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

I turned sceptical on the markets around 6-8 weeks back as the USD rally started in a big way and it became apparent that the Global Growth scenario wasn’t looking as good as it seemed in the middle of the year. Since then most global markets have corrected by 10-15% from the top. The US markets have held on relatively well with a fall of just 8% from the top and now trade around 5% below their top as economic data continued to be strong out the the US.

The normal assumption that plays out is that the linkages between financial markets tend to be extremely high in the short run while the long run performance depends on relative Economic Growth as well as future prospects and earnings. The Indian markets in that sense have held on very well despite poor economic growth numbers and a relatively subdued start to the earnings season for the 2nd quarter.

The two big reasons are

Rapidly falling inflation – Inflation has come down sharply over the last two months largely driven by the crash in global commodity prices and a lower food price spike relative to previous years during the July-October time period. Given the global growth outlook this scenario might hold out and help RBI in its inflation fight over the next few months. Supply side measures on the domestic side are still awaited.

Economic growth in the domestic economy has slowed very sharply and this by itself has created a disinflationary cycle. However we actually need faster growth and low inflation. RBI also seems to be watching out for how inflation behaves as the economy revives and might not cut rates in the very short run.

Growing strength of the Central Govt – The Modi Government has started taking aggressive decisions to revive in the economy over the last few days. Diesel deregulation was aided by the nearly $ 30 fall in crude prices from the peak. Measures have also been taken over the last two days on getting the Coal segment on track. The State Govt elections have also strengthened the hands of the Government.

However a greater economic revival will require industrial activity to pick up and Infrastructural projects to get going. Most industrialists are of the view that without the change in the Land Acquisition Law it might be difficult in the short run. Economic growth has slowed very rapidly with growth likely to be 4.5-5% for the first 3 quarters of this year.

The Global growth outlook is also moderating which puts pressure on commodity producers as well as exporters. Export oriented companies have done very well in the stock markets over the last one year. However this might not hold in the next six months. Now the further upmove in the markets has to be driven by Capital Goods and Financial sector stocks.

IN CONCLUSION

Without writing too much my view at this stage is that the longer term outlook for India is becoming Brighter and Brighter. However I still believe that it is difficult to escape global linkages in the short run.  I turned negative on the markets around the 7900 Nifty level. After several ups and downs we are at the still level. As a BULL I would like the markets to do well but given my past experience I would be naive to believe that India can be a standout market in the entire world. This has never happened in the past.

In my view the Global Stock Market correction is still not over. One more round of correction is still likely. Lets see how it plays out.

As people say “There is always a first time”. I personally wouldn’t bet on it though.

I have overall been a supporter of Raghuram Rajan since the time he was appointed as RBI governor. My view has always been that we need someone who understands economics well and can look into the future to formulate policies as RBI governor instead of ex Bureaucrats that we have traditionally got. RBI’s thinking and actions have been a refreshing change over the last one year.

The overall policy stance on building defences for the INR last year, the change in focus to CPI, keeping liquidity relatively easy while targeting short term rates around policy rates, clearer communication etc have been extremely good steps from the RBI. The RBI has also removed tail risks for the INR by getting rid of their forward dollar delivery commitments and now holds a net long position in the forward markets. I have also argued that RBI’s inflation focus of getting CPI down to 6% is infact the best thing for bond investors as sustained low inflation will lead to a sustained bond rally.

However the INR policy in the near term has been a cause of concern. INR appreciation led by capital flows was the bane of the INR post 2007. I have argued in the past that we should have a weak INR policy till the time the CAD comes below 0.5% of GDP. The rupee should appreciate due to structural factors and not cyclical ones.

The fall in commodity prices, especially crude oil will save the country nearly $ 15 billion this year and also help reduce the Fiscal Deficit by reducing subsidies. However this is a stroke of luck and not due to any structural move by the Government or in the economy. The reduction in CAD in the USA is structural as they are now producing nearly 50% of their requirement of Oil & Gas. However India’s import dependence has actually gone up as production as continuously declined. On top of that we have increase imports of Coal, Edible Oils, and Electronics etc.  What if the crude oil prices spike up again going forward due to any reason? The entire Trade Deficit reduction and Subsidy reduction argument will no longer hold then.

