Market Outlook 2019
January 3, 2019

Stability breeds instability – we in the markets often tend to forget this famous dictum of Hyman Minsky, only to be reminded of the same with a sudden and rude shock.

As we closed 2017, complacency was setting in. Comfort around global growth was taken as a given and investors underpriced the potential risks associated with twin tightening in the US: rate increases and unwinding of balance sheet. VIX, a proxy for markets’ risk aversion, hit historical lows in the second half of 2017.

What followed was a huge shake-up. Markets sold off significantly and sharply: first in EMs (bonds, equities and currencies) and subsequently in the US. S&P 500, which looked invincible at one point, sold off precipitously 15–20% in two months) and high-yield spreads in the US widened from unusually low levels.

In India, September turned out to be disastrous due to the IL&FS default and liquidity squeeze for all NBFCs, spike in oil prices and INR depreciation. All these happened in a short span of time and all-time high leveraged position[s?] in the market led to panic selling, especially in the small & mid cap segment.

Nonetheless, Indian markets returned close to 6% and outperformed the MSCI EM Index by almost double in dollar terms – which is impressive given what’s happening around the globe. Things are gradually stabilizing as oil prices reverse the course and local liquidity gets better. However, the situation is not back to normal yet.

2019 : Year of global slowdown, liquidity pressure and TREADING CAUTION

Current global backdrop: As we progress into 2019, we should keep in mind global growth is surely showing signs of deceleration in a synchronized manner. The sword of global trade tensions is still hanging. While the Fed seems to be getting close to the normal rate, with one or two more rate hikes left in this cycle, balance sheet unwinding continues. Meanwhile, the ECB has stopped injecting liquidity. Deceleration in global growth coupled with a liquidity squeeze cannot deliver good equities’ return. The case for Commodities is likely to be similar. Moreover, a large part of the debt added post-2008 (Global Financial Crisis) is more than its needed share of incremental GDP, representing unproductive investments. The debt bubble in China too continues to be a threat.

Indian backdrop: A mild slowdown in global growth is positive for India’s fundamentals as it keeps commodity prices in check. But India still needs to address some of the key issues. There is an urgent need to kick-start the credit cycle and accelerate the capex cycle, which might be difficult amid the current domestic banking set-up.

The general election in 2019 is more likely to divert fiscal resources back to the agriculture sector and rural economy, which might boost consumption. The currently fragile and heated political environment will keep policy fairly unpredictable and make it hard for government to take necessary steps.

What stands out though for India is its low levels of both domestic and international leverage, which insulate it from global shocks to a great extent. India is surely better placed from global shocks on a comparative basis, and this provides downside protection in an otherwise global fragile environment. India will again outperform most developed and emerging markets in 2019.

One needs to plan and invest in 2019 keeping in mind all or at least some these realities. Investment decisions should be anchored around the following themes:

Earnings growth: Better, but broad-based revival still distant

The earnings cycle has been disappointing for a while now. 2019 is unlikely to be much different. Expect earnings traction to be in select pockets, rather than a broad-based revival. Overall, in this tough global landscape, if we achieve mid-teens’ earnings growth, it will be commendable. What needs monitoring is the government’s ability to keep up spending in the economy until the private sector is fully back on its feet. In this regard, developments pertaining to fiscal consolidation targets, and one-time large transfers from the RBI to the government for PSU bank recapitalization etc are crucial to monitor. I do feel that some fiscal relaxation is well-advised at this stage.

Credit and liquidity flow: The key monitorable

An important fallout from the liquidity crisis in the second half of 2018 will be on lending to the real economy. In the last few years, NBFCs have been at the forefront of lending and the retail sector or households (LAP, mortgages, autos, unsecured, etc) have been the key borrowers (the corporate sector was largely deleveraging). While the situation has begun to normalize gradually, the liquidity squeeze has clearly taken a toll on lenders’ risk appetite. Thus, NBFCs’ lending growth may not return to 25%-plus anytime soon. And PSU banks are still far from the normal credit cycle. In such a scenario, select private sector banks cannot fully meet the growing demand for credit. In this regard, one should watch out for the RBI’s moves under the new Governor. Timely and meaningful steps to ease liquidity can certainly limit the damage. It is encouraging to note that the RBI has already stepped up OMOs.

Monetary policy: Prepare for rate cycle reversal

We should be open to the possibility of reversal in the global rate cycle in 2019. The global economy is slowing down conspicuously with interest-sensitive segments such as autos and real estate slowing almost everywhere.

Furthermore, with a fall in equity prices and widening of bond spreads at the global level means that monetary conditions are tightening further. Finally commodity prices have begun to come off, starting with crude oil prices. Thus, there is a good possibility that the rate cycle reverses. It is therefore quite possible that we might see one or two rate cuts by the RBI during the year, which should be good for the Indian economy and markets.

