. The major exports out of Brazil are that of industrial and agricultural commodities which have seen price pressure and might see more price pressures going forward due to slowing growth in China.

South Africa – South Africa has also seen a huge increase in its Current Account Deficit due to the commodity nature of its exports as well as a series of strikes which has impacted production of various products. In the last quarter the CAD shot up to 6.8% of GDP which on an annual GDP of $ 400 billion amounts to around $ 26 bn. South Africa has Foreign Exchange reserves of just $ 50 billion. Falling commodity prices and a slowing China directly impacts South Africa due to large exports to that country. Due to lower Forex Reserves the vulnerability of South Africa to an EM crisis is quite high.

Indonesia – Indonesia has seen its CAD move up to around 4% of GDP last year. A ban on unprocessed mineral exports combined with falling prices of its key exports has put further pressure on the CAD. The Rupiah was the worst performing EM currency in the year 2013 and fell by 21%. Lot of exports of Indonesia are related to agricultural and industrial commodities where the prices are under pressure. Indonesia saw its forex reserves fall by 13% last year to $ 100 billion and they are enough to cover just 1.6 times its short term debt which is the lowest in South East Asia. Its exports are venerable to a Chinese slowdown. The central bank in Indonesia has been slow to increase interest rates, which is likely to put greater pressure on inflation and has led to the sharp Rupiah fall.

 

India

India is clearly in a very different position from the above mentioned countries. India is a beneficiary of a fall in commodity prices and does not get hurt by the same like in the case of South Africa, Indonesia and Brazil. It’s Current Account Deficit has moderated significantly over the last two quarters and not expanded as is the case with the other countries.

We in India have borne the worst impact of the corruption scandals as well as lack of decision making under UPA over the last three years and things are likely to improve and not deteriorate going forward. RBI has successfully built reserves over the last three months anticipating a crisis scenario unlike the central bankers of most of the other affected countries. Infact the CAD for the 2nd and 3rd quarters has been extremely low and seasonally the fourth quarter is always better for the CAD. This has also reflected in the way the INR has behaved where we have seen extremely low volatility in the INR vis a vis other EM currencies. With CAD likely to decline below 2.5% of GDP this year and the probability  of a pro growth Central Government increasing in the elections whose results will be out over the next 100 days this is actually the time to be optimistic rather than pessimistic on India. I have argued for a weak INR policy earlier and the actions of the RBI lead me to believe that they are in agreement with this strategy. The economy can take a 4-5% INR decline without it adversely impacting inflation in any big way. As it is we have got a tremendous Term of Trade benefit built up over China due to the relative currency movements. This should be supportive of the CAD going forward.

A lot of the increase in the Trade Deficit over the years 2011-13 has also been due to the poor policy environment in India which has increased Coal imports to over $ 10 billion and reduced mineral exports by over $ 10 billion. Lack of increase in import substitutes across the board has led to greater imports. Modern consumption basket products like Smartphone’s, Televisions, Laptops & other electronic products are being directly imported without there being any domestic manufacturing. A proper manufacturing policy can take care of this issue over the medium term. As the new government focuses on growth we will see domestic manufacturing and productivity pick up and help the external trade further. Retrospective tax amendments, poor policy framework and lack of growth have slowed down FDI flows which will also pick up as domestic growth picks up.

In conclusion this entire Fragile 5 thing is total humbug and best given a miss.

MARKETS

As expected the markets in January were difficult to call as are most Januaries. As I write this article we are 35 days to election notification, 70 days to the start of the elections and 100 days to a new government. The leads in the elections are quite clear at this stage and the wave that has built up should only get stronger in my view. This will lead to the start of a pre election rally. The risk is more from the Western Markets which rallied sharply in 2013 and a correction in those markets always impacts EM’s in the short run. With the impact of Tapering by the US FED now clearly getting built into all models there is unlikely to be great volatility due to this factor going forward.

The longer term outlook remains the same as what I wrote at the beginning of the year. Markets look good for a 20% plus gain this year and sometime from now to the next two months might be the best time to buy into Indian Equities. 