India has got nearly Rs 120000 Cr inflows into Debt and Rs 80000 Cr into Equities this year.  However the overall build-up of reserves since the beginning of this year has been just around $ 20 billion i.e. just around the amount which has flowed in as Debt inflows. Forex reserves were $ 295 billion at the end of Dec 2013 and are $ 315 bn now.

The government is taking more time than was initially anticipated to bring about structural changes in the economy. This was always supposed to be a time consuming thing however expectations were that a start would be made sooner than later. However we do see some delays there. In such a scenario allowing a strong rupee builds up risks for the economy.

The INR has appreciated by nearly 5% against a broad basket of currencies since the beginning of August while holding steady against the USD.  This includes advanced economy currencies like the Euro and the Yen where it has been in the magnitude of 5-6%. Most EM currencies have fallen by nearly 5-10% against the USD in the same time period. In the absence of any structural improvements in India’s external balance of trade this is extremely risky. This could lead to a cooling off of exports and a pickup in imports going forward as imports become cheaper and India loses the relative currency advantage in exports. Textile, chemical and auto ancillary exporters a big story in the stock markets could lose competitive advantage.  The other major factor to consider is also that one of the major reasons for the reduction in the trade deficit has been the restrictions that have been put on import of Gold. Finally these restrictions are artificial and will not last forever. As prices of Gold come down and the restrictions are eased we are likely to see gold imports pick up again.

A strong INR also has the impact of keeping imported prices low and inflation lower than what it would have been in the case if INR was 4-5% weaker.  The other big factor playing out these days is that due to a high forward premium of Rs 4.5-4.8 for USDINR most exporters are hedging their receivables while importers are going unhedged as the hedging cost seems too high to them. This is now building up another risk factor in a scenario where a reversal in capital flows could create a short term downside in the INR and hit the unhedged importers in a big way, which would then run to hedge and create more downside for the INR.

In conclusion I believe that the RBI should use relative INR strength to build reserves rather than keep the INR at levels which are not economically sustainable. Forex reserves could be $ 20 billion higher if this strategy is employed. Till CAD is sustainably under control and inflation much lower than current levels there is no case for a strong INR.

 

MY ARTICLE IN THE HINDU BUSINESS LINE TODAY

Stocks markets worldwide have been on a runaway up move for the last several months. We have seen some intermittent corrections, but those have been shallow and of a very short duration. Although I am quite bullish on the markets over the Long Term the near term picture does not look encouraging. The risks to the markets are predominantly global and somewhat local. Some risks that I see playing out are as follows
(CONTINUE READING ON THE LINK)

Multiple challenges to galloping markets | Business Linehttp://www.thehindubusinessline.com/features/investment-world/market-watch/multiple-challenges-to-galloping-markets/article6367123.ece

In recent days we have seen the Competition Commission of India (CCI) either starting investigation or imposing fines on companies in several industries with respect to potentially cartelization. We have seen fines impose on Cement and Auto Companies along with some Real Estate companies. However much more needs to be done.

The issue of inflation and inflation control has taken centre stage in India over the last several years. Despite extremely tight monetary policy as well as stagnating to weak global commodity prices inflation has not come into control. Small period of low inflation have been followed by long periods of high inflation. In the strong growth era of the period 2004-2007 one could have argued that high demand and lagging supplies could explain higher inflation. However the last two years have seen an absolute demand collapse in the domestic economy and as such it is not demand pull that is responsible for higher inflation. The obvious reasons of the social sector dole outs of the outgoing UPA government, high Fiscal Deficits and a weak INR combined with persistently high food inflation are the logical explanations for high inflation, however strong cartels that operate within the economy are also responsible for the persistently high inflation. Some examples of these cartels are as follows-

The Real Estate/politician nexus cartel- The real estate cartel is one of the worst in the country. The entire real estate industry operates under a shadow of extremely opaque operating structures, payoffs to politicians and local bodies, restrictive supply regimes which create artificial shortages etc. There is also an extremely regressive taxation structure related to both the sale and purchase of property where the registration charges and stamp duties are extremely high and force people to understate the value of the transaction as well as on the capital gains front where taxes are high and force people to understate the value of the transaction. Given high transaction costs and opaque approval structures Real Estate which constitutes the maximum allocation of savings among Indians (recent estimates put HNI allocation to real estate at 43% of savings) is poorly regulated. The Real Estate Regulation bill has still not been approved and implemented. As such lack of transparency and extreme political patronage has made real estate extremely expensive in most parts of India. The rental value of residential property ranges between 2-3% in most parts of India and 3-5% on commercial property. These returns are obviously not viable given the interest rate regime in India and reflect a negative carry. One of the flats that we owned in Mumbai started off giving us a pre tax rental yield of 7% in the year 2007, this fell to just 2.5% in the year 2012 as property prices rose and rentals fell. This is when we decided to sell it off.

