An extremely efficient auction of telecom spectrum brought out so many evils in the Indian economy that I now wonder how shaky foundation is our nation built on.
First the facts - Inspired by other nations who made a fortune from 3G auction, our government hired lazard to conduct the prized auction in similar fashion. The big hope was to generate 35,000 cr so as to fund the bloated expenditure bill of government. The auction collected 105,000 cr as Bharti.Vodafone Tata and Reliance fought the battle for exclusivity.
Consequences -
1. This was the genesis of 2G scam. The revenue department quickly realized that the license fee that it got for 2g was a mere pittance. With this realization, parliament stopped functioning, ministers head begin to roll and skeletons began popping out of closet. The political turmoil that followed was no great news for stock markets.
2. This sucked the life out of banking system. It took some months for banks to realize that it truly was a lethal blow and then they began pulling all levers raising all rates frantically. Meanwhile the lifeguard of monetary policies, RBI, was tightening at snail's pace.
Tuesday, 28 December 2010
Wednesday, 22 December 2010
Crystal Gazing 2011 - India
Let's go a bit detail on India. I would focus as much on markets as I intend to do on overall economy. They are distinct in a way that markets tend to become the lead indicator of economic expansion and lagged indicator to a crisis. Call it positive convexity
1. The economy is poised to run full throttle as consumers and businesses race against each other to create demand and enhance supply respectively. The outcome of this race at various stages, will decide the course of inflation. Going by the tradition of conservative capacity expansion by domestic buinesses, I believe, demand would usurp supply for atleast few more years keeping inflationary outlook uncomfortable. The supply constrained economy of ours has been feeding two monsters since long time 1) current account deficit and 2) fiscal deficit, as they help in augmenting domestic supply, one directly and other indirectly. While a robust growth in economy would reduce the relative size of these external sources, there is a risk that they too grow at a same clip or higher. Since the solution to trade gap lies only in building manufacturing and technological capabilities within the country, there is really no solution in the short term. The fiscal situation is also not rosy given that the recent shellacking of ruling party will likely keep them populist and extravagant. So my guess is that both these deficits will remain high, one out of choice other by compulsion. Few enablers that may prevent the deficit problem from spiralling out are 1) fuel price deregulation and 2) tightening of monetary conditions. In absence of global shocks, Indian economy will try to seek its goldilocks condition where there is less of firefighting and policy uncertainty going forward. My view is 2011 is not going to be that year, but 2012 could be.
Broadly my sense is monetary tightening and high commodity prices will prevent the economy from overheating, but we may still clock a 9% growth next year.
2. Its increasingly being feared that the money from emerging markets will find its way to developed markets, as relative attractiveness of those markets increase. This is the new theme which strategists are clinging on to because of its intuitive appeal. I feel enticed to reject it outrightly, but out of modesty, I believe that the reasoning is quite flawed. Equity markets do not have to worry as long as money find its way to some other equity market and not towards USTs. As long as risk appetite is there, emerging markets provide very useful diversification and will continue to see incremental flows. Put it simply - if dow goes up nifty will not go down, it doesn't happen that ways. But at the same time I have no notion of immediate gains in Indian equity market as well. The scam season, tight liquidity, rising rates and rising costs will keep the markets on toes for atleast another 2-3 month. The risk on short side, however, is that all these problems may end all at once or so it may appear. And if earnings keep the pace, market will just reset to factor in even better 2012 earnings.
So my guess is we may see a 500-800 point surge at somepoint during this year, leading to an all time high on Nifty, and therefore every dip for me is a buying opportunity. For bond markets, I believe there is going to be a demand drought for a really long time as banks are invested neck deep even while SLR requirement are being reduced. The bond market is on RBI life support (read OMO) , and may tank once the support is withdrawn.
Happy Investing !!!
1. The economy is poised to run full throttle as consumers and businesses race against each other to create demand and enhance supply respectively. The outcome of this race at various stages, will decide the course of inflation. Going by the tradition of conservative capacity expansion by domestic buinesses, I believe, demand would usurp supply for atleast few more years keeping inflationary outlook uncomfortable. The supply constrained economy of ours has been feeding two monsters since long time 1) current account deficit and 2) fiscal deficit, as they help in augmenting domestic supply, one directly and other indirectly. While a robust growth in economy would reduce the relative size of these external sources, there is a risk that they too grow at a same clip or higher. Since the solution to trade gap lies only in building manufacturing and technological capabilities within the country, there is really no solution in the short term. The fiscal situation is also not rosy given that the recent shellacking of ruling party will likely keep them populist and extravagant. So my guess is that both these deficits will remain high, one out of choice other by compulsion. Few enablers that may prevent the deficit problem from spiralling out are 1) fuel price deregulation and 2) tightening of monetary conditions. In absence of global shocks, Indian economy will try to seek its goldilocks condition where there is less of firefighting and policy uncertainty going forward. My view is 2011 is not going to be that year, but 2012 could be.
Broadly my sense is monetary tightening and high commodity prices will prevent the economy from overheating, but we may still clock a 9% growth next year.
