Corporate Debt:33% find it difficult to repay

Ask anyone how they would avoid investing in a leveraged company. Chances are that nine times out of ten, you would be advised to look at the company's debt to equity ratio. If it is within safety limits, the firm can be considered as a good candidate for investing. What doesn't get analysed often is the issue of liquidity. For if the company has built long term assets with relatively shorter term funding, there is a risk that the company may run into cash flow problems if the old debt is not refinanced. Alternatively, if the assets don't start generating revenues soon enough, even then the company could run into trouble. 

The Economic Times reports how it is this latter issue that is giving lenders and borrowers sleepless nights these days. Sample this. As on September 2013, listed companies had total borrowings to the tune of Rs 24 trillion. And out of this, a whopping one third was with companies where interest costs exceeded the operating profits earned during the quarter! And the problem, as highlighted earlier, is not that of solvency but mostly of liquidity. In other words, thirty year assets were built with 10-year money with the borrower expecting money from the eighth year onwards. Well, the indebted companies will have to quickly offload other assets or somehow find new sources of funding to replace old debt. If not, we could well be staring at a crisis of huge proportions. 

Going by this parameter stocks are not expensive

That Foreign institutional investors (FIIs) are interested in Indian stocks is not something new. The fact that their stakes in large Indian companies have increased over the past few quarters is something that proves this point. On the other hand, the actions taken by domestic institutional investors (DIIs) are quite the opposite. In the year till date, their net outflows stood at over Rs 732 bn. As per the Business Standard, this is probably the highest sold by such institutions in about 9 years; data prior to 2004 is not available. The earlier record was about Rs 570 bn in 2012. On the other hand, the net inflow by FIIs stood at Rs 1 trillion during the year. This is their third highest figure of such inflows reported in a year. 

One may argue that redemption pressures, which may have led to a situation of net outflows by DIIs, must be taken into consideration here. Not to forget the outperformance of other asset classes, coupled with profit booking (with the BSE-Sensex touching its highest levels recently) as reasons for investors pulling their money out of stocks. 

I believe this should ideally be the situation that investors should be taking when the markets seem overheated. Sure, the markets have touched new highs, but does that mean they are expensive? 

Warren Buffett is of the belief that the best single measure for gauging the attractiveness of stocks in an economy is the 'total market capitalisation to GDP ratio'. The lower it is the, more attractive the stocks are in that market. The higher it is, the more expensive they are. 

If one were to view valuations by this parameter, stocks look anything but expensive at the moment. At the end of FY08, the figure stood at about 106%, which indicated an overheated situation. Post the market decline, the figure fell close to 55% levels at the end of FY09. Going by the chart below, valuations picked up quickly thereafter. However, in recent years the ratio has moved lower. As of a couple of days ago, India's market cap to GDP ratio stood at about 64%, which is pretty much close to its thirteen year average. 

Going by this parameter, stocks are not expensive

* As of December 23, 2013; It may be noted that the business daily has estimated the FY14 nominal GDP growth rate to be 12% (5% growth + 7% inflation).

What does this suggest? A short answer would be that one can consider investing in stocks at the moment. 

But when one views valuations of the different indices, it paints a slightly different picture - for the blue chips mainly that is! The BSE-Sensex trades at a multiple of about 17.8 times its trailing twelve month earnings, which is slightly above its long term average. Comparing this to the BSE-500 index, which comprises of the large cap companies in India, valuations are lower at about 15 times. Now, considering that the bluest of blue chip companies form a significant portion of this list of 500 companies - in terms of market capitalisation - it would be fair to assume that the collective valuation for the balance large cap companies would be much lower.

Also, if one looks at the smaller companies, i.e. stocks forming part of the BSE-Midcap and BSE-Small cap indices, they seem all the more attractive. Given the volatile earnings reported by them in the past few quarters, looking at these companies on a P/E basis may show a distorted picture. But when seen on a price to book value basis, stocks forming part of these indices collectively seem attractive. The price to book values of the BSE-Midcap and BSE-Smallcap indices stand at about 0.67 and 1 times respectively. These are much lower than their long term averages and attractive when gauged in isolation as well. 

Considering the last five year period was one of the most challenging phases for companies, it would be relatively easy to identify the ones that have done well or those that have done much better than their peers. Investors would do well to identify such companies for investment opportunities, especially considering that the markets are not seemingly expensive at the moment. 

Do you think that property prices will come down only when corruption from the real estate sector is eliminated? Let me know your comments

New highs 2008 and 2013 what was there and whats here

Something strange is happening in the Indian stock markets these days. The markets are flirting with new highs, close to the levels seen in 2008. Unfortunately, there is nothing more to the nostalgia. In 2008, the gain in the markets was supported by high growth in the Indian economy. At an enviable growth rate of around 9%, the economic growth rate was around all time high. India then had a strong claim to become Asian power house and seemed like a safe bet for an investment. Coming back to the present, disconnect between the Indian economy and Sensex could not be starker. The GDP growth rate is crawling at around 5%. Even as there is hardly any optimism about the future prospects of the economy; the markets are touching new highs. Ironically, the driving force behind the rally is also one of the key concerns in the Indian economy. The weakness in the domestic currency and hence the benefits accruing to Indian exporters is a key factor that has pulled foreign money t o the stock markets. This is obvious from the fact that stocks of the companies whose business is linked to Indian economy is languishing in the red while stocks in the sectors such as IT and pharma are finding huge favour. 