Better regulation, ease of purchase and sale as well as better transparency will reduce the cost of homes for millions of Indians who cannot afford it today.

The Cement Cartel- This is one of the most open cartels in India. I still remember that couple of year’s back I was sitting in the office of the MD of a large south based Cement Company when he got a call from one of his subordinates. The entire summary of the conversation was about how one of the other companies was increasing supplies despite their arrangement and was insisting on a higher quota. The openness with which this conversation was on really surprised me. Since then I have not invested into this sector.

Cement has been plagued with huge oversupply across the country, especially in South India. Demand has been weak and cost pressures have been high due to rising coal and fuel costs. Logistics costs have also risen due to rising diesel prices. However despite all of this we have seen huge stability in the EBDITA per tonne of most cement companies. Cement prices have fallen in some periods of time; however they have bounced back as fast. This has been despite large capacity additions and poor demand. Supply restrictions, pricing discipline is a well understood principle of this industry at this stage. If it had not been for this cement prices would have been much lower than they are today.

THE Tyre Cartel- Tyre oligopoly and pricing arrangements in this industry was a case study that we studies in our Management Schools nearly two decades ago. The same thing has made an appearance over the last couple of years. The Tyre lobby first got Chinese imports restricted and virtually stopped by putting some certification requirements on those tyre imports. As such Bus and Truck tyres which had seen a huge influx of Chinese tyres which had taken away more than 10% of the replacement market suddenly saw their exit. This was also the time when most tyre companies had embarked on a program of significant expansion expecting strong demand driven by strong economic growth. However as growth collapsed the demand for tyres also collapsed. On top of this the industry has been aided by the severe fall in input costs where rubber prices are off nearly 50% from their peak levels seen more than two years back.

Despite low capacity utilization, low input costs and poor demand the tyre prices in the market have held up, mostly due to some pricing arrangement. But for this prices would have been much lower.

The Power Cartel- The power sector cartel is largely a state owned one and not that of the private sector. Extremely poor inefficiency, large scale power theft and transmission losses combined with unfavourable power purchase arrangements from power producers makes us pay nearly 30-100% more than what we should actually be paying. The open sourcing and common carrier principle as envisaged under the Electricity Act is nothing but a joke. The power costs that household consumers and industry pays continues to rise despite the peak power deficit in the country now being just around 3% from a peak of nearly 15% a few years back. The power price on the electricity exchanges have collapsed to just around Rs 3 per unit & sometimes even below that. However despite that consumers are forced to pay higher and higher every passing year. The unbundling of most power utilities into generating and transmitting utilities happened several years back in most states. Despite that and despite investing billions into the supposed improvement of transmission systems power losses have not reduced in most states. As prices have risen the incentive for power theft has increased more and more.

There is need for implementation of the Electricity Act in letter and spirit. The supposedly independent power regulators need to act on the behest of consumers and stop approving tariff hikes every year without efficiency gains. Overall power tariffs in India should peak out and actually fall going forward instead of rising if these inefficient state cartels are broken.

The Agri Cartel- I will not go into details of the extent of losses of farm produce post production in India as this issue has been talked of and discussed enough in the past. The key is that despite increasing production every year, improving farm productivity and huge buffer stocks with the government food inflation has been very high in India over the last 5 years. One reason for this has been the continuous increase in support prices under UPA. However the bigger reason also has been the rampant food grain purchase by the government which then lets it rot and degrade instead of selling it to consumers at reasonable prices. The government has made no major move to improve the agri supply chain or break the cartels which operate under APMC acts. Food product inflation can only be controlled if the mark up from the production stage to the retail sale point moderates. However there are so many layers in the entire agri chain that this mark up has only increased over the last few years.

Then new government will have to work on this front strongly to control the CPI which has a weightage to food of 57% for rural CPI and 43% in Urban CPI.

