HAPPY DIWALI

INDIAN  ELEPHANT  IS AWAKE  AND  READY BUT  MAHOUT  CAN  NOT  SET  PRIORITIES RIGHT  . . .

Last year DIWALI time was very exciting. Air was pregnant with expectation. PM Narendra Modi  could do NO WRONG. PM Modi  had  started ASWAMEDH  YAGNYA  and He was conquering country after country with his charisma and we were basking  in the afterglow - feeling proud about the PM.

The days / weeks and months passed but the expected and promised  economic recovery was not apparent.  The company earnings were not improving and bank credit off-take also refused to move upwards.  We were listening and reading glowing announcements at regular intervals but no effect was felt on the ground.

GDP methodology was changed in between. As per new methodology, our FY 15 GDP was posted at  7.1 %.  BUT 2013/14 GDP when recalculated turned out to be 6.9 %  after all the hullabaloo against corrupt /  indecisive /directionless UPA II regime.  SO WE HAD IMPROVED BY JUST 0.2 % OVER UPA II GDP FIGURE. For FY 16, Govt is expecting GDP around 8 % while most analysts as well as RBI expects GDP between 7 to 7.5 %. THIS WILL BE ANOTHER LACKLUSTRE PERFORMANCE – DEFINITELY NOTHING TO WRITE HOME ABOUT.

During FY 16, so far … we have had fabulous tailwinds  – 1… VERY LOW COMMODITY PRICES    2… LOW WPI AND CPI INFLATION ( result of low commodity prices and BASE EFFECT ).  This has resulted into RBI rate cuts which means reduced finance costs for the industry.  BENFITS ACCRUING DUE TO THESE TAILWINDS HAVE ALREADY BEEN ACCOUNTED FOR BY THE GOVERNMENT BY INCREASING EXPENDITURE  this fiscal -  in a bid to pump-prime the growth engine.

But that makes us very vulnerable in FY 17 when all the tailwinds will not be there  - infact we may have some mild headwinds as commodity prices can inch-up a bit and inflation base effect will now work against  us. What this means is that ability of RBI to cut rates further will be  considerably reduced. The govt also will not have any spare cash to increase expenditure if the FM wishes to maintain FRBM targets.

IN SHORT, WE HAD GREAT MACROS LAST FISCAL BUT WE DID NOT CAPITALISE ON THEM FULLY.   WE STILL HAVE SOMEWHAT BETTER MACROS THAN REST OF THE WORLD THIS FISCAL AS WELL.   BUT WE MAY NOT BE ABLE TO SAY SO ABOUT NEXT FISCAL.

After the longish prelude, let us now turn to our main topic –  MARKETS

Any market is fairly valued at the most 10 % of the time. When I wrote my last DIWALI article, I had said that our market is seriously over priced but has still not reached EUPHORIC zone. In the following four  months after last diwali, the bulls  pushed the market in euphoric zone in view of exorbitant expectations about UNION BUDGET in FEBRUARY 2015 and chorus for rate cut from RBI.

We did hit AN ALL TIME HIGH of 9119.2 on 4^th march after RBI announced rate cut before market opening. IT WAS A DIFFICULT LEVEL TO SUSTAIN  as fundamentals were lagging far behind. It was not easy to justify that level even on FY 17 expected results basis. Markets then kept sliding down in a classical lower top lower bottom formation as ground reality slowly sank in.  We had a small flutter in between when market suddenly jumped to 8600 odd level in a sharp and swift up-move but again started a decline over slowdown in China fears. Ultimately we have closed the SAMVAT 71 ABOUT 2.3 % LOWER THAN SAMVAT 70.

SO, WHAT ARE THE LESSONS OF SAMVAT 71 – FOR MARKETS AS WELL AS THE GOVT ?

The govt must learn to respect opposition – however small the numbers may be - SINCE THOSE NUMBERS HAVE NUISANCE VALUE  and can prevent the govt from achieving their economic agenda. Govt also shud not run slipshod over opposition because that will force them to unite and become even more powerful force in opposing any pragmatic moves.

The markets must learn that showing reasonable price multiples to 2018  or even 2019 earnings may justify current price for a week or two but it is simply impossible to  do so for months on and then  - when the reaction sets in, IT CAN BE VICIOUS. Even the company managements cannot look beyond  4 to 6 quarters – max 8 quarters …. So  to discount anything beyond that is a futile exercise which is bound to fail badly - sometime in the near future and then you will have egg all over your face.

We have  banking sector which dominates NIFTY in a big way – with little over 30 % weight. Naturally this was the best performing sector when markets hit peak of 9119. However, subsequently due to non performance of several capital intensive sectors like steel and power has resulted into pile up of NPAs of huge proportion dragging down bank valuations massively. Things are not as bad as 2002/2003 proportion but the figures are scary to say the least. BOB and BOI have tried to clean their balance sheets in September quarter results and the amount of provisioning they have made is mindboggling. INSPITE OF THAT THERE NET NPAs HAVE GONE UP.

JUST IMAGINE WHEN ALL THE BANKS WILL COMPLETE THIS EXERCISE… WHERE THEY WILL STAND COMPARED TO CAPITAL ADEQUACY RATIO AS PER BASEL NORMS  ?  HOW MUCH CAPITAL NEEDS TO BE PUMPED IN BY THE GOVT AND WHETHER GOVT HAS THAT KIND OF MONEY ?