Domestic flows: Standing up to the test of time

As mentioned earlier, the strength of the domestic retail savings flowing into markets is particularly encouraging. Domestic flows have held up despite persistent FII outflows, India’s deteriorating India’s macros as crude oil jumped and the INR fell, and persistent earnings disappointment. In that sense, one could argue that the ramp-up in domestic flows to financial markets is not just a short-term blip, but is perhaps a reflection of a more structural trend that is underway.

This is not to suggest that Indian markets are completely de-linked from the rest of world, but it does provide cushion during periods of sudden reversal of global capital flows.

Crude oil fall-off: India is an oil trade

That India benefits from lower oil price is stating the obvious. To that extent, oil cooling off from USD80/barrel levels to now below USD55/barrel is a boon for India. If the crude remains below or around this range, it will surely give India resources to deal with some of the domestic problems and a widening CAD due to electronics consumption.

Politics: To take centre stage in first half of 2019

The general election in May 2019 will keep markets busy in the first half. It is going to be a hard-fought battle between the BJP and the Congress, and the outcome is uncertain. While markets would like to see continuity of the NDA government, it must be emphasised that India has seen a fair bit of policy continuity regardless of the party in power. One must say that many key reforms (GST, RERA, IBC, DBT, etc) are irreversible irrespective of who forms the government in Delhi in 2019. A fractured third-front kind of government will surely have negative impact, and markets may not do well in that case.

In a nutshell, it may not be a smooth ride in 2019. There would be volatility in the market, although at this stage it appears that the second half is likely to be far more positive and constructive.

• Leverage should be avoided, and one should patiently wait to take advantage of market corrections to buy companies and sectors with structural growth.

• Bond markets could be the star performer in 2019—specially adjusted for risk.

• Real estate will continue to struggle until liquidity and rate cycle changes, but would bottom out this year as it is getting more structured and organised.

• Commodities are unlikely to perform given the current set-up.

• Equities will have a moderate year, but this year is more likely to form a base for the years ahead. The second half will be far more constructive than the first half.

• In summation, 2019 will be great year to pick stocks amid volatility.

Sectors/themes I think will do well:

BFSI – Private sector banks, unleveraged structural plays like GI, AMC and other services companies.
Industrials – Capex cycle is slowly picking up and public capex can get further boost due to election.
Manufacturing-led plays are becoming more and more attractive due to China factor and trade war.
Unorganised to organised theme, which cuts across many sectors/segments.
Lastly, Consumption plays, especially rural-focused non-discretionary, might do better.

The best time to buy market is when no one is keen to buy, leverage in low in the market, uncertainties are galore, which is the current set-up. The only caveat is that one should be prepared to sustain and be in the game if markets still disappoint you.

Beat volatility, stick to these three long-term themes: ET Interview
December 14, 2018

What is your view on the new RBI Governor? Is this what the markets and the economy needed at this point in time, given the uncertainties that loom with global markets trying to find their feet?

Absolutely. In the last one, one and a half years, the government and RBI were not co-ordinated. They had opposing views on many of the critical issues and as a result, the banking sector, specifically the public sector and the economy in general were suffering. This came at a time when coordinated action was needed to kickstart the economy which was needed after DeMo and GST which did not happen. On some of the issues like PCA where the banking sector had to come out because today one of the biggest problem in the economy is that credit is almost dried and industries are not getting enough credit ex, especially MSMEs and that has been creating very big issue.

I am assuming that since the new RBI Governor would be a lot more coordinated, it does not mean that since the new RBI Governor would be a lot more coordinated, it does not mean that the RBI is not going to be independent. But what is needed is coordinated action by the regulator and the government to jumpstart the economy.

In my opinion, some of the touchy issues around NBFCs, real estate as a sector I think can probably be a lot better handled now. There would not be any noise in the public around the relationship between RBI and government. That itself is a calming and soothing effect for the markets. Markets are taking it positively and it is a positive development.

The other market positive news has been the Congress’ 3-0 win in the key state elections. Does that put the spotlight on what happens over the course of the next six months in terms of the event risk associated with the general elections in May 2019?

Take yourself a week back. If you asked somebody what would happen if there is a 3-0 outcome in favour of Congress and the RBI Governor resigns, most experts probably would have predicted that there would be market fall and a big negative selloff. But markets have reacted completely differently.

This clearly shows that the market has got to the bottom. Typically how market reacts to negative news flow also reflects the underlying strength of the market I believe that yesterday’s response showed the market has got over the uncertainty. The downside will be very limited from here and yesterday there was a widespread participation from the midcap space. Markets are very light at this point in time. This is the setup we are working on.

Now look forward to next six months. From general elections perspective, uncertainty has increased. Now there will be uncertainties over how NDA will respond to Congress win in three state Assembly elections development and also how opposition would be galvanised for the 2019 general election.

Globally we are still dealing with lots of uncertain events. Over next three to six months, I would like to see the market getting consolidated in a narrow range and that should be probably volatile as well given the news flow. Even international markets are very volatile depending on the comments coming from the regulators or governments overseas.