However, the rally that is unlikely to last long. The first factor that will have an immediate impact will be Fed tapering. Indian economy is already out of favour as far as macroeconomic environment is concerned. There is hardly any internal catalyst with regards to reforms. Hence, it is just a matter of time when Sensex will start reflecting the ground realities. As such, the investors should not get carried away by the current trends and invest only in the stocks with robust fundamentals and attractive valuations.

Asset quality at PSU Banks

The asset quality of public sector banks (PSUs) has been deteriorating assets (NPAs) are steadily increasing. Unscrupulous lending and concentration of loans to big borrowers is the primary reason for increasing slippages. Recently, the All India Bank Employee's Association (AIBEA) released the list of top 50 defaulters who have not repaid their bank loans. Collectively, they owe about Rs 405 bn to the PSU banks (except SBI). Vijay Mallya's Kingfisher Airlines tops the list with a sum of Rs 26.7 bn. It is followed by Winsome Diamond and others as can be seen in today's chart. 

The most worrying factor about rising NPAs in PSU banks is that they have increased due to weak credit administration and not due to financial crunch resulting from global crisis. These are ominous signs for PSU banks. It indicates that their lending practices were inadequate and proper credit checks were not conducted before loaning out money. But the steps taken by these banks once slippages have occurred are even more worrying. Most banks are undertaking write offs rather than indulging in loan recovery. This indicates laxity in efforts on their behalf to recover money. 

The warry road ahead

In FY13, India's fiscal deficit was at 4.8% of GDP. And the finance minister has given assurance that in FY14, the government will be able to rein in the deficit through various austerity measures. However, considering the huge subsidy bill and falling tax receipts reining in the deficit appears difficult. Yet the government is confident of doing it without even raising its borrowing programme. 

Now, the primary reason for cause of increasing fiscal deficit is subsidy burden. And fuel subsidy is one of them. So, the obvious way to conceal the actual deficit number is to manage fuel subsidies. In the past, the government resorted to rampant issuing of special securities called oil bonds to oil marketing companies (OMCs). This was to ensure that the burden does not reflect on its own balance sheet. Although the practice has been discontinued and the PSU oil companies are now paid in cash, the oil bonds still appear in the balance sheets of OMCs suggesting that Government still has a huge liability to take care of. 

Further, seems like the practice of camouflaging subsidies is here to stay. It is not just oil bonds but several other 'special securities' that have helped the government book up the fiscal deficit number until recently. As per an article on Firstpost, currently special securities worth Rs 2 trillion are outstanding! 

Rest assured that oil bonds are not the only culprits. Let us now look at how fertilizer subsidy is being managed through special arrangements. In order to fund fertilizer subsidies, the government makes an arrangement with PSU banks. These banks make payment to fertilizer companies for subsidies that are due. On a later date, government makes the payment to PSU banks. This effectively means that PSU banks are financing the fertilizer subsidy! Yet another example relating to off balance sheet funding. 

We wonder what kind of arrangement government is likely to make in order to finance huge food subsidy burden post the enactment of the Food Security Bill. 

It is therefore evident that the special securities have allowed the government to rein the deficit within its targeted number. Actual deficit though is much higher. Such arrangements may keep India's economic data temporarily healthy. But it is only a matter of time before our vulnerability becomes evident. Investors therefore have every reason to be circumspect of the veracity of economic data, both global and domestic, and keep their portfolio resilient to the worst case scenario. 

Do you believe India's fiscal deficit numbers are authentic? Let me know your comments

Some news for retail investors

Retail investors have been pulling out of the Indian stock markets. Is it only because of the subdued economic condition that has impacted corporate earnings, and in turn, the stock prices? We believe this is not the only reason. Another major reason for the investors' wariness towards stocks has been due to mistrust of corporates. Investors have lost heavily by investing in companies with poor corporate governance, fraudulent behaviour, corruption, etc. Many promoters are also known to take decisions that may be detrimental to the interests of minority shareholders. 

This seems to have worried the Securities and Exchange Board of India (SEBI). As a result, the market regulator has been trying to tighten norms to bring in more transparency in corporate dealings and to ensure protection of investors against malpractices. Here is one such move that the SEBI seems to be considering. 

As per an article in The Economic Times, companies may now have to seek the approval of shareholders if they plan to divest stake in major subsidiaries. As such, companies may be mandated to disclose the financial performance of their subsidiaries, benefits from sale, consideration amount and the names of the parties involved. In addition, the market regulator also plans to mandate companies to disclose their policies on related-party transactions. If such steps are initiated and implemented correctly, we believe it will go a long way in reviving the trust of retail investors. 