Same way  … 75 % DISCOM losses will now be taken over by states. What will happen ? States will have  too much  excess borrowings which will limit their borrowing capacity for normal day to day  running of the govt. So this 75 % amount will not be included for calculation of FRBM TARGETS  FOR TWO YEARS.   But interest on that amount will have to be paid – even if at just 8 % - by the states … AND WHAT HAPPENS FROM THE THIRD YEAR ? ? ?   no one has a clue. IN SHORT  - THE TRASH CAN IS KICKED AHEAD BY TWO YEARS …. NOTHING ELSE.

WHAT HAS BEEN DONE TO ENSURE THAT IN THE NEXT TWO / THREE YEARS THE DISCOMS WILL NOT AGAIN GENRATE ANOTHER MONSTER FIGURE AS LOSSES ?

We expect the govt which has popular mandate to find  some permanent solutions to these long pending problems. Make a rule that will stop state govts from giving free or even subsidized power to farmers and some specific sectors. Please understand that farmers don’t need free power … THEY NEED ASSURED AND QUALITY POWER.

So, it looks like that  in-spite of any specific efforts from the govt, the resilience of the Indian Economy is such that we will be able to maintain 6/6.5 % GDP growth rate in coming years. That itself will make INDIA as the second best performing economy  on the global basis and will attract GOOD FDI and FPI.  SO THAT BECOMES A SELF PERPETUATING CYCLE.

IF WE HAVE SOME HARMONY BETWEEN THE GOVT AND OPPOSITION, WE CAN SCALE UP TO 8 % GDP GROWTH NEXT YEAR VERY EASILY.  NORMALLY INITIATIVE HAS TO COME FROM GOVT AND LET US HOPE THAT BETTER WISDOM WILL PREVAIL IN THE COMING WEEKS AND MONTHS  – THANKS TO BIHAR DEBACLE.

Hardly any money has been made by retail investors  in last one year and FIIs have in fact lost money due to adverse rupee dollar rate. FED rate hike … expected in DECEMBER 2015 is another joker in the pack. We have to wait and see how it affects FII money flows to our markets as FII flows have an accentuating impact on our markets. Just a 3 / 4 billion dollar withdrawal of FII money  in a month can make our market go down by as much as 10 % - such is the power of FII flows.

COMING BACK TO VALUATIONS – I must say that we are  mildly overvalued today and a small 5 to 7 % correction will make us a fairly valued market.  IF WE CONSIDER A POSSIBILITY OF HAVING  8 % GDP GROWTH RATE AS APOSSIBILITY FOR FY 17 …. I SEE A CHANCE OF 25 TO 30 % APPRECIATION FROM A FAIR VALUE LEVEL ( about 20/25 % from current NIFTY level ).

AT 6.5 / 7 % GROWTH RATE OF GDP, THE APPRECIATION WILL BE ONLY  12/15 % FROM CURRENT LEVEL.

All  above is subject to global markets remaining fairly steady and NO MAJOR FII WITHDRAWALS will happen.

If we achieve 8 % GDP growth next year, we can say that THE INDIAN ELEPHAT HAS STARTED WALKING PURPOSEFULLY rather than “a stroll in a garden”  of the last year.

LET US REALISE THIS, KEEP IT AT THE BACK OF OUR MIND WHILE TALKING ABOUT MARKETS IN THE COMING SAMVAT.

Compared to last year - around this time  -  the mood is rather sombre .  We are nearly 15 % down from all time high and corporate earnings and credit growth are the key concerns. Not only PSU banks but even private banks have started raising asset quality  concerns.  The global markets have also corrected from all time peaks and generally everyone is weary of FED rate hike – after holding the rate at 0 % for 8 long years. MAY BE THIS IS NOT THE RIGHT TIME TO CELEBRATE A FESTIVAL LIKE DIWALI WHICH IS SUPPOSE TO BE  VERY BRIGHT AND CHEERFUL.

LET US SINCERELY HOPE THAT WE WILL HAVE 8 % GDP GROWTH IN THE COMING YEAR AND WE WILL HAVE THE RIGHT ATMOSPHERE FOR NEXT DIWALI.

PLEASE BEAR IN MIND THAT OVER A LONG PERIOD OF TIME, ONE CAN ONLY EXPECT  12 TO 15 % CAGR RETURNS FROM EQUITY WITHOUT TAKING UNDUE RISKS. SO, ONE HAS TO BE PATIENT TO HAVE HEALTHY RETURNS OVER TIME. THERE ARE NO SHORTCUTS.

LET ME NOT FORGET TO THANK YOU ALL for patronizing  my website WWW.SUMAMURA.COM and I hope you have been rewarded in some way. You must have found it much different than other financial websites that you may have seen.

I am giving below a table covering several frontline stocks  / indices  and commodities with annual – 2015/16 ( SAMVAT 72 ) -  entry / exit levels , stoploss and targets. 

If you have any doubts you can reach me on 9371002943 or my email id madhavranade1@yahoo.com. I am also available on yahoo messenger with yahoo id  madhavranade1.

WISHING YOU ALL

A VERY HAPPY DIWALI 

& 

A  PROSPEROUS  NEW YEAR

MADHAV RANADE – 11^TH NOVEMBER 2015