This kind of market scenario should continue over next three to six months. This is the time to build a portfolio with the best vintage for any investor from a three- to five-year perspective because I continue to have faith in strong fundamentals of Indian economy. We have a good story whichever government comes in. The only thing you do not want is a very unstable government. As long as there is a stable government, the market would be fine.

We have been bracing for volatility over the next six to eight months. What is the prudent strategy to navigate this kind of market? Which are the themes one should look at and which are the ones best to avoid?

In times like this, we should definitely stay away from short-term trading. One should definitely stay away from leverage and be prepared for whatever portfolio you are constructing. If there is 8% to 10% correction, you should not panic. One can take broader general approaches.

From a thematic perspective on where to invest, I do not much change my opinion. The India story remains one of consumption and of exports. It is a very balanced economy and we are seeing lots of interesting ideas and plays in each of these themes.

Financials have also been a great theme for me. I continue to believe that it will deliver very well. On any correction, you will find lots of opportunities within the private sector banks, some of the fee-based financial services plays whether it is insurance company or mutual funds would be very interesting to look at. Even the NBFC sector will do pretty well from a long-term perspective. So financials is one bucket one should look at it.
Within consumption, I have seen lots of corrections in the consumer discretionary space and the GST theme of move from unorganised to organised continues to remain whichever government comes in. I do not think that will change. There are lots of segment, sectors and sub-sectors one can look at to benefit from the unorganised to organised theme and that has legs over next 8-10 years. I would continue to believe in that.

Lastly, our current account deficit being what it is, we would always have a little bit of strain on the currency side with the depreciating bias. Given where IT sector right now is with developed markets doing reasonably alright, demand picking up and depreciating currency, the midcap IT sector should do well.

These are the three-four segments, sub-segments you should look at. But India is a fairly wide market. There are lots of interesting ideas. Even within the manufacturing sector, one can do a lot. That segment is a sunrise sector and continues to pick up. One has to look at what business model one wants, what kind of risk profile you have as well as the time horizon. Within that these themes can be played.

How are you looking at the defensive space?

As I just mentioned, IT is one of the defensives. It is developed market focussed and currency gives a natural hedge. I would like to keep some portion of the portfolio into IT sector and I see robust demand in the sector.
Within the pharma space, you have to be company specific. The pharma space offers interesting ideas which are both defensive as well growth opportunities over the next three to five years. You should have bits of defensive in the portfolio. There is no doubt on that.

What about NBFCs among the financials? Could there be a trigger to look at that segment of the market more favourably?

Yes. There was a bit of a challenge in the recent past which is getting addressed slowly. It is not going to get addressed overnight. NBFCs definitely serve market needs. NBFCs had a little bit of imbalance in terms of asset liability mismatch which is getting corrected or got corrected in a significant way.Things should return to normal. Most NBFCs predicted a lower growth in the current financial year. From the next financial year onwards, we probably would see much better growth than what we will see this year. It will start leading to multiple rerating which got corrected in the recent past.

I do feel that NBFCs offer a superior risk reward. One has to be careful in terms of what kind of management team you are choosing, what kind of business model you are going after. All those things are a given, but I think NBFC or housing finance companies is a segment I do definitely like.

Typically in an election year,policy sensitive names get more active. Is there any theme or sub theme so to speak that you would want to be bullish on over the course of the next six months?

It is very difficult to think about that to be very frank and a lot depends on guessing what the government will do, what kind of pain points will be there for the government etc. In general, one can say that government is likely to spend more on rural side. It is likely to do something more about MSMEs but I have no thought on how one can can play that.

Last time during the elections, fertiliser stocks went up and they did very well. These stocks are probably back to or are much lower than what they were at that point in time. My investing advice style is very different and focusses more at structural plays. If there are any turnaround plays, they have to be structural in nature, not dependent on a particular dose of government action for a shorter period of time. My investing advice style is very different and focusses more at structural plays. If there are any turnaround plays, they have to be structural in nature, not dependent on a particular dose of government action for a shorter period of time. I would highly recommend to avoid such plays.

Consumption earnings have been mixed in the recent past, even for the FMCG space. Even the auto pack has not picked up and has actually slowed down. How do you then believe that the consumption is likely to go up?

The last two quarters have been extremely volatile and what we saw in September October period has not been witnessed by most businesses for a very long period of time. That shocked the businesses and consumers and the credit flow almost stopped or slowed down significantly.

This is bound to have impact on the sales numbers as well as profitability. So there has been volatility with currency depreciating more than 20% in a month’s time, oil prices going up significantly. Even if you are running a consumer business, you cannot pass on this kind of prices to consumers overnight. You have to take a hit.

Thus volatility has impacted profitability as well as demand and this might affect this quarter’s earnings. Also, we have seen quite a bit of volatility. As volatility recedes, we are not going to see a change overnight. Also do not forget that whenever there is a big loss of wealth due to market corrections, it impacts the consumption pattern of any consumer and that takes time to come back.