Infrastructure Bottlenecks

Ask any well meaning expert the biggest problem that India faces towards its journey to higher growth. 9 times out of 10, they are likely to use the word infrastructure. Indeed, it is the sorry state of the infrastructure in the country that is not allowing us to become more productive. However, it has recently come to light that infrastructure is affecting country's growth prospects in an indirect manner too. In fact, the damage here could be as large as its direct repercussions on the economy. LiveMint reports how NPA crises that most PSU banks in India face are a result of the collapse of the infrastructure boom of the past decade. 

Clearly, no other sector has hurt the finances of the banking industry as much as the bad loans from the infra space. Agreed that on account of delays, a lot of infra projects find themselves with no revenue generation options. However, there is too much concentration of loans among just a few large firms. Besides, the banks most affected have mostly been PSU banks. This raises doubts about the existence of under hand deals and palm greasing in disbursing infra loans. Having said that, the importance of infrastructure development cannot be emphasised enough. And therefore, an effective lending mechanism for the sector will have to be given a serious thought. However, any mechanism will not be able to stay profitable unless Government eases up bottle necks to infra development. 

Crony Capitalism

Nothing seems to be going well for the Indian economy these days. The economy has been hit hard by a slew of scams in the last few years. And it looks like it will be a long time before the dust starts settling. Yet another skeleton has come out of the closet in the coal scam case. As per an article in Indian Express, the Central Bureau of Investigation (CBI)while probing the coal blocks allotment scam has recovered a diary from the offices of the Aditya Birla Group that could be a cause of embarrassment for many. The diary lists around 1000 payments made to politicians across parties over a period of 10 years by a Birla company. While this sounds shady enough, what makes it murkier is that the payments coincided with Lok Sabha and several state assembly elections. Further, the CBI has claimed to have found unaccounted cash worth Rs 25 crore at Hindalco office. Ironically, the events that could taint the reputation of Aditya Birla Group Chairman Mr. Kumar Mangalam Birla have come around the same time when he has been chosen as the Business Leader for the year 2013 by a reputed financial daily. 

The only positive we can look at in the whole matter is that the issue is being now probed and brought to public knowledge. While it is yet to be established whether the management has been involved in the wrong doing, this is just another reminder of the shady nexus between big corporate houses and politicians. Such endemic crony capitalism has caused immense harm to the economy and investment climate in the country. The corrupt politicians and corporates have found out a win-win way to feed their respective ambitions. The large corporate houses shell out huge money to fund elections. In return, they seek high return on investment in the form of preferential treatment while carrying out business activities, irrespective of their competence in the latter. It's a win-win deal for both with the least regard for the critical resources in the country and the interests of the Indian economy. This is indeed no way to run either a business or the Government. 

The unrestrained greed of corporates and politicians has led to a breeding ground for corruption in the country. Already the country is out of favour as far as macro economic environment is concerned. On top of that, such events strike fresh blows to investor sentiments. No wonder that overall trust level on Indian corporate is declining. 

We believe that investors have an important lesson to learn from such incidents. That is, not to get carried away by big names but choose the companies with robust fundamentals, management integrity and sound corporate governance practices. 

Do you think the shady nexus between large Indian corporate and the Government is a huge threat to the Indian economy? Let me know yourcomments

All aset classes are over valued: FABER

This gentleman has quite a reputation in calling doom scenarios. In fact, being the publisher of "The Gloom Boom & Doom Report", Dr Doom Marc Faber takes his nick name quite seriously. In a recent interview with Equitymaster, he had highlighted why investors should prepare for the worst. But this time, in an interview with CNBC he has actually gone to name several commodities that according to him are in bubble territory. Surprisingly, one of them is his favourite, 'farmlands'. Faber has earlier citied significant upside in the price of agricultural commodities in the long run. This was primarily based on demand -supply gap with falling size of farmlands. However in the latest interview, he pointe d out that prices of farmlands a re up 10 times in 10 years. Moreover, in addition to stocks and commodities, even assets like bitcoins that were unheard of until few years back are in bubble territory. Thus, Faber believes that until the Fed stops printing money, more and more assets will have irrational valuations.

"I'd abolish the Federal Reserve, and then I'd resign." --- Jim Rogers

Time and again I have voiced my criticism about the US Federal Reserve's reckless monetary policies. I believe that the massive QE gamble that the central bank is experimenting with is going to have dire consequences in the long term. 

Renowned global investor and commodity expert Jim Rogers is known for his no holds barred approach when taking on policymakers. In a recent interview Rogers was asked what he'd do if he was made the chairman of the central bank. This is what he said: "I'd abolish the Federal Reserve, and then I'd resign." 

As per him, economies across the world have managed to survive even when there were no central banks. Of the three central banks that America had in its entire history, two had disappeared. Rogers is of the view that the US Fed too will disappear someday due to its self-destructive policies. 

We do agree with Rogers on his concerns about the US Fed. However, not all central banks are useless, especially the one we have back at home. The Reserve Bank of India is highly regarded for its conservatism.