2. Its increasingly being feared that the money from emerging markets will find its way to developed markets, as relative attractiveness of those markets increase. This is the new theme which strategists are clinging on to because of its intuitive appeal. I feel enticed to reject it outrightly, but out of modesty, I believe that the reasoning is quite flawed. Equity markets do not have to worry as long as money find its way to some other equity market and not towards USTs. As long as risk appetite is there, emerging markets provide very useful diversification and will continue to see incremental flows. Put it simply - if dow goes up nifty will not go down, it doesn't happen that ways. But at the same time I have no notion of immediate gains in Indian equity market as well. The scam season, tight liquidity, rising rates and rising costs will keep the markets on toes for atleast another 2-3 month. The risk on short side, however, is that all these problems may end all at once or so it may appear. And if earnings keep the pace, market will just reset to factor in even better 2012 earnings.
So my guess is we may see a 500-800 point surge at somepoint during this year, leading to an all time high on Nifty, and therefore every dip for me is a buying opportunity. For bond markets, I believe there is going to be a demand drought for a really long time as banks are invested neck deep even while SLR requirement are being reduced. The bond market is on RBI life support (read OMO) , and may tank once the support is withdrawn.
Happy Investing !!!
Tuesday, 21 December 2010
Aisa Outlook 2011
Several of them already in, more to follow. Will be adding to this post the different views:
1. Good discussion at MoneyControl with Jonathan Garner, chief Asian and emerging market equity strategist at Morgan Stanley :
1. Good discussion at MoneyControl with Jonathan Garner, chief Asian and emerging market equity strategist at Morgan Stanley :
The bigger story is not so much funds flow between different countries in Asia and emerging markets as maybe funds flow that could be heading out of Asia and emerging markets, back into the developed markets, particularly the United States where we are now expecting a 4% GDP growth next year
India, he says, is more vulnerable to higher deficit and, therefore, he has turned underweight from equalweight on India. Garner says corporate governance is the key reason for the recent contraction in prices. Hence, most FIIs are concerned about the price contraction in India. He also adds that higher crude prices are a headwind for emerging markets and he sees a divergence in demand growth within energy and materials.
Their sector view: We like sectors in markets that are more oriented towards the US. So the tech sector certainly has some positive features in that regard. We are also looking heavily at the mid to late cycle sector outperformers which in rising inflation and rate environments tends to be energy and materials. Upstream energy names particularly, in oil and coal. Those are areas that we like across Asia
2. CLSA expects Indian markets to decline in 2011: The money apparently is going away from emerging markets to the US. Russell Napier, Strategist, CLSA in an exclusive interview with CNBC-TV18 says, he sees more upside in the US markets.Napier further said he was cautious on emerging markets asset prices. “The authorities in the EM will be watching like a hawk for asset prices inflation and trying to keep that in an orderly fashion. As equity investor, that’s the real reason for caution rather than just inflation per se.”
3. ET Now intereviews DSP Blackrock: http://economictimes.indiatimes.com/opinion/interviews/banking-stocks-to-lead-the-rally-overweight-on-pharma-anup-maheshwari/articleshow/7149786.cms?curpg=1
India suffering from policy paralysis at this point , important that that solves itself early into the year.
The budget is not as important an event as the fact that it should just go through relatively smoothly.
Apart from that, things like the macro headwinds on oil prices, interest rates, inflation etc.
Top 2 Themes for 2011:
- Capex: very interesting with cycle in the later stage of investment. Capital goods space.
- Media: Some degree of deregulation may help, people particularly in the distribution space and media. Albeit a very small one.
- Power: Huge macro headwinds - environment, fuel supply, coal, pricing power, Not the healthiest. Good overall for the economybut may not be as robust for growth.
- Pharma: Good long term defensive sector with a fair degree of growth attached to it, so makes sense to stay invested with high quality names.
more to come
Saturday, 18 December 2010
Strategy: HYP
Just saw a video which talks about a Stephen Bland’s HYP stragety (quite popular supposedly):
http://www.fsponline-recommends.co.uk/page.aspx?u=dvlvid1&tc=LDVLLC01&PromotionID=2147067369&
While everybody today is talking about churning out million trades a minute through their high frequency low latency systems, the author reiterates a long term approach to investments which focuses not on capital appreciation but on income yield, sort of creating your own pension stream. He bascially says don’t worry about capital appreciation, invest in stocks focusing on the yield, any capital growth that happens is an icing on top. Stocks with good dividend yields not only provide an income stream, but are also less volatile and less suseptible to crash in bear markets, and for these same reasons, do even better in bul markets.
I found the HYP strategy even more interesting given how low the yield environment is currently. It’s also obvious how a strategy like this will not be recommended usually by brokers, because HYP means very little churn, translating into very little brokerage for the broker. Makes sense.
Here is the stagey in a nutshell – Create a diversified portfolio of 15-20 shares over a period of time (say adding one per month, jus to make sure you don’t catch the market at any peak valuation) with no intention to sell and primary focus on income. While selecting the stocks, observe these points:
• See if they can sustain the dividend through various businesses
• If they are not paying dividend to mask deeper problems
• Can sustain market conditions - diversify
A simple way to observe the above points is as follows:
• Buy big caps - they are safer
• Check the dividend history – has to be a good track record for many years over
• No debt – stay away from companies with high leverage
• Sector diversification – diversify, because if this portfolio is your source of income, then it has to withstand different market cycles
• Strategic ignorance - something am missing here.