I am not saying that next quarter you will have earnings coming back but in this period you will get some of the high quality businesses, including consumer businesses at a reasonable valuation or a reasonable price than you would have otherwise got.
As and when the normalcy returns, which I am reasonably sure would return in the second half of next year, you will start seeing demand picking up. This kind of volatility cannot continue forever and as volatility subsides, you will see a slow and steady pickup and it will create a long-term trend in your favour which could last three to four, five years. So that was the point I was trying to make.


Another Tryst With Destiny
October 16, 2018

In 2002, I joined young Edelweiss at a young age of 25, when it was a young and fledgling organization, its networth was approximately INR 22 crs, PAT was around INR 1 cr and the Nifty was 1180 . Today, I’m 42, and Edelweiss’s net worth has grown to INR 8200 crs & PAT is INR 890 crs (CAGR of ~50%) and the Nifty is at 10450 (CAGR of ~14%).

What a journey of growth it has been; and now after almost 17 years of fulfilling journey of building high quality businesses, I am embarking on yet Another Tryst with Destiny.

This journey called Edelweiss has been no less than a dream & a thrill ride. It has been full of challenges, excitement, successes, setbacks, satisfaction and most importantly of growth. In this period I have grown as a Professional, as a Manager, as a Leader and more importantly as a Human Being. Edelweiss has become second home & nature to me. Leaving this has been a big decision and has taken a lot of time, courage and Introspection.

The thought of life without Edelweiss is slowing sinking, but even if you know what’s coming, you’re never prepared for how it feels! (just like market corrections )

– First of all, I want to thank and express my deep gratitude to Rashesh for all he has for me in this journey. Rashesh has always been kind enough to throw opportunities my way and keep faith in me despite all my follies & shortcomings. I have been extremely privileged and lucky to get his unending support and conviction. My journey wouldn’t have been the same without it. A Big THANK YOU.

– A big thank you to the entire senior leadership team, many of you have been my long standing partners in crime. A BIG heartfelt thanks for cheering when I succeeded, for supporting when I failed, for guiding when I was lost and for holding my hand when I needed you. Many of you have been also guiding factor in shaping my career.

– A big thank you to my team on whose capable shoulders I always stood tall and smart. It is said one can accomplish anything if you have a capable and motivated team. I have been more than lucky to have this combination in the team over the years; which has built and delivered such a high quality bouquet of businesses. I have countless examples of customers complementing the motivation and drive of the team. Among other things, this has made me most proud. I will miss you guys a lot. A Big thank you to all of you for supporting me, tolerating me, standing by me and making me look successful.

– In this journey I am sure I would have hurt or been inappropriate or impatient with many of you, sometimes driven by my task orientation or at times arrogance; I apologize for it from bottom of my heart for those moments and behaviors.

– To all Edelites, you guys rock. An organization is what its people are, and so is true for Edelweiss. You guys make Edelweiss truly distinct and enviable.

Edelweiss is a very fine institution and it takes work of many lifetimes to build such a high quality and ambitious organization. I am confident that it will grow by leaps and bounds under Rashesh’s leadership supported by an exceptionally talented & motivated team. While I will miss this first hand, I will always be proud to see it grow and prosper. My best wishes to Organization and to each and every one of you. I shall always pray to the Almighty for your growth, success and prosperity.

I am moving on to pursue my entrepreneurial passion – my Another Tryst with Destiny, with the confidence that I will continue to enjoy your support, trust, conviction and blessings.

I shall be active on social media and shall continue sharing my thoughts with all of you.

#BeUnlimited in your ambition, enjoy every moment of life, take good care of your health & family.

I would like to end with a beautiful Song by ABBA which me and my daughters often sing together:

I have a dream, a song to sing
To help me cope with anything
If you see the wonder of a fairy tale
You can take the future even if you fail
I believe in angels
Something good in everything I see
I believe in angels
When I know the time is right for me
I’ll cross the stream, I have a dream

I have a dream, a fantasy
To help me through reality
And my destination makes it worth the while
Pushing through the darkness still another mile
I believe in angels
Something good in everything I see
I believe in angels
When I know the time is right for me
I’ll cross the stream, I have a dream
I’ll cross the stream, I have a dream

I have a dream, a song to sing
To help me cope with anything
If you see the wonder of a fairy tale
You can take the future even if you fail
I believe in angels
Something good in everything I see
I believe in angels
When I know the time is right for me
I’ll cross the stream, I have a dream
I’ll cross the stream, I have a dream

Best Regards,

General Global Markets Governance Markets
Stock market fluctuations: India’s structural story is just beginning to play out; we are still at inflection point: FirstPost Article
August 31, 2018

I am writing this article at a time when the markets are hitting an all-time high every few days. Veterans warn us that in times of excessive optimism one should take a more cautious and thoughtful view. However, for myriad reasons (enunciated below), I feel that the best for the markets is still to come and that India’s structural story is just beginning to play out. From a 5 to 7-year perspective, we are still at the inflection point.