Inflation some more

Inflation in India has been high for quite some time now. More so for the common man who has seen higher prices of items, especially food, burn a hole in his pockets. Despite some lean years on account of poor monsoons, large part of the food inflation has largely been due to several supply side issues. Lack of good infrastructure, inadequate storage facilities and the overall apathy of the government in fixing this has been the problem. Plus, it is also running on huge fiscal and current account deficits. The RBI on its part has been raising interest rates to bring inflation under control. But this has not really had the desired effect. Rather it has only made matters worse at a time when economic growth has also slowed down. The UPA has always been an advocate of the common man. One would have thought that from a political point at least it would do something to ease the pressure off the people. And yet it has not shown much initiative in this regard. This is something that seems to have now caught the attention of the Finance Minister Chidambaram. He recently stated that the UPA will pay a high political price if it does not tackle the problem of inflation. Now it appears that this may be a little too late. 

Points to ponder

Stock price movements are generally governed by future expectations. If you look at the BSE Capital Goods index, it has gone up 36.1% over the last three months. Compared to that, the BSE Sensex has gone up just 10.3% during this period. 

Now, the financial performance of capital goods companies are directly linked to the investment cycle in the economy. And the investment cycle is again a function of the overall demand, interest rates and so on. So are investors hoping for a revival in the economy after the new government takes over post the 2014 general elections? As per an article in Financial Express, investors are looking forward to a new government that is business-friendly. 

In my view, this is an extremely flawed approach to investing. I have highlighted earlier that a change of government alone cannot solve India's problems. All it could do is lift sentiments in the short run. On the fundamental side, we don't see any immediate revival in the investment cycle. The economy continues to remain subdued. Inflation is still very high to facilitate any easing of the interest rates. So do take into account these factors before falling prey to sentiment-driven investing.

60:40 or rule of thumb or global gyan

As a rule of thumb, investment advisors and wealth managers say that an ideal portfolio allocation should be 60:40. This means that 60% of the portfolio should be in equities and the balance 40% in bonds. However Burton Malkiel, author of a book on investing called A Random Walk Down Wall Street, stated that investors following this rule would be "badly hurt". The reason is the change in scenario. 

You see when the rule was written, bond yields were higher and interest rates were not close to zero in the US. The US had not started printing money and things were different. But now a lot has changed. And this change necessitates a change in asset allocation as well. The one size fits all idea no longer holds. This is something we agree with too. Just because one allocation strategy works for one person, does not necessarily mean it would be equally beneficial for another person. Each individual is different so an asset allocation plan will differ from person to person based on his or her personality traits, age, risk taking capacity and the ultimate investment objective in mind. One cannot take a 'one size fits all' approach. 

If Bill (Gates) is listening to him then we should also

Vaclav Smil. Chances are most of you are hearing this name for the first time. This should not take anything away from his reputation as a very good writer though. In fact, Bill Gates, the richest man in the world for many years now, seems to swear by Smil's books. Wired.com quotes Bill Gates as saying 'There is no author whose books I look forward to more than Vaclav Smil'. 

Well, given the rate at which he comes out with new books, Gates doesn't have to wait too long we reckon. This year alone, three of Smil's books have hit the stands. Ask him about his modus operandi and Smil retorts he has a habit of scanning all horizons. In other words, most people know everything about one thing while he tries to grasp the basic essence of everything. 

Well, enough of the man. Let's try and listen to some of the advice he dished out in plenty in a recent interview. There was this one in particular that left a deep impression on us. And we believe it perfectly summed up the current political and economic environment in the country. 

Smil is of the view that a country that stops manufacturing falls apart. Simply because manufacturing builds the lower middle class in a society. And if you give up manufacturing, there is huge income inequality to contend with which then gives rise to the total extinction of the lower middle class. And what remains is extreme polarisation. 

Well, with the quality and the quantity of population that we have, India should already have been a manufacturing powerhouse. However, the reality is anything but this. So far, we have totally squandered away the population edge that we have. Things have come to such a pass that items like ganesh idols and rakhis can't be manufactured competitively despite the low value add involved and abundance of cheap labour. Thus, what has remained is the extreme capital intensive businesses at one end of the spectrum and a huge unorganised and a parallel economy on the other. 

The policies that could lead to promotion and growth of labour intensive and lower-middle class creating ventures are totally absent. Not just that, whatever little is left of the organised economy is also being systematically taken away by high inflation and taxes. Is it any wonder that the economy that was growing at well over 8% till about a few years back is now literally huffing and puffing its way to the 5% mark. And if things are not sorted out soon enough, even this growth will be hard to come by. 

Do you think the root cause of India's problems is because of the poor state of its manufacturing? Let me know your comments

ARE WE SUFFERRING

2006 to 2008 was a boom period for Asian majors China and India - although things started taking a turn for the worse towards the end of this period. Majority of people would have not expected things to turn out the way they did. The eruption of the global economic crisis has pretty much put the brakes on the growth levels of these - then seemingly slowdown defying economies - quite strongly. 