• Reinvest the dividends – while the dividend is the really an auxiliary income, part of it reinvested can only add to the yield
Clearly this is not for kicks, idea is to put in the money and forget it. Ignore the news, ignore the prices and ignore the temptation to sell unless there is a very strong reason (need cash, there is a better investment, etc)
http://www.fsponline-recommends.co.uk/page.aspx?u=dvlvid1&tc=LDVLLC01&PromotionID=2147067369&
While everybody today is talking about churning out million trades a minute through their high frequency low latency systems, the author reiterates a long term approach to investments which focuses not on capital appreciation but on income yield, sort of creating your own pension stream. He bascially says don’t worry about capital appreciation, invest in stocks focusing on the yield, any capital growth that happens is an icing on top. Stocks with good dividend yields not only provide an income stream, but are also less volatile and less suseptible to crash in bear markets, and for these same reasons, do even better in bul markets.
I found the HYP strategy even more interesting given how low the yield environment is currently. It’s also obvious how a strategy like this will not be recommended usually by brokers, because HYP means very little churn, translating into very little brokerage for the broker. Makes sense.
Here is the stagey in a nutshell – Create a diversified portfolio of 15-20 shares over a period of time (say adding one per month, jus to make sure you don’t catch the market at any peak valuation) with no intention to sell and primary focus on income. While selecting the stocks, observe these points:
• See if they can sustain the dividend through various businesses
• If they are not paying dividend to mask deeper problems
• Can sustain market conditions - diversify
A simple way to observe the above points is as follows:
• Buy big caps - they are safer
• Check the dividend history – has to be a good track record for many years over
• No debt – stay away from companies with high leverage
• Sector diversification – diversify, because if this portfolio is your source of income, then it has to withstand different market cycles
• Strategic ignorance - something am missing here.
• Reinvest the dividends – while the dividend is the really an auxiliary income, part of it reinvested can only add to the yield
Clearly this is not for kicks, idea is to put in the money and forget it. Ignore the news, ignore the prices and ignore the temptation to sell unless there is a very strong reason (need cash, there is a better investment, etc)
Tuesday, 14 December 2010
Crystal Gazing 2011
US Economy should register above normal growth in 2011, with the backdoor fiscal stimulus (read extension of bush tax cut) and monetary stimulus (QE2) encouraging above par spending and investments on the ground. The improving economic outlook and rising business confidence will trigger risk taking and robust hiring by corporates, and therefore would take care of employment situation slowly. However, housing market will remain one big drag for the economy. Overall, the year 2011 in US will be the year of reckoning for the main street but not so much for wall street.
European Economy will continue to languish with high likelihood of sovereign default risk spilling over to portugal and/or spain. The order of Europe has become rigidly hierarchial and may cause political unrest anytime. Overall european growth will be bumpy and noisy.
The fast growth of Asian Economies is mainly due to the yawning gap in GDP per capita that exists between developed countries and the emerging countries (euphemism for poor countries). Since the gap is not filling any time soon, Asian tigers may continue to roar next year also. The risk of flare up in commodity prices, which China may once again be found fanning rather than dousing , may act as a speed braker for Asia. Overall we should not expect any major surprise from Asia other than what possibly could come from Korean peninsula.
Up next, India
European Economy will continue to languish with high likelihood of sovereign default risk spilling over to portugal and/or spain. The order of Europe has become rigidly hierarchial and may cause political unrest anytime. Overall european growth will be bumpy and noisy.
The fast growth of Asian Economies is mainly due to the yawning gap in GDP per capita that exists between developed countries and the emerging countries (euphemism for poor countries). Since the gap is not filling any time soon, Asian tigers may continue to roar next year also. The risk of flare up in commodity prices, which China may once again be found fanning rather than dousing , may act as a speed braker for Asia. Overall we should not expect any major surprise from Asia other than what possibly could come from Korean peninsula.
Up next, India
Thursday, 9 December 2010
Strategy: Pure momentum play
- Compare the total no of volume price gainer and loser for the day -a 70/30 skew is the direction – which although is only partially important
- Classify the gainer loser stocks in sector buckets – any sector with many entries will give the market bias for that sector
- Pick the sector which has a bias, then pick top 3 stocks in that sector
- Take position in line with the bias next day, limiting going in price to current days high or low depending on whether the position is long or short.
- Overall long and short (may) be dollar neutral.
- Need to understand if it makes sense to put a cap on the no of holding days, say 3.
- Doesn’t matter if a stock is looking cheap on PE etc
- Doesn’t matter how much the stock has gone up or down
- Even if the stock has gained a lot, don’t short even if the price volume says so if the sector bias is not short
- Even if the stock has fallen a lot, don’t buy even if the price volume says so if the sector bias is not long
- Don’t fight momentum, let the correction begin, which establishes the low or the high
- Rules above are easy to write down, but very hard to follow
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