Overall several cartels operate in India which keeps prices higher than what they should be. I might not have covered all the Cartels as many more might exist. A proper control and operation of the Competition Commission of India along with strong punitive action by the government will help moderate prices and control inflation. 

The Bull Market in developed markets like the US, Germany and UK have been now on for the last 5 years. Most developed markets have doubled or more from the bottoms of 2009. However in the case of most Emerging Markets we have seen turbulent periods over the entire 2009 to 2013 period where we have had good years like 2009 and 2010 followed by an extremely tough 2011, a good 2012 and an average 2013. So it is difficult to say when the bull market started in EM’s. However for India it has actually started this year as the driver of the markets over the years previous to 2014 were either defensive stocks or stocks that derive growth from overseas markets i.e. IT and Pharmaceuticals.

First let’s look at the global perspective. To me it is very clear that the global bull market cannot end when major economies have zero interest rates. Today we have a scenario where the overnight rates are zero in US, UK, Euro zone and Japan. The first expected increase is likely from the US that too 15-18 months down the line. Euro zone is still grappling with deflationary fears and unlikely to increase rates in the foreseeable future and same is the case with Japan. When the US FED decided to wind down Quantitative Easing there was lot of fear in the markets. At that time, in my article “Do Not fear FED TAPERING for the right reasons” I had clearly pointed out that the fears were baseless and if growth revival and not inflationary spiral is the cause of Tapering then it will be good for the markets. It played out exactly that way.

Now comes the question at what level of FED FUNDS rate should we start getting worried. My guess is that till the time the overnight rate in the US reaches a level of 3% and the US 10 year bond yield a level of 4-4.5% the bull market in Equities will continue. I will not elaborate but explain in brief. Firstly rates will go up as the US FED becomes more comfortable with the growth outlook i.e. possibility of stronger growth. Stronger growth is good for the Equity Markets. The second factor then is that at what level of interest rates will growth prospects start looking dimmer. That should be around 200 basis points above the current US 10 yr bond yields of 2.5%. At that stage depending on the stance of the ECB, Bank of Japan and other central banks we will need to take a call on the direction of the markets. However this is still 3 years down the road.

INDIA

Looking specifically at the Indian perspective my view is that the Bull Market actually started after the massacre of the small and mid cap stocks was over. Small and Mid caps got smashed in 2008, Whacked in 2011 and finally destroyed in the year 2013. This was the time when people lost total hope in equities in India and redemptions from domestic MF’s reached a crescendo. The outflow from equities in general and a shift into other assets like gold, tax free bonds, real estate etc also reached a peak at this stage.

Most people tend to believe that as interest rates in the US move up they will move up in India too. This is not necessarily true. The difference between the 10 yr bond yields in India and US has swung between as low as 0.5% to as high as 6.5% over the last 10 years. Fiscal Prudence combined with lower inflation can create a situation where Indian interest rates can actually decline even as they increase in the developed markets.

Several factors led to a stagflationary scenario in the Indian economy. It started with the commodity spiral boosted due to easy money policies of Western Central banks, which in combination with Fiscal Profligacy let to high inflation and interest rates. This got combined with a governance deficit of the previous UPA government and led to a collapse of growth from 9% three years back to just 4.5% in 2013. Inflation is now on the way down and the new government is focussed on growth revival along with inflation control by a combination of Fiscal constraint and a boost to the supply side.  These factors are positive for growth revival.

The growth revival cycle in India is just starting. We saw a bottoming of growth at 4.5% last year. This should swing back to 6% this year and between 7-8% over the following 3 years. Stock markets will always do well in the period of accelerating growth. . Every economy goes through phases of profit expansion and compression while the GDP and the Turnover (sales) of companies continue to grow. The phases of profit expansion take the profits more than the growth in sales. As profits grow more than the turnover of the companies, in general the Return on Networth or the Return in Capital also move up. This leads to an upward rerating of the companies in that economy as the outlook for future growth looks positive. During this phase the Market capitalization to GDP ratio of that stock market expands

India’s market capitalization to GDP reached a level of 60% last year. This level currently stands at 85%. The case for expansion in India’s Market Cap to GDP going forward is extremely strong. The ratio moved up from 45% in 2003 to 160% by the end of 2007 in the case of India. If the ratio moves back to a level of 120% over the next five years and in the same time period we have a nominal GDP growth of 11-12%. The calculation reveals a 125-150% return potential in this scenario over the next 5 years. Basically NIFTY above 18000 and SENSEX above  60000. As such wealth creation in the Indian Markets over the next 3-5 years could be huge due to a combination of a stronger growth in profitability as well as a rerating of the economy i.e. expansion of Market Cap to GDP in the same time period.