Today, growth rates in these countries have reduced significantly, to more than half (from peak level) in India's case. And things are expected to slowdown going by some of the recent predictions that are making rounds. Clubbing this with the many problems India has been facing and it seems to paint a grim picture. In fact, things are so grim that the negative developments seem to have made Indians to be amongst the most 'suffering' people on this planet. 

As per a survey done by Gallup, the South Asian region - which largely constitutes of India - has seen the largest increase in terms of people suffering. The average number of people suffering in the country has more than doubled to about 25% during the 2010 to 2012 period from 10% in 2006 to 2008. On an overall level, India ranked fourth in terms of sharpest change in suffering between these two periods. 

The survey was carried out by asking respondents to classify their current and future lives from 0 to 10. Any rating below 4 would be termed as 'suffering', with the other two classifications being 'thriving' and 'struggling'. 

Whether this survey should be taken with a pinch of salt is something that would be difficult to comment on. But, we believe it does signify the high frustration levels of Indians. The past few years have been difficult. Difficult because of many factors. First and primarily being the high inflation level, which have pretty much increased the price of nearly everything! Be it basic necessities, food or energy. To add to that, the weak currency has made matters worse! Not to forget the unaffordable housing prices leaving most to extend their dreams of buying and owning a home and improving their lives. To add to that, the many episodes of scams along with the low business confidence levels are also aspects that have added to the frustration. 

We are living amidst difficult times. And the way things are going, it seems we will continue to do so for a while. What is the approach an investor must take? The right asset allocation, we believe. Investing through troubled times should be done with care. Investments into relatively risky assets should be done only after keeping aside enough for one's short to medium term requirements. 

Do you believe Indians to be the most suffering people on this planet? Let me know your comments

Some more on QE

The US Fed had thrown open the doors of its money printing exercise around 5 years ago with its quantitative easing (QE) programs. Over these 5 years, several other developed countries decided to adopt the same policy. The result is that the global financial system is flooded with cheap money. And has all this money really helped the printing countries take care of their troubles? Not really. But the critics who thought that this money would only lead to inflation in the issuing countries were proved wrong as well. These countries especially US have not seen consumer inflation go up either. 

So where has all this money gone? And what has it really accomplished?Well it has led to inflation but just not where it was expected to. The cheap money has found its way into emerging markets and has led to inflation in asset prices in these countries. In a way the inflation has actually been exported to the emerging markets. At the same time the goals of stimulating economic growth in the developed world have fallen short. Banks are still unwilling to lend in these countries as they prefer to use their funds for earning higher yields in emerging markets or risky asset classes. Consumers and industries are not enticed by the lower interest rates and are not borrowing either. They think the low interest rates would continue into the future as well. Given that the QE programs have fallen short of everyone's expectations, won't it be better to just discontinue them?

Reality bytes

Property prices in some major Indian cities finally seem to be easing. Consider for instance, India's most expensive property market Mumbai. As per Economic Times, in central Mumbai areas such as Parel, Lower Parel and Mahalaxmi, property prices have declined by nearly 10%. In fact, in the premium category, developers are even offering discounts of about 25% for sizeable upfront payments. On the other hand, home prices in Navi Mumbai, Thane and the suburbs of Mumbai have remained steady or reported marginal increases. Is the Mumbai real estate finally becoming a buyer's market? Well, it seems so. Unsold inventory level in the Mumbai Metropolitan Region (MMR) stand at around 45% with 1.3 lakh unsold units. Moreover, about 2.9 lakh residential units are under construction. 

Similar is the case with commercial real estate. During the quarter ended September 2013, vacancy rates in Mumbai and New Delhi crossed the 20% mark. What more, out of the 10 office markets with the worst vacancies in Asia, six are from India. 

All in all, it seems that the weakness in the overall economy has clearly impacted both residential and commercial real estate markets. Given the high inventory levels, vacancy rates and the fact that India's economy is likely to remain sluggish in the medium term, a revival in the property market seems unlikely in the near future. 

Some Random Thoughts

India's economic problems are no longer restricted to broader macro issues that do not directly affect the common man. We have been battling poor infrastructure, falling industrial growth, corruption, red tape and fiscal profligacy for a while now. But over the past few months, inflation, unemployment and dramatic slowdown in economic growth have severely impacted our standard of living. The economic slowdown has not just hurt job seekers. The extent of the crisis can be understood from the fact that even the search firms are getting out of business. 

Once the holy grail of those wanting to land into meaty profiles, the job search firms' client list has now run dry. As per Hindustan Times, nearly 7,000 job search firms have shut down in the past few months. And many more are on the verge of doing so. We believe that it may be a long while before the economic scenario gets any better. And hence it is in the interest of investors to prepare themselves for the worst

The global economy has been enduring an extended slowdown. How have the fortunes of the super-rich (net assets of US$ 30 m and above) been impacted globally? An article in Financial Times shares the findings of an interesting study conducted by Wealth-X. The countries that saw their super-rich population shrink in 2013 were largely emerging economies. Brazil and China lost the highest number of multimillionaires. Only Russia and India reported a marginal increase in the number of super-rich individuals. 