AAP’s Economic Logic, Not Good for India
The germination of AAP as an offshoot from the Anna Anti Graft movement has raised a lot of expectations in the minds of the Indian Middle Class and the poorer class due to the pain that they have suffered in the hands of the Ultra Corrupt UPA government in terms of heightened levels of corruption and runaway inflation. Over the last five years job growth has completely stalled, growth and income increases have slowed down and inflation has spiralled. This has renewed socialistic thoughts in the minds of a vast swath of Indian populace who are looking at an alternative that can rescue them from the clutches of traditional politicians and bureaucrats who are perceived to be not only exceptionally corrupt but also least bothered about the sufferings of the people.
However in the long term the Ultra Left ideology of AAP puts us more at risk of below potential growth, a downgrade of the country’s rating, a squeeze in growth and job creation as well as runaway inflation.
The easiest thing to do is to give out things for free in terms of subsidies. Giving out things free leads to wastage. An example can be seen even in the case of diesel. As the subsidies have come down and prices moved up the consumption has moderated drastically. A precious resource like water being given out free at around 140 litres per capita when the consumption on an average might be not more than 80-100 litres will lead to wastage. Secondly any product that is sold lower than the market price distorts the market place, leads to theft. Delhi Jal Board might have a surplus, but due lack of investments,no up gradation of networks and no capital expenditure on connecting newer areas with pipes. It needs money to invest and expand and improve the network. Free water will lead to lack of investments and inability of supply to reach new areas or improve the network in existing areas. Laloo Prasad Yadav was widely acclaimed as a Railways Minister; however the Railways degraded during his tenure as no steps were taken to improve passenger amenities, quality of stations or trains. It is easy to show a surplus if you don’t invest anything.
For all the shortcomings of UPA I like their cash transfer schemes. This way the commodity is market prices and every consumer gets a fixed subsidy per annum. Since the commodity is market priced the wastage and consumption normally comes down. This is a better way to give subsidies if at all they have to be provided.
Similar is the case with electricity. Subsidies lead to erratic supplies, eventually the government’s fiscal position deteriorates so much that it cannot pay subsidy after a few years. Supplies get cut and everyone is a loser. Today there is enough and more electricity available for supply in the country but lot of distribution companies still prefer power cuts as every incremental supply leads to move losses and government subsidies are either not paid or delayed inordinately. Supply at rates that are below the cost of supply will lead to wastage in general. If distribution companies have positive cash flows they will invest in networks in order to reduce losses that will benefit the consumers in the long run. Over the last 10 years the supply of electricity in Delhi has improved drastically and losses have been curtailed. The cost increase to the customers is much less than the purchase prices which have shot up due to rising cost of Coal and Gas which is known to everyone. Now Delhi has announced a Rs 700 Cr subsidy. This will wipe out the Fiscal Surplus of Delhi and take it into a Deficit.
Look at how the Congress Governments of Haryana and Maharashtra have responded to the Delhi Subsidies. Haryana announced a subsidy of Rs 600 Crores and as I write we hear that the Maharashtra Government has announced a subsidy of a whopping Rs 7000 Crore. This will be disastrous for Maharashtra Government finances. The Fiscal Deficit of Maharashtra last year was Rs 23000 Cr. With this it will go to Rs 30000 Cr & it will include total electricity subsidies of Rs 18000 Cr. These governments like that of the AAP in Delhi or several state governments have no idea of how to take the country forward on the path of prosperity or development. They just know how to give dole outs at the fag end of their governments tenure. However as we have seen in Rajasthan this does not influence the voters so much.
Equality in the economy can come in two ways. All move up economically or all move down to distribute the current levels of progress. AAP socialism seems to be that of taking everyone down to the same level. By scaring away foreign investors or coming out with statements that portray all corporate as crooks will lead to a withdrawal of investments, lower job creation and much slower trend growth. Finally most of the revenue of the governments comes from taxes. If growth collapses then tax collections also collapse and this will lead to a further deterioration in the Fiscal Position. Once subsidies are introduced they simply cannot be withdrawn or reduced. It can only go up.