Unlike most other policy actions of the government the entire process of disinvestment as being reported in the media has similarities to the Destructive Disinvestment of UPA Government. In recent days we have read about proposed disinvestments in ONGC, SAIL and Coal India. Initially when the entire disinvestment programme was launched in a bigger manner under the previous NDA government the idea was to use potentially positive policy moves to disinvest or sell out companies in a strategic sale manner where the ownership changes to the private sector and as such the government tag is removed from the companies, greater professionalism comes in and the process creates value for the investors. However the entire disinvestment programme subsequent to the Coal India sale a few years back became one of destroying the wealth that is imbedded in PSU’s as the sales happened at lower and lower valuations without policy actions to improve the valuations of the companies. Just to meet disinvestment targets PSU’s that are owned by the President of India and are funded by tax payer money were and are proposed to be dumped at absurd valuations.

On the other hand white elephants like Air India, BSNL etc are getting dole outs from the government again out of shareholder money. There was an opportunity to disinvest out of companies like MTNL in a strategic manner at some stage which would have helped the company not only survive but also thrive due to its predominant presence in Delhi and Mumbai. It is absurd that the government wants to continue to run an airline, a telecom company etc at a time when these companies are clearly not equipped to compete with the private sector in a competitive environment.

Strategic sales like Maruti, Hindustan Zinc etc have helped these companies adapt and thrive by improving productivity. However the way disinvestment is being carried out today, at the worst of times makes me wonder what the thought process of the government is.

The initial disinvestment of Coal India was done appropriately. However later the government decided to sell more of the company when the price was Rs 400. However at this time the Coal scandal was on, global coal prices were falling and Coal India has been unable to increase production courtesy previous policy actions of Mr Ramesh/Ms Natrajan. The market sentiments also were bad. As a result the stock price has crashed to Rs 260 levels. Coal India has Rs 50,000 Cr plus of cash, the government should have just taken an Rs 10,000 Cr dividend which it eventually decided to take in the last quarter of 2013-14 when Chidambaram was trying to show a lower Fiscal Deficit at any cost.

Similarly NTPC Follow on Offer disinvestment was planned when the entire power sector was in doldrums, NTPC capacity addition was lagging and there were fuel price issues. The issue was planned when the stock price was Rs 200 plus and fell to Rs 140 at the time of disinvestment. Similarly NMDC was dumped into the markets at a time when the iron ore mining ban issue is prevalent all over the country and iron ore prices globally have crashed. The better time obviously was when the iron prices were better and the mining issues were resolved.

I have mentioned this earlier also the better opportunity obviously is to sell high. Strategic sale of ITC will yield the government Rs 50,000 Cr, get in over $ 8 billion of FDI and also reduce the pressure on the INR. The remaining holding of Hindustan Zinc could also have been disinvested at extremely good valuations and can still be done.

It is extremely unfortunate that the thinking process has not changed and the same kind of disinvestment is being proposed. First there should be Diesel deregulation, subsidy cuts and then ONGC should be sold. Similarly there needs to be visibility on improved performance at Coal India before it is sold so that the sale is also at a good valuation and the investors also make money.

Lets hope better sense prevails and disinvestment is not carried out just as a book balancing activity.

Well the Union Budget has come and is through now. I will not write in details as every news channel and every business paper tomorrow will be full of analysis. I will just do a brief macro commentary on how I see the Budget.

Firstly I do believe that the Budget is growth supportive and anti inflationary. It is ant inflationary in two big ways. The first being the fact that the cash given in the hands of taxpayers is not very high and is actually lesser than the inflation in the economy. The tax free limit has been increased from Rs 2 Lakhs to Rs 2.5 Lakhs. The other two Rs 50000 breaks have been given on saving and asset building. Housing loan interest limit increase will make acquiring self occupied houses cheaper and the increase in limit on 80C savings as well as on PPF will help increase the savings rate. Improved savings and limited incentives to spend are anti inflationary.