On the contrary, the developed economies saw a rise in their super-rich population. Doesn't that sound counter-intuitive? Especially because these economies have been growing through a severe crisis. Then what is it that has led to an increase in the wealthy population in the United States and Europe? Thank the ultra-easy monetary policies of the central banks. The massive money printing drive triggered a strong recovery in the asset prices of these economies. In other words, there has been a massive redistribution of wealth in the developed world. And this has further widened the income inequality gap. We believe this is unsustainable. Policymakers are doing nothing but brewing a recipe for a big economic disaster in the coming years. . 

TATA says tata to banking licence

When the RBI came out with its long awaited guidelines on the entry of new banks into the banking sector, there was considerable buzz all around. Many of the big corporate houses such as the Tatas, Birlas, Mahindras showed a lot of interest in entering the field of banking. Especially since most of them already had formed separate financial companies to cater to their businesses. 

But it was not going to be easy. Globally, banks and financial institutions were the worst hit once the credit crisis in 2008 erupted. But Indian banks emerged relatively unscathed largely on account of the strict norms laid out by the RBI. In an era where increased regulations on banking all over the world seems to be gaining favour, it was imperative for India's central bank to not relax its rules for the entry of new players. 

With the bad memories of the global banking crisis still fresh, there was no room for complacency. Hence, the need for stricter regulation. This meant among various other things, it was essential that promoters of the new banks had sound credentials and integrity. Moreover they had to be serious about the banking business from a longer term perspective rather than look for short term opportunities. 

When Equitymaster conducted polls on India's Most Trustworthy Corporate Group in the last two years, the Tata Group emerged at the top on successive occasions. That is not all. Readers of the Honest Truth, were asked two questions, (1) Who should get a banking license, and (2) Who I would like to keep my deposit with. For both the questions, the Tata Group edged over the others by a wide margin. So the Tata Group was obviously the most favoured conglomerate depositors would park their money with. 

But here is the twist in the tale. The Tata Group yestersday announced its decision to pull out of the race to secure a banking license. The reasons that it cited for this were more or less the same that were pointed out by another entity that had earlier pulled out, Mahindra Group. The Tata Group believes that the regulations and norms outlined by the RBI are too cumbersome. It opines that entering the banking business will impact the successful running of many of its other businesses. 

What does this mean? Does the pullout tarnish the reputation of the company? Does it cast a doubt that maybe the Group was not that serious about the banking business? The banking business at the end of the day is about more than just capitalising on profitable opportunities. It is also about protecting the capital of depositors, lending responsibly and aiding economic growth. So if the Tata Group felt that it was not upto the task, it probably makes sense for them to withdraw. And so, all eyes are now on the RBI and the decision that it takes on whom to award licenses among the list of remaining applicants. 

Do you think that pulling out of the race to secure a banking license will hurt the reputation of the Tata Group? Let me know your comments

ARE WE READY FOR QE TAPPERING

Will the US Fed taper its QE program or not? When will it taper? These questions have been on everyone's mind in the financial world. Ever since Ben Bernanke first hinted at a likely taper in May 2013, the world financial markets have reacted sharply to news pertaining to the Fed taper. 

As we know, FIIs are the most important market movers as far as Indian stock markets are concerned. So an obvious question follows: How will the Fed taper impact India? Is India better prepared now to deal with such a situation? 

Well, if you compare our present situation with what it was in May, you can say we are somewhat better off now. The government imposed curbs on gold imports. Exports are picking up. RBI took a series of measures to reign over the currency fall. So yes, relatively we are in a better position. But we have seen in the past how markets tend to come down like a house of cards when FIIs have dumped Indian stocks. So it's would be a bit presumptuous to say that the Fed taper will not impact Indian markets much

Growth may have slowed down in China, but that has not stopped large asset management companies from investing in the country. As reported in an article in Bloomberg, one of the reasons for this is the massive US$ 3.66 trillion currency reserves that the dragon nation has amassed. The US Fed's decision to taper its QE program some months back had given global markets the jitters. As a result, there was an exodus of capital from emerging markets including India. For the latter, this posed a problem because it is burdened with a rising current account deficit. But China has no such problem. Some of the other factors that are in favour of investments in China include the country's intention of moving away from an investment and exports based business model. But that does not mean that there are no other problems. For quite some time now, China has been plagued by issues such as shadow banking, unregulated lending and increasing debt burden of local governments. Efforts to bring these under control have led to cash squeezes that helped drive up borrowing costs. Also, China is looking to make the Yuan fully convertible. But this may not be that easy given the opaqueness with which the currency is managed. Thus, investing in China is not without its share of risks. 

They say good things come in small packages. Currently there is not a single economic statistic that is showing some sign of recovery. The global economic risks are expected to get worse, much worse, before they get any better. Large corporates are reeling under the pressure of low profitability and poor interest coverage. Banks at the same time are courting networth erosion with mounting bad loans. In the midst of this, few midcap and smallcap stocks, that are by nature a high risk asset class, are showing a ray of hope. As per an article in Business Standard,274 companies listed on the BSE have surpassed their FY13 full year profits in first half of FY14 itself. Most of these stocks belong to the midcap and smallcap indices. Now, while this may be a reason to feel enthused about recovery, there is hardly enough case for investors to react. 