I have tried a lot to garner more information on their economic thinking, however have been unable to. How will they generate jobs, since they believe all corporate s are crooks? They want more government in the economy after India has successfully moved away from that over the last decade. By asking government auditors to audit private companies it has set a very bad precedent which will open this up in the future to misuse. Any company that does not go along with the view of the government in power can be threatened with a CAG audit. With all due respects to CAG, their traditional style of working has to criticize everything minor or major. This will create fear among private companies and make them withdraw to the sidelines.
Imagine if RBI has to take its decisions by referendum every time, it will not be able to focus on what is good for the economy for the long run. It has to take decisions in the short run which are not populist but good for the economy in the long run. Why is it that mature democracies of the West do not have referendums? The main reason is that the government in power has to sometimes take decisions that are good for the country in the long run and not necessary populist. Referendums in general will lead to populist decisions.
Recently AAP has set up committee to deliberate and come out with their long term economic thinking and policies. My fear is that given that the top leadership is Leftist it will be very difficult to formulate policies that are good for long term growth. Any growth or development oriented policy that they come out with will look very similar to that of BJP and as such take voters away from them so it is unlikely that they will go that way. It will be interesting to see what they finally come out with.
It is the extreme corruption and very high inflation under UPA which has made people fascinate about parties like AAP. Their anti corruption plank is good but not much beyond that. For example what is their plan to bring out the black economy in Delhi? They do not want to turn the traders away from them so they will not do much on this front. Also what plan do they have to bring out the huge black economy in the Real Estate sector in Delhi. I do not think that AAP has any plans to increase revenues. As such if the plan is to dole-out and not create any mechanisms to collect revenues the government can never be sustainable.
Instead of improving efficiency their manifesto talks about making contractual staff permanent, filling vacant positions in the govt. This will increase the fiscal gap and reduce money available for development. Government is already overstaffed. The need is for them to work efficiently.
Regularizing unauthorized colonies is bad. Once done more will come in the expectation that someone will come and regularize. The expectations are much greater from a party that is made up of highly educated people who should know what is good for the country in the long run.
I have no qualms in admitting that I would like Narendra Modi to become the Prime Minister. He has given a vision of progress without dole outs and promises of giving things for free. This is what India wants as of today. I guess that the challenge that he faces is that of his and several BJP CM’s positive image as against that in states like Maharashtra where the BJP-Shiv Sena alliance does not inspire confidence as most of the leaders are the same as earlier and there is not much to look up to. This is a state which could potentially be a huge one due to the negative image of the current state government and the 48 seats available.
Starting from his last speech in BJP’s meet in New Delhi Mr Modi has started clearly outlining his vision for India and what all he proposes to achieve once he is in power. The focus on building new roads, rail links, modern cities, creating jobs and taking decisive decisions is what India wants’ at this point of time. Not only in terms of economics, but also in terms of our international relations and Foreign Policies we need to have a tall leader who can protect India’s interest and not a grouping which has prominent leaders that talk in support of Maoists and referendum in Kashmir. Under UPA India’s international standing has gone down substantially with the actions of Obama in the recent diplomatic controversy clearly reflecting that India is not very important in the overall scheme of things. Global Poweress comes with a strong and vibrant economy which I believe that only a leader who is not only non corrupt but also strong and decisive can deliver.
Whenever a country progresses everyone in the country moves ahead. Some people lead in the progress and others follow in the trickle down. As such if the country moves to a higher growth path then it will not leave behind the minorities or any particular community.
Some people that I talk to tell me that I am not for AAP because I am more bothered about the stock markets. That’s not the reality. I am more bothered about the long term progress of India and its potential to be one of the foremost countries in terms of economic poweress as well as prosperity. I really cannot see that happening under an AAP kind of formation or a motley crowd of parties like BSP, SP, Communists, Third Front, and Fourth Front etc.
We in India are at a critical stage today. Either we can choose to rescue India from the clutches of Corruption as well as Dole Out politicians who loot you for 4 years and give something back in the 5th year or choose progress and development. Another 5 years of lost growth will mean that at the end of 10 years we will look behind at a lost decade.