The second anti inflation move is in the structure of government finances where revenue expenditure is proposed to grow at just 9.4% which will be lower than the nominal GDP growth of around 12%. The other part is the restructuring of MNREGA spending which will now be directed towards productive usage like agriculture and rural asset building rather than just paying off people for free which had created a huge labour shortage for farmers in rural areas. Moreover these spends have been restricted to last year’s level, thus an inflation adjusted decline.

The other big observation is that the budget is growth oriented. Capital expenditure is proposed to be increased by 26% plus which will boost growth and employment. Incentives given for capital expenditure to corporate, extension of excise duty cuts as well as investment allowance for smaller capital spends are positive. The power sector has got extended tax breaks and there has been a huge increase in allocations for the roads sector which is hugely employment generating. This will be followed up by several measures to ease the way business is done and project clearances made. Lot of these moves will be outside the budget. Retention of a low Fiscal Deficit figure of 4.1% is also anti inflationary as it will prevent crowding out. The direction of Fiscal Deficit which has been put out and directed towards 3% over the next 3 years implies that the Government will continue to borrow flat over the next three years and thus provide a huge impetus to economic growth by releasing funds for the private sector.

Lot of clarity on taxation has been sought to be provided to foreign investors by means of taxation of profits of foreign investors, transfer pricing as well as retrospective taxation. More moves of these will be seen outside the budget.

There will be lot of columns written with headlines like “Opportunity Missed”, “Could have done more”, “Damp Squib” etc. These need to be ignored as most people are just interested in flashy announcements and not implementation. The key focus of this government is likely to be on implementation. All said, “The proof of the pudding is in eating it” as such let’s see how the delivery plays out. 

There has been lot of hype around the EL Nino and the likely shortfall in rainfall in India this year. In my previous article I had pointed out that the two major indicators that impact monsoon rains in India i.e. Southern Oscillation Index (SOI) and Indian Ocean Dipole (IOD) had turned neutral to positive for the Indian Monsoons and do not indicate an EL Nino at this stage. As it turns out the shortfall in the monsoons in June is not due to El Nino but due to local factors.

Now to come to the impact of the monsoons on agricultural production. The good part is that there was so much noise around the El Nino that most farmers were already aware that rains might be late or deficient. As such plantations were delayed. The second and more important part is that except for West India the progress of the monsoons is reasonably fine. Moreover the shortfall of 42% in rains in June is not very significant as July and August rains are more important. Moreover statistical analysis of past data has revealed that whenever rainfall is deficient in June it is above average in July and August in 90% of such years. As such probability of above average rains over the next two months is quite high. So given that farmers delayed plantations and rains are most likely to recover we should have a reasonable agricultural season. There could be some shortfall due to reduction in yields but overall production should be good. This combined with proactive action by the government to prevent hoarding should keep food inflation under control. Let’s not forget that under the previous UPA government food inflation remained high despite excellent monsoons and agricultural production.

If we see the monthly average Long Period Average of monsoons in India the statistics are as follows

Month LPA (mm)

June                                      163.5

July                                       288.9

August                                  261.0

September                         173.5

TOTAL                                   885

As such it is clear that June is the month of lowest precipitation and the following months are more important.

This is also empirically borne out by last year’s agricultural production data for the Kharif season where June saw very good & above average rains, however the monsoon continued to weaken mid July onwards and was below average in August and September. As such although the print figure of 106% of LPA was very good Agri Output was up just 0.9% as standing crops got damaged.

The important months are ahead of us. Rains have picked up quite a bit lately and given the historical statistics the probability of good rains going ahead are high & so is that of agricultural production. As such let’s not fear now but be hopeful of decent food grain production.

Fulfillment and Contentment are the key            

This is the second and concluding part of my articles on attaining happiness in life. Let’s get the basics clear first

You need to be happy today. There is no tomorrow. As they say, how do you know that you will even be alive tomorrow or might not be facing a situation tougher than‎ today? The future holds many imponderables, the present is fully known. We need to live for today and work towards a happier tomorrow, but be ready for situations to play out differently.

Happiness also cannot be correlated to materialistic fulfillment.  Are we happier than what we were in the past? At that time our needs might have been lower and the money required maintaining our future lifestyle to the current levels might have been lower. Is the thought of the future destroying our current happiness.