First, let’s look at the economic recovery from the numerous reforms that were undertaken in the last few years namely the Goods and Services Tax (GST), Real Estate Regulatory Act (RERA), Insolvency and Bankruptcy Code (IBC) among others. After the initial teething issues — which are characteristic of reforms — the worst is behind us and the economy is largely on the recovery trajectory.

Investment cycle which is crucial to sustaining economic growth has also begun to pick up. Recently, the Reserve Bank of India (RBI) released data on the Capacity Utilization of domestic companies, which has risen to 75 percent in the March quarter — the highest in the last two years. This is a clear signal of an uptick in economic activity and will have a big impact on the profitability of the corporate sector. Demand-led growth will also encourage expansion plans, as is visible from the pick-up in bank credit.

One of the biggest strength of our economy (and something I am particularly enthused about) is our consumption power. As India transforms into a $5 trillion economy over the next eight years, our growth will be more inward-looking domestic demand and services-led (akin to the US in the 1980’s).

India has a potent combination of right demographics and rising per capita incomes; this holds immense promise for consumption-related sectors, both staple and discretionary. As discretionary spends increase, low-cost financing options shall also continue to do well, backed by aspirational purchasing. This bodes well for FMCG, modern trade retailers, healthcare, NBFCs among others.

The other encouraging trend is the structural and diversified rise in Indian exports. Numerous tailwinds like the depreciating rupee, intensification of trade wars between the US and China, revival in demand from the European Union and most importantly, rebalancing of Chinese economy – are reviving the Indian manufacturing led exports.

Along with these catalysts, one must also be mindful of the risks that prevail in the macroeconomic milieu. The revival of the economy faces headwinds, primarily from a rising current account deficit (on the backdrop of a rising trade deficit) given the rising depreciation of the dollar and rising crude prices.

Second, on the political front, this year, we shall witness four state elections and this is also the penultimate year to the run-up of the general elections. Hence, we could see some volatility. Lastly, the global tightening of liquidity in developed markets is putting pressure on emerging markets currencies, bonds and capital flows. However, the external risks are unequivocal for all emerging markets though India is relatively better placed than other markets but, is not isolated from global shocks.

In summation, I feel India’s economy holds tremendous potential over the next decade especially given the three-pronged growth drivers of investments, consumption, exports and the best way to play these themes is to have a long-term horizon and to take advantage of the short-term volatility. This, however, is easier said than done. As is often observed in markets, it is the patience and the behavioral aspects that one needs to master to do well in equities and to use compounding to one’s advantage.

Let me illustrate this with a simple example. Since, inception in 1979, the Sensex has given a 16 percent compounded return annually. To put this into perspective Rs 1,0000 invested in 1979 would be worth a whopping Rs 33 lakhs today. If you started a bit late and invested in 1991 you would still have Rs 20 lakhs; if you began in 2,000 it would be worth Rs 10 lakhs and if you were a really late bloomer, and began investing in 2008 you would still have Rs 4 lakhs!

While this may seem impressive in hindsight, the key thing to note is that one would have had to be awfully patient and would have to sit tight, even in the face of recessions and temporary negativity. To do it successfully is simple, but it is not easy. In this context the words of the famous Peter Lynch serve as the pole star, “My best stock has been the third year, fourth year, the fifth year I have owned them. It’s not the third week, fourth week. People want their money very rapidly, It doesn’t happen.”


Rise of risk, will Federal Reserve come to the rescue: ET Article
June 11, 2018

Since early 2016, the global economy has been in a so-called goldilocks situation of easy liquidity, low inflation and accelerating global growth — a near-perfect backdrop for risk assets to perform. No surprises, therefore, that EM assets and commodities had the best two-year run since 2011. However calm in markets often breeds complacency or as famous economist Hyman Minsky taught — “stability breeds instability”. Despite the calm of last 2 years, it is worth emphasising that the global environment is still characterised by elevated debt levels and central banks are slowly but surely normalising the ultra-accommodative conditions.Untimely US fiscal stimulus may spoil goldilocks set-up

Specifically, it is important to evaluate the possible implication of US fiscal stimulus recently passed by Washington. Traditionally, the US fiscal stimulus happens amid business cycle downturns when Fed is cutting interest rates and this combination is a big boon to emerging markets as it improves their exports and lowers interest rates. However, this time the situation is much more complicated as US fiscal stimulus is occurring at a time when the US economy is close to full employment, inflation is close to target and Fed is raising rates. This is an historical anomaly. One way to think about the situation is to ask who will absorb the rising supply of US treasuries amid US fiscal stimulus?US treasuries supply to rise… who will buy?

Generally speaking, US Fed, EM central banks and global private sector (insurance, pension funds etc globally) are three large buyers of US treasuries. Among these, it is clear that the Fed will actually add to the supply of Treasuries as it normalises its balance sheet. Indeed, the combined supply of US Treasuries (US government + Fed) could ramp up from under $700 billion in 2017 to over $1.5 trillion by 2019. If so, can the EM central banks do the needful? Unlikely, because the EM surpluses today are not even a shadow of what they used to be during 2005-2008 when EM surpluses kept US bond yields under check despite sustained monetary tightening by the US Fed (remember Greenspan’s famous “bond market conundrum”?).