Is the rise in profits reason enough for investors to jump at the opportunity of buying any and every mid and smallcap stock? We believe that the time is ripe for investors to exercise utmost caution. Instead of getting drawn to just the bottomline growth, investors must investigate if the growth is sustainable. More importantly if the companies recording high growth have safe balance sheets and good business models. Else going by such raw statistics to invest in such high risk asset classes can be a dangerous move we believe. 
If you go shopping, you would certainly like to buy things that are flying off the shelves isn't it? You would buy the most popular thing out there. Not so when it comes to investing however. In investing, buying what's popular is not going to take you anywhere. Simply because if it's popular, it's more often than not fairly valued. Therefore the idea out there has to be to buy the most unloved asset and wait for the eventual upside to come. We believe gold could be a perfect candidate for this experiment. This is because its popularity keeps coming down with each passing day. 

The latest to give the yellow metal the cold shoulder is billionaire investor John Paulson. Turns out Paulson has clearly told his clients he wouldn't personally invest more money in his gold fund. For he has no idea when inflation could accelerate, a scenario that usually makes gold the asset class of choice. Paulson can afford to do so for he already has gold in his gold fund. But those of you who don't, now is not a bad time to invest a small 5%-10% of your total wealth in the yellow metal. For as even Paulson acknowledges, inflation will eventually accelerate. It is only a matter of when. 
Global markets gained modestly on favorable US economic data, including tame inflation and fewer-than-expected weekly jobless claims. Although the Fed has so far held off on tapering its monthly bond purchases, central bank officials still expect to begin to reduce the quantitative easing program in the coming months. The minutes of the Fed's late-October policy meeting indicate that officials are searching for other ways to provide support for the economy and that short-term interest rates are likely to remain low for a long time. The US markets closed at record high (up 0.6%). 

China's central bank followed up this week on last week's announcement of significant economic and financial reforms. The Chinese equity market ended the week up 1.4%.Overall weakness in the Eurozone stood in contrast to rising business confidence in Germany. The Eurozone composite purchasing managers' index slipped to 51.5 in November, from 51.9 in October. All the major European equity markets closed the week in the red. 

Diesel Deregulation

Indians are considered to be people sensitive to pricing. Since consumers are price sensitive, usage usually drops when prices go up and vice versa. This seems to be true for oil products as well. As per Petroleum Planning and Analysis Cell (PPAC), consumption of price sensitive products has taken a hit this year. The growth in consumptions this year (January to October period) is actually much lower than what it was during the same period last year. In fact it is not just the consumption of the 'sensitive products' like diesel and LPG that has declined. Even the growth of all other oil products has been subdued this year. The price of diesel has been hiked by 50 paise since January this year. But even these small hikes have hurt the consumption of the fuel. The oil minister has recently stated that he plans to deregulate the prices of diesel completely within the next 6 months. If the trend till now is anything to go by, any further increase in diesel prices would most likely hurt its consumption in the short term at least. But the high point of this is that it would also help reduce the fiscal burden to a large extent. Oil subsidies on products like diesel and LPG have weighed down on the country's fiscal position. Therefore any taper off in consumption and/or prices would be a welcome relief. 

Fiscal deficit and Tax hike

In the Union Budget presented in February 2013, the Finance Minister had vowed to keep the fiscal deficit at 4.8% of GDP. Even then most of us were skeptical about this target. We were worried that it would be a long and difficult task for this target to be achieved. 

And now it seems that we were right with our skepticism. In its recent report, the Finance Ministry has reportedly admitted that there have been fiscal slippages in the first half of the year. The findings of this report (as carried by Business Standard) state that there was an increase in expenditure. And a shortfall in revenue. As per the report, the fiscal deficit has already touched 76% of the budget estimates in the first half of the financial year. 

The total expenditure for the six month period ended September 2013, was 48.6% of the budget estimates. This is higher than the 46.5% seen during the same period last year. On the other hand revenues, particularly the tax revenues, were much lower. The disinvestment target is not even close to being met as of now. 

Even then there have not been any announcements on whether the government plans to cut down on its expenditure to achieve the fiscal deficit target. Given that the elections are due next year, cutting down any of the populist expenses like subsidies, etc, would not bode well. So how would the Finance Minister achieve his target? 

In October 2013, Reuters had reported that the Finance Minister could push about US$ 15 bn worth of subsidy expenses of this year to 2015. This would help him achieve the target this year at least. But what would happen next year and the year after that? Guess thegovernment has not really thought this through for the long run. 

If the FM does not postpone the expenditure then what are the other alternatives that he has? One is to expedite the disinvestment program. As reported yesterday, the Finance Ministry is toying with the idea of introducing innovative financial instruments for this. Another alternative that the government has is to raise taxes. 