The question is whether we are happier today than we were 10 years back. A decade ago my goal in life was to be the best performing fund manager and to get awarded and rewarded for that. Once I achieved that the goal post became retaining that position and remains there for a long period of time. Which I achieved for sometime but then it will never remain forever. The fall from the top always hurts the most.

Subsequently the aim and target became reaching to the top again. And the cycle went on till I realised sometime last year that this was not making me happy but more and more frustrated. I decided to then step back, focus on research and do things that I enjoy. Today I am much happier than I have been anytime over the last 5 years.

Let’s take an example to explain things.

Earlier whenever I used to trade in the stock markets I would play a high risk game and try to make more profits in the short run. This would make me tense and create stress. Sometime back I moved to a mode where I only take stress less positions. Once I do that I do not worry as worrying will not impact my profit or loss in any way. We can only do our due diligence and then let the forces play their role. As such I am much more content and happy today. Earlier I would always regret and feel frustrated over some stock that I never bought despite thinking about buying it after its price moved up. Now I am not bothered. Returns always flow from what we do and  not what we think of doing. Investing, which is my passion has become much more satisfying for me.

 Goalposts lays keep on changing. I vividly remember a conversation that we had among a lot of friends in the year 1997 where everyone lacked about their aspirations in life. One of the person, who currently heads debt markets in a prominent asset management company at that time, had a target of Rs 50 lakh so after which he wanted to shift back to his home town Bhubneahwar. Today he has 50 times that wealth but is still slogging it out and working 12 hours a day.

There are so many people who are proud of the fact that they live out of the bag, travel 200 days in a year and do not take many holidays. This does not exactly seem like a receipt for happiness. I personally have never stayed in office beyond 5.30 PM as there is mostly nothing that you cannot do in8 or 9 hours. If you cannot do it in this time then even 12 to 15 hours are too less.

There has been enough and more written about work life balance. It is a necessary condition for happiness.

Are you able to laugh at least once a day? Do small things make you smile? If not then you don’t seem to be happy. Do you give time to your family, go out with them, listen to your kids and share their experiences. Or are you just busy in things that might not matter in the long run.

Taking stress, being worried achieves almost nothing. If we need to complete a task we need to give it our maximum effort, however being stressed because of it eventually impacts the health. There are events in our life that are impactable i.e. our actions can impact the eventual result. On the other hand there are those where our actions will not impact the result. We could worry for the first, however most of us tend to take stress and worry for both kind of events.

Although we believe that we are responsible for all outcomes, in reality there are bigger forces at play. In the year 2004 at the time when the birth of my daughter was due, I and my guruji worked out her time of birth to the last minute and worked on it. We were successful in achieving the result as the doctor was very cooperative and managed it to the last minute. However in reality did we do it? The answer is no. There are bigger forces of the almighty at play who decides these events. Similarly sometime in the year 2002 a friend of mine, whose mother in law used to do some astrology, took out the time of birth for her granddaughter. Here the situation was a bit tricky as the horoscope of 8 am showed a perfectly healthy baby. However a one hour delay created a situation where the child could have a eye problem. As it happened the doctor agreed for the 8 am delivery. However at the last moment an emergency came up because of which the surgery got delayed. Unfortunately the child does have a problem with her eyes.

One of the major factors that creates discontentment in today’s materialistic world is a sense of underachievement. We tend to compare ourselves, on a continuous basis with our friends, peers and others. We might be doing better than 95% of others but create discontentment for not doing as well as the remaining 5%. We need to be mentally ready to deal with failures. If we try to do something we will invariably face failure at some stage or the other. However this is just part of our destiny we have to accept this and move ahead.

We need to manage our ego, achieve humility & respect the other person’s point of view. Our ego is our worst enemy as it slowly builds into a ghost like that in the story of “Vikram aur Betaal” where we just cannot get rid of the ghost. The other big source of unhappiness is our expectations from others. When we do something for someone we expect Newton’s Law to play out in terms of the action getting an equal reaction. This will never be true. There are always people who do more for others and in any relationship we cannot be evaluative at every stage as it will always bring discontentment.