In other words, the combined official sector (Fed and EM central banks) is not positioned to absorb the expanding supply of US treasuries. If so, the global private sector will have to ramp up the purchases of US bonds. And history shows that this happens when private participants perceive higher risk in their portfolios e.g. during crisis-like situation (e.g. around China’s RMB devaluation episode, amid European debt crisis and so on). In such scenarios, US yields surely fall but it is a fall driven by global rush towards safety of US Treasuries and therefore no comfort for EM assets. Even if US yields fall, EM rates could still remain elevated/move higher amid this rush to safety. Recall the situation that played out in 2015 when China was persistently losing reserves amid capital flight (selling US treasuries) and yet US bond yields fell by nearly 100bps but that fall in US yields was no comfort for EMs as the fall in US yields was a reflection of global private sector rushing toward safety of US treasuries amid mounting China risk.

EM dynamic more akin to 1990s than 2000s

No surprises therefore that we have seen involuntary rise in interest rates in EM, much ahead of their growth cycle. In recent months, bond yields in EMs have risen 70-80bps, a few central banks — Turkey, Indonesia — have been forced to hike rates amid pressure on exchange rates (EM FX down 8-10% from their peak). Now, one may ask, how come Fed’s tightening cycle of 2004-2007 was so peaceful for EMs (indeed EM saw full-fledged upswing in business cycle and asset prices)? It was so because the Fed and EM monetary cycles (and business cycles) were fully aligned. Growth and rates fell together and rose together.

Indeed, the history which is more instructive for our current situation is Fed’s tightening cycle in 1990s (not 2000s), which proved quite troublesome for EMs (the Mexico crisis in 1994, the Asian Financial Crisis in 1997) precisely because EMs were not in a position to match US rates higher. Put differently, the global economy is basically facing two misalignments. One is the mismatch between US fiscal and monetary policies — the former is adding stimulus, the latter is withdrawing (this will tend to push rates higher); and second, US monetary cycle and EM monetary cycle (which would tend to push dollar higher). Left to itself, this dynamic will pose serious challenge to macroeconomic management in EMs.

What is the way out?

The Fed backing off from aggressive rate hikes will be one such development. This in turn could be led by unexpected fall in US inflation (or sharp fall in oil prices) and/or softer than expected incoming economic data from the US. Also if EM situation deteriorates, Fed could certainly reassess the situation as has happened so often in history.

Interviews Markets
Rising probability of of global risk-off biggest threat to Markets: Business Standard Interview
June 4, 2018

You expected around 10-15% return from the markets in calendar year 2018 (CY18) when we spoke last in February. Is there any change to these estimates?

I have maintained that 2018 will be a year of Micro improvements and Macro risks. I feel that that is panning out, the numerous structural reforms undertaken over the past years(GST/RERA) is behind us and we are now seeing a largely broad based recovery.
While domestic fundamentals are strong, global concerns with regards liquidity and balance sheet tightening of the Fed & ECB are areas of concern. Further, the rising Oil prices, Trumps trade wars and more recently the Italy issue are all developments that have contributed to the volatility of the markets. That being said, I am still bullish on India’s prospect of being a story of the decade and the opportunity it offers to create significant wealth, despite all challenges & risks.

How insulated is India from these risks?

A rising probability of global risk-off is the biggest risk to the markets which could get triggered from any of the factors like Trade war, Fed tightening or European Situation. Markets gets jittery whenever these signs develop. USD getting stronger also has huge implications for the already leveraged EMs (India included) in terms of cost of capital as well as capital availability. On the domestic front, given that this year is a precursor to the election year, one could lots noise which keep markets jittery.

The weights of India and Brazil markets could be capped on MSCI Indexes. What are the implications for the Indian markets?

MSCI currently has an exposure to Indian market to the tune of $35-38Bn via the MSCI EM Index. Application of capping factor to India will surely dent the flows that track India via the Emerging Markets Index. On one side China A share inclusion in the EM basket will gradually take China’s wt in MSCI EM higher and on the other hand use of capping factor on India will further reduce the wt of India in the EM Basket. We believe if such capping factor is introduced then MSCI EM Index will be highly dominated by China Wt and will not reflect the true picture of Emerging Markets.

What are your key takeaways from the March 2018 quarter earnings season?

I think by and large, the results have been on the good side, indicating a demand recovery in the economy. The mid-teens growth of YoY PAT in Commodities and Domestic Investment sectors and with FMCG, Domestic Auto companies, retail lending banks, NBFCs posting good results it is safe to say there was a broad based recovery. It was heartening to see a green shoots in rural economy with FMCG and Two wheelers posting good numbers. Margins seem to be getting better in IT, whereas in the Consumer Durables space, demand is muted, and an increase in input prices is putting pressure on margins.

What are your sector preferences from one year’s perspective?