The truth of the matter is that India is in a bad shape thanks to its government. And unfortunately the onus of satisfying the government's ambition would once again fall on the common man. Let us not forget that the high inflation and interest rates have already taken a toll on our pockets. At the same time the slowdown has made income streams volatile. With the way things are, the honest tax payers could be asked to stretch themselves even further. And all for what? So that the government can win popularity votes and come back to power! 

Do you think the government would be able to meet its fiscal deficit target this year? Let us know your comments

India No Longer Poor Country: World Bank

One of the country's parliamentarians recently said that poverty is just a state of mind and self confidence is needed to overcome it. This was probably the most bizarre definition of poverty we have ever come across. It speaks volumes of what the government thinks of this social evil. It is probably deeming poor citizens to be just voters who can be flattered by promises. With no intent, nothing can be done to eradicate poverty in India. And now one of the means through which poverty can be eradicated has also been trimmed
The World Bank has curtailed its window which offered concessional loans to India to fight poverty. These concessional loans are available to countries that are below a certain benchmark. The benchmark in this case is per capita GDP. With India surpassing that benchmark, it is now no longer eligible for such concessional loans. 

This effectively indicates that India is no longer poor and the standard of living has improved. However, in reality more than half of the country's population can barely afford a reasonably decent standard of living. And with no hope of redressal, neither from the government nor by way of international aid, Indians may have to learn to live in poverty. 

World banks' withdrawal has indeed come as a setback to India. But we believe this is because of the use of a flawed benchmark. Per capita GDP measure gives wrong picture of any nation's standard of living when there is a huge income divide. Increasing wealth amongst the rich can result in higher per capita GDP. And this is precisely what is happening in India. Rich are getting richer and poor are getting poorer. While this increases the per capita GDP, it does not reflect the true picture of India. 

Now considering that support window from World Bank has been curtailed, it is yet another setback to poverty eradication in India. 

We pity that even after 65 years of independence, there are no visible signs of large scale poverty reduction in India. As per one World Bank report nearly half of the Indians still do not have access to basic sanitation facilities. And this is a sorry sign for a country which is en route to conquering Mars! 

The current state is a result of rampant corruption and lack of intent from the politicians. Money destined to be used for the poor is siphoned off. Then there are scams, subsidies and wasteful expenditures which swallow the balance money! 

We feel that no government can change the face of India unless there is an intent to do so. And the intent can change only when people at the helm rise above their own personal self interests and work towards creating a more equitable society. 

Do you think money alone can eradicate poverty in India? Let me know your comments

The oily way

What happens in Saudi Arabia can have a significant impact on oil supply dynamics across the world. The OPEC nations have a reputation of manipulating supplies so as to get the maximum benefit. Many of them have been blamed for keeping production deliberately low to keep supplies limited and command high prices for crude., 

However, as consumption of oil across the globe is surging, Saudi Arabia, one of the largest OPEC member is keeping pace to some extent. Infact, the higher supplies from the region have resulted in the recent slip in the Brent crude price. This is despite the fact that the kingdom's own need of oil is on a rise to meet power and travel needs. Not inclined to lose on the export revenues, Saudi Arabia is replacing crude oil with fuel oil to meet internal needs. It is even planning to focus more on the usage of gas. 

But can we predict anything about the oil prices based on such developments? While higher supplies have eased crude prices for now, with so many variables affecting crude prices, it is hard to tell where prices will head from here. 

American Recover: Myth or Reality

Anyone who thinks the recovery in the US is sustainable and that it is actually leading to greater prosperity across all sections of society, they could do well to listen to Marc Faber. Writing for thedailyreckoning, Dr Doom opines that wealth creation in the US in recent years has been totally lopsided. Thus, while the top 1% in terms of net worth has seen most of their wealth go up by 2%, the bottom 50% are still down more than 40%! 

If this is not enough, here's something even worse. The same bottom 50% have actually increased their debts meaningfully post 2007. In other words, they are more indebted than they were in 2007. And thus it is this higher indebtedness that must have caused whatever little improvement there is in the US economy and must have taken corporate profits higher. But now what? The debt levels of the bottom 50% cannot go on increasing forever. Besides, there is also a limit to which the Governments can support them. As a result, long term US economic growth much below its trend line does look like a strong possibility. 
Much of what is written about the US economy often focuses on the short term scenario. Short term growth rates... Short term employment data... and so on... Many policymakers and Wall Streeters seem convinced that the current slowdown is only cyclical. And that the US economy would soon bounce back on its growth path. 

But once in while some long term thinkers do pose a valid question. Can the US economy really grow the way it did in the past? Are the problems in the US economy more structural in nature? As per an article in Business Insider, several economists have significantly cut down their long term growth forecasts for the US economy. 

The 2008 financial crisis marked the end of an era for the US. In the aftermath of the crisis, policymakers have been making desperate attempts to revive spending and investments in the economy through their ultra-easy monetary policies. But the economy is showing no sign of revival. We believe that the US economy is likely to remain subduedfor an extended period. And this period could actually be several years.