Happiness is all about enjoying today as it is without worrying about what tomorrow will look like. Put aside all fears, jealousy, anger, worries & stress. All of these are going to get you nowhere. Be happy and enjoy life for what it is. Thank god for what he has given you do not curse him for what you do not  have. Go to temples, pilgrimages etc for peace of mind & not to ask god for the impossible. Internalize the fact that you will get what you are destined to get, nothing less and nothing more.

 

Iraq, Monsoons, Modi warning on hard decisions and beyond

The Modi Euphoria has given way to Iraq concerns over the last few days even as most strategists have turned positive on India and have upgraded their long term outlook for the Indian markets. This issue has also been impacted by the predictions of a below normal monsoon and the potential resultant impact on food inflation which has been in high double digits for the last few years. At this stage it is important to evaluate things in order to get a hang on the near term outlook.

Iraq tensions have come up suddenly, as did the Ukrainian crisis a few weeks ago. My view on Ukraine was very clear i.e. the impact on the markets was likely to be muted as it did not carry much of impact for the rest of the world. However Iraq is a different story altogether mainly due to its potential impact on crude oil prices which have remained elevated over the last several years despite extremely weak demand fundamentals. Today we have a scenario where most other global commodities like Iron Ore, Coal, Copper etc are trading near multiyear lows. Among major industrial commodities Crude Oil stands out due to the significant impact on crude prices due to unrest in the MENA region. Iraq is strategically important as it is supposed to be the country which will add the maximum to the additional supplies of crude oil over the next decade. A prolonged period of unrest in this country has severe implications for long term crude prices. Libya, which went through a transition couple of years back has seen periodic disruptions in oil production due to civil unrest in that country. The same thing could happen in Iraq. It will be important to watch the developments in that country.

The long term Brent futures curve indicates much lower prices 5 years down the line. However continual disruptions in Iraq and other oil producing countries in the Middle East could pose a risk to these projections. However the good part is that most other commodities are likely to remain muted for a prolonged period of time and could balance higher crude prices. Due to summers and this not being the peak demand season for oil products we should not see too much of spike up in prices from the current levels till August. However if the situation deteriorates we could see a $ 10 spike up which could be unsettling for the markets.

The other bogey in the bag is the Monsoons. Various prediction models have been projecting a below normal monsoon for a long period of time. These predictions have had two impacts. Firstly a lot of analysts have turned cautious on current year Economic Growth prospects due to predictions of a poor monsoon and the concurrent impact on food prices. Initial indications also point towards hoarding which could drive up food prices.

The good part is that the government is seized of the situation. Supply side augmentation and reducing post production losses is a longer term strategy. In the short run there is little that the government can do except to prevent sharp spikes. However, I am in the camp that actually believes that the El Nino threat is overblown. There are two major factors that impacts the Indian Monsoons are the Southern Oscillation Index (SOI) and the Indian Ocean Dipole (IOD). Both these indicators are actually pointing towards a normal monsoon and the SOI is actually indicating that the El Nino could be giving way to a La Nina. The IOD is also neutral at this stage.

On an overall basis the monsoons could go either way. How the situation is managed by the government will be interesting to see. There is need to set up a Monsoon monitoring committee in order to guide the farmers at this stage and also to track perishable food product prices so as to manage food inflation.

Narendra Modi has also talked of taking harsh measures in order to set the economy on the right path. The damage done to the economy by the last government is known to everyone. The good thing is that these harsh measures are likely to be stock market positive. Fiscal Prudence along with strong steps towards economic revival is important at this stage. Tax increases are extremely unlikely in a stagnating economy. The attention will be towards dealing with unproductive freebies.

The impact on the sentiments post the new government taking over are there for everyone to see. The actual ground impact will also become clearer over the next 3-4 months. I am optimistic on the direction that the government is taking and the growth outlook for the next 3 to 5 years looks quite encouraging. The key is to get over the initial period which has been hit by possibilities of higher crude oil prices as well as inflation spike induced by poor monsoons.

I have not yet revised my earlier December 2014 Nifty Target of 7654. I will wait till the second half of July to take a view on the rest of the year. Risks look balanced for the next 3 to 6 months at this stage. There are too many people on the sidelines waiting to come in on any sharp correction. This should limit downsides in the market. Any global correction will have its side effect on India too and that is also something we will need to watch out for around the end of the 3rd quarter/beginning of 4th quarter.

That said, there are huge stock specific opportunities available to be tapped and that is where investors should be focussed on.