We are quite positive on IT, BFSI, Infra and Consumption. Also, quite positive on private capex. I think this is one overlooked theme in the markets. Green shoots are finally visible after a long hiatus of over half a decade and hence this is one sector investors should watch out for. Most corporates across sectors have started equipping themselves for growth as their capacity utilization is rising. Power and Utilities is another sector that is broadly neglected by the market, but I feel this too could be a good contra bet.

Has the outcome of the recent elections in Karnataka made foreign and retail investors in India cautious on the possibility of a hung mandate in the general elections scheduled for 2019?

I think that it is still premature to comment on the General Election outcome, and one State’s outcome does not constitute a trend. Further, the market recovery post results has clearly indicated that the Market has treated this as a one off event. However, generally speaking there could be volatility in the year, as is usually seen in the run up to major elections. There will be lots of noise in next one year around politics which will keep market nervous.

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How your mental biases can stop you from becoming rich: ET Wealth Article
May 14, 2018

As a child, coming from a middle class family, I frequently used to wonder what it took to be rich. It was not until I read Predictably Irrational by Dan Ariely and Secrets of Millionaire Mind by T. Harv that I discovered how becoming rich was more about one’s mindset than anything else.

We often imbibe certain principles from our families, social circles, etc. which unknowingly deter us from developing the mindset needed for wealth creation. Find out if any of these cognitive biases are preventing you from getting rich.

Do you strive to make your money work for you?

I saw my family members work hard, sometimes more than 14 hours a day. However, it was surprising to see the same dedication missing when it came to managing their hard-earned money. Most people, including accomplished professionals, do not focus on making their money work at all. Unless you approach investing your hard-earned money with the same passion and dedication with which you earn it, you will not be financially independent.

One of the ways I do this is by asking myself: ‘Is this the best investment I can make with my money?’ This simple question will drive you towards the most effective investment option. Remember, you can only work 8-12 hours a day, but your investments work round the clock. Warren Buffett has put it aptly: “If you don’t find a way to make money while you sleep, you will have to work till you die.”

Investing is about risk and reward, not just risk

When most people think about investing, they think of the risks involved and the possibility of losing money. Generating returns is an afterthought. While there is nothing wrong with assessing investment risks, there is a difference between risk consciousness and risk averseness. Risk consciousness is about minimising the risk for a given reward. Risk averseness is just the fear of losing money.

In wealth creation or investing, the interplay of risk and reward is very important. People tend to go back to being risk averse, if they lose money in a particular investment. Their subsequent actions are defined by their previous experience. But whether you play poker or invest, when you lose money, it doesn’t necessarily mean that you made a bad bet or investment. Whatever the asset class you choose—equities, real estate, gold—be cognizant of why you are investing in it. Look at what is the upside—how much you can earn, with how much certainty and how you can minimise the uncertainty. This is called taking calculated risks. As Buffet says, “Real risk comes from not knowing what you are doing.”

Do you focus on increasing earnings, or just cutting costs?

Our Indian culture teaches us to control our expenses. It’s a great thing. But the moment we are faced with a sudden expense, our first reaction is to cut back on spendings. While this might help temporarily, it is not a sustainable solution. Why not look at increasing the family income? Find something that you are good at and see if you can monetise it.

Something that you can do in your spare time for which people are willing to pay. More than the end result, it is such a mindset that needs to be cultivated. Most successful people build multiple sustainable income streams, whereas the others are largely dependent on income from salary, and look at improving their savings by curtailing their expenses.

Do you focus on saving for goals or financial independence?

Human beings have a commendable ability to work single-mindedly and tirelessly to realise specific goals. Our savings mentality is events based and the aim is not financial independence by a certain age—which will also take care of the most important events in one’s life be it children’s education, marriage, etc. When there are emotional aspects playing in financial decisions, the decisions will always be sub-optimal .

A marriage 20 years down the line is a goal that may be met by putting in money every month into a savings kitty but, if the goal is financial independence, say, by the age of 45, then this cannot be achieved by a linear growth in income and savings. You will have to find alternative ways, including upgrading yourself to earn more, finding better investment opportunities and, most importantly, orienting yourself to wealth creation and not just wealth preservation. As Michelangelo said: “The greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low, and achieving our mark.”


Why well priced acquisitions are important; why catastrophes could bring out Berkshire’s inherent strength in the Insurance business; and how market vagaries can create long term value: My learnings from Buffett’s Annual Letter to Shareholders
March 13, 2018

Every year around late February, I wait for Buffett’s Annual Letter to shareholders. Though unfortunately, I have not been a shareholder of Berkshire Hathaway; what I have gained from reading the letters has been priceless. I strongly feel that his letter is amongst the finest pieces of Investment (and finance) literature that is written.


This is the first year I decided to pen down my thoughts (although a bit late) on the annual letter (which incidentally is the shortest one in recent times), and what it teaches us about investing and about Buffett himself.


Like every year, the letter begins with Berkshire’s year wise performance since inception along with the corresponding performance of the S&P 500 – the benchmark index. Berkshire’s compounded returns since inception (1965-till date) have been 20.9% which comprehensively outperforms the index which grew at 9.9%.


