Filter Out The Noise

I have stopped blogging over the last few months to be on the right side of SEBI's guidelines. Now, that there is some amount of clarity, atleast in my mind, I have decided to continue chronicling my thoughts once more. The only change is I will restrict myself from discussing specific stocks or valuations related to stocks. 

The last few months saw a tremendous amount of volatility. We have seen both 29000 and 25000 on the Sensex since April 2015. We have seen the Green drama, the unending US Fed rate hike soap opera keeps playing in the background every few months. We are also witnessing a human tragedy of great proportions in the Syrian refugee crisis. The run-up to the US elections has started and is likely to pick up momentum in the months to come.

Closer home, the Bihar polls are heating up. Lalu-Nitish-Modi are battling it out - or so the media would want us to believe. Hardik Patel wants reservations for the Patels in Gujarat. Monsoon session in Parliament did not achieve much, again as expected. Raghuram Rajan did not decrease rates.

So, where am I going with all this? I just want to highlight that all of this is noise. I sometimes go back and read old newspapers. I am yet to see an issue where there is no news printed. There is always something going on. As an investor it is critical to filter out the noise from the signal.

The signals which are important to me as an investor are the following:

1. Passing the GST bill - this has long term implications as it is a fundamental shift on the taxation front. This bill has been making for over a decade and we may be in the last lap of the marathon. 
2. Land Bill - After the Singur agitation, land acquisition all over India has become a non-starter. India needs a stable land acquisition policy so that industries can realistically acquire land for projects. The government does not seem to be making much headway on this.
3. Improvement in Corporate Results - Quarterly results in general have been quite dismal. Management of nearly all the companies' for which I have attended conference calls stated quite candidly that on the ground there is very little traction in the core sectors.

I am skeptical of a major impact of rate reduction that everyone is so keen on. I cannot think that a company will decide to invest in capacity expansion because interest rates are 0.5% down. We need some major projects in the infrastructure space either by the government or incentivized by the government through tax cuts to kick start the real economy.

In the meantime, filter out the noise and remember that in India, news channels are for entertainment ;-)

End of the "hope rally". Focus back on fundamentals.

Last month, India may have witnessed a watershed moment in its history. The reason I say may, is because, only time will tell if it really was such a moment, or it was another great opportunity lost. Expectedly the markets rallied as the results poured in. All the common reasons were offered - Modi has a single majority so he can fix all the problems of the economy, India will push forward with its reform agenda, industrialization and fix governance.

So, the "easy" money based on the hope of "acche din" played out. During the hope rally, everything that a "India development" story went up - mining, power, infra, cement - almost everything. A lot of the PE re-rating for mid caps took place. It removed the glaring cheapness of most of the "good" midcaps. 

With the obvious cheap stocks now becoming well priced, we are back to the grind of making money on the fundamental basis. So, it is critical to focus back on individual companies and how they can perform and grow in the next few years. 

It is obvious that there are no easy answers (from Modi or anyone) of India's challenges. Inflation is stubbornly high and so are subsidies. Any reduction in subsidies (oil, LPG, fertilizers, rail fare etc) without a commensurate increase in efficiency is likely to increase inflation even higher. There is no magic wand that the PM has to fix the Indian economy. Once people start realizing that, markets are likely to correct or stagnate at the very least. And provide an opportunity for patient investors to buy into. The trick is to be prepared with a buy list and cash when (& if) that happens.

Employment Guarantee Scheme - An Economic Disaster

Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) or better known as the Employment Guarantee Scheme has been running since the current UPA government came into power. The intention for this scheme is to to provide a minimum guarantee of work for Rs 100 a day. And the idea is to provide work which is required at a block or panchayat level. The idea is indeed noble. To provide (lets say distribute) income to the poorest of the poor. I will not get into the sociology or political angle of the program. My comment is however the economic and psychological aspect of this scheme and its devastating impact.

This largesse by the government, unfortunately, is being run by increasing India's current account deficit. In simple terms it means we as a nation spend more money than we earn in a year. The only way this can be done is by taking on additional debt. Again in simple terms, it means the government floats debt paper (fixed deposits) and the banks, institutions and the public buy it using their savings. Think PPF, NSC, KVP, Infrastructure bonds, T-bills etc.

This whole affair is not sustainable in the long run unless the country starts printing more paper currency thereby boosting inflation. And inflation, my friend, is the poison that kills slowly. Coming back to the employment guarantee scheme. The practice of giving away money  (Rs 10,000 = 100 days x Rs. 100) to people is never a good idea. I am saying giving away because India's corruption is institutionalized so I am more or less certain that very little actual work is happening to justify this expense (refer: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/28/MNVB13VKMC.DTL).


In such a scenario, there has been a multifaceted impact. Here are the main ones:-

1. Beneficiaries of this scheme are consuming more (primarily food) as they now have more disposable income resulting in spiraling food inflation.
2. Unavailability of unskilled labor for most industrial and real-estate work thus jacking up the cost of most labor intensive production processes.
3. Setting an extremely dangerous precedent for people that it is their right to get paid without having to work for it. This is another subtler version of the subsidy scheme and very very difficult for successive governments to remove and attract the "anti-people" tagging.

Points 1 and 2 are, to my mind, what is actually causing the high inflation numbers we are seeing. Tinkering with monetary policy by the FinMin and RBI is unlikely to help as it does not address the core of the problem. Point 3 is not easy to demonstrate but is likely to have the most adverse impact over a longer term.

As a populist policy, this will probably win some votes but economically it is bringing the country a bit more closer to disaster!