“There comes a time when one must take a position that is neither safe, nor politic, nor popular, but he must take it because conscience tells him it is right.”
― Martin Luther King Jr

The revival of the investment cycle will require a concentrated attention from the new central government. High fiscal deficit has reduced their abilities to provide incentives or contributions for investments. Under the circumstances they need to facilitate by removing hurdles on projects rapidly.
Poor capacity utilizations in industries like Capital Goods, Cement, and Automobiles etc have lead to complete slowdown in new investments. Oil and Gas has been hit by policy uncertainty. No fresh investments are happening in refining, petrochemicals, pipelines etc. Most sectors except for the infrastructure sectors today have overcapacity which is reflected in the inflation of manufactured products that reflects a complete collapse of pricing power. As such the revival cycle has to be led by revival in consumer & investment sentiment as well as investments in infrastructure projects.
The first steps Huge delays in approvals make projects unviable. The first step towards reviving investments is to clear projects as a rapid pace where the onus should move on the approving authority to show non compliance rather than on the investing company to show compliance.
The land acquisition bill is seen as another death knell for investments, not in terms of cost as actual land prices in most areas are already much higher than collector rates. However the rules are onerous.
Steel & aluminium sector where India is competitive in terms of cost of production and had the potential of attracting huge investments has been hit by iron ore mining ban, coal gate as well as land acquisition & environment clearance issues. Projects are ready to be executed, red tape clearance is required.
PPP projects need relief in terms of tariff relaxations.Power sector IPP’s/UMPP’s relief requirement is of Rs .5-0.75 per unit in most cases miniscule as compared to the peak domestic power rates of Rs 8-10 per unit.
Relaxed Environmental norms-Environment clearances take the maximum time & need to move with a deadline.Most countries that have developed till particular points of time have had relaxed environmental norms. However we have moved towards one of the most stringent norms even at low development level of. Another five years of relaxed environmental norms is not going to kill the country. As they say, Heavens will not fall if we relax environmental regulations for a fixed period till time bound norms are finalized.
Subsidies- The next government will need to deal with fertilizer and fuel price moving to market levels. Though inflationary in the short run it will create a huge investment cycle by making projects in these sectors viable. It will free up huge resources of the government, reduce the fiscal deficit by 1.5% of GDP and eliminate crowding out.
This will reduce domestic interest rates & attract Foreign Capital into the country.Sovereign Rating will in all probability be upgraded & start a virtuous cycle
Road Projects- Road projects are hugely positive for the economy as they generate large employment,require lot of inputs & machinery.The economy around the project sites also gets a big boost.
Last year NHAI could award just 1322 kms as against a target of 9500 kms.Easier exit norms post completion of project combined with proper evaluation of bids can attract lot of Private Equity.An award of 8000-9000 kms of projects pa will lead to an investment cycle of Rs 100,000 pa.
Agriculture – In good times supply constraints have not been worked on especially in the case of agricultural produce where it is estimated that 33% of the perishable produce worth Rs 200000 Cr gets destroyed. Even where the government maintains a buffer as in the case of wheat, pulses and rice wastage is high due to poor storage and distribution.
APMC needs to be made optional and a reduction of the middlemen network is required. There is need to set up food processing units,modern cold storages & transportation networks.The total storage capacity in the country currently is just 30MT. Estimates indicate a requirement of another 37MT requiring an investment of $ 20 billion. It will set the tone for Round 2 of Rural Prosperity which started off with the inefficient NREGA .
Urban Infrastructure Projects- Projects like metros,overhead road/rail networks, water and waste water projects etc are easier to execute as they do not have land acquisition issues. An initial focus on these could contribute strongly to investment revival. For example metro projects in 20 cities would involve a layout of Rs 200000 Crore.
Mining – Investment in Coal Mines is easiest to revive as monetary investments are low.This sector has been the worst hit due to Coalgate and Environmental activism.
Coal imports today exceed $ 10 bn and can be easily replaced by domestic production. It will go a long way in reducing power costs & reviving the economy. Coal India’s monopoly needs to be revoked at the earliest.Coal prices can be benchmarked to global levels and mines opened up to private companies. Similarly Iron ore mining can restart in a big way from 2014 onwards.
To Conclude
India offers one of the best nominal returns to investors in investments across sectors and segments. We can attract huge foreign capital. It is not difficult to revive the investment cycle in a country where there is an actual requirement of better roads, power, urban utilities & all kind of basic amenities etc.
Except for acting on the Fuel & Fertilizer subsidies none of the other steps required are politically unpalatable. We need a revival in investor confidence & a focused approach on awarding & implementing projects.
The economy can revive rapidly; it’s only a question of confidence. A stable external situation & improving fiscal situation should take growth back to the 7-8% range in the next two years.

In the first two parts of the series I talked about the various kinds of mutual funds and about Equity MF schemes. Now let’s come to the fixed income part of the Mutual Funds. Now the fixed income part of the mutual funds essentially serves the purpose of treasury management of companies and in the case of retail investors it gives an alternative to investment in bank fixed deposits. There are a large number of categories of debt mutual funds which can confuse investors to a great degree. However beyond the nomenclature what investors have to know is the time duration for which they are investing. If that is known the fund to be invested into becomes simpler to understand. Read more…

Over the last 5 years we have seen a collapse of private investments in India. Gross Capital formation which moved from levels of 20-22% of GDP in the late 1990’s till 2003 peaked out at 34% in 2009-10 and has since come down to 28%. The fall in Private sector investments has been sharper and the steady growth of 20% in the years 2004-2007 has come to virtually zero.

The core logic given for the collapse in the investment cycle are Collapse of Governance under UPA II,Global slowdown,High interest rates & Environmental issues. Read more…

As I sit to write my prognosis for the year 2014 I am also looking back at the last two years and how the forecasts went. My view at the height of pessimism at the end of the year 2011 was that the markets would rise by 25% in the year 2012. The forecast turned out to be bang on with a market rise of 24%. Given the slack in the economy and poor governance at the government level my view for the year 2013 was for a rise of 12%. As we have ended the year the markets have moved up by around 9% thus underperforming my expectations by a couple of percentage points. The other key calls for the year 2013 from my side was that easing credit conditions will stop the downward spiral in Euro zone economies and the stock markets of these countries will do well. The other big call was for a collapse in gold prices and the breakage in the linkage between the US Dollar and Gold. This call also went off quite well. The last major call was that it will be a year of two carry trades i.e. Yen and USD and this played out through the year. I expected the Yen to decline by a minimum of 10% in 2013; the actual decline was more than double of this. Read more…