Two aspects about the performance are remarkable- first Berkshire has grown at a compounded rate of ~21% annually over a 57 year period well above the benchmark is in itself phenomenal. Such consistency (with such a massive AUM) over a prolonged period undoubtedly make Buffett and Munger the best money managers in the world.


Second, a 21% return would in effect be much higher in equivalent Indian terms -mind you in the last 25 years the 10 year US T-Bill has historically yielded half of what the Indian T-Bill returns ie 4.42% vis a vis 8.13% (since credit is relatively scarce in a developing country such as India compared its developed counterpart- the US.)


The letter broadly details 4 aspects- Acquisitions, Insurance, Investments and Active vs Passive Investing, which I shall touch upon sequentially, and finally I shall give my 2 cents on traits that make Buffett not only an outstanding money manager, but also an astute and businessman.


The first theme is that of acquisitions: to quote


In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.


That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.”


Now Buffett and Munger are value investors in the true sense of the term, but what really stands out is their conviction of buying cheap the very basic principle of investing- which is particularly difficult to adhere to in times of euphoria and their aversion to leverage.


Discussion on merits and demerits of leverage is usually an academic one, but the point to note here is that the best money managers stick by their principles – even at the risk of underperforming in the short term in order to “sleep well at night.”


Conviction, discipline and sticking to what you know are the cornerstones of successful investing and Berkshire is an embodiment of this.


The letter highlights many notable acquisitions, with Pilot Flying J being the largest. Given Berkshire’s AUM they are compelled to make big tickets investments, but one common underlying theme in all of them is that the companies, is that the size of the opportunity relative to the sector and consequently their growth prospects remains invariably vast.


The second theme is Insurance, which has been an engine for Berkshire’s growth over the last 50 odd years. While, Buffett’s often stated “float income” and “underwriting profits” enable him to hold billions of dollars, and “get paid for holding them” (and this has in effect facilitated Berkshires growth over the decades) this year’s discussion gives a unique insight as to why structurally Berkshire is one of the best possible insurance company by sheer design and offers an unparalleled competitive advantage in the industry.


The reasoning is as follows: last year US suffered a black-swan event of 3 hurricanes hitting them- namely at Florida, Puerto Rico and Texas. The cumulative loss arising from these hurricanes is about USD 100 bn, and Berkshire’s losses amount to USD 3 bn. This accounts for less than 1% of Berkshire’s net worth, whereas other insurance companies suffered losses in net worth ranging from 7-15%.

The probability of a mega-catastrophe hitting the US is 2% and the estimated damage is far more in such a scenario, and is pegged at USD 400 bn. In such a situation, Berkshire is likely to face a loss of the order of USD 12 bn. A loss of such a magnitude would place most US Property and Casualty insurers out of business; but Berkshire, by the virtue of being a mammoth diversified conglomerate is likely to earn far more than that amount through its non-insurance businesses in any given year. This explains why the large insurers come only to Berkshire for reinsurance of such claims.


This is a classic example of a moat that they have successfully created over the years, and one which leads to a virtuous cycle of business for their insurance business.


The investing section once again highlights the principles of successful investing, for Berkshire stocks are not a ticker but interest in businesses, and over time if the businesses do well, it is likely that they will do well. The theory is aptly substantiated with a snapshot of Berkshires largest holdings, which were investments made using the same principles- among these are behemoths ranging from Apple Inc, Bank of America, Coca Cola, and General Motors amongst numerous others.


Over the years Berkshires top fifteen investments have grown 2.3x, but this has not been in absence of stock market vagaries.


The four major dips in US stock market history (crash of 1973 caused by a dramatic rise in oil prices and downfall of Heath government, Black Monday- the crash of 1980s, the dot-com bubble of 2000s and finally the sub-prime crisis of 2008) and the percentage correction in Berkshire shares have ranged from 37% to as much as 59%. Infact, this is one of Buffett’s strongest reasoning against leverage and to highlight how wildly and unpredictably stock markets can sway, which when taken advantage of can provide outsized returns.



As Buffett poetically puts it-

“Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value. Over time, however, Ben Graham’s oft-quoted maxim proves true: “In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”


When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:


“If you can keep your head when all about you are losing theirs . . .

If you can wait and not be tired by waiting . . .

If you can think – and not make thoughts your aim . . .

If you can trust yourself when all men doubt you . . .

Yours is the Earth and everything that’s in it.”


The last section talks about how active fund management (with high fees) can underperform an Index over a long period. The key insight being that inactivity can sometimes be economically more lucrative than activity– an often underappreciated facet of investing.


While Berkshire’s story continues to be an epitome of superior money management, there are some traits that make Buffett not only an exceptionally good money manager, but an equally great businessman. Chief among them is his outstanding marketing acumen.


The last couple of pages describes the itinerary of annual meeting, a skillful and imaginative initiative to exhibit the sheer diversity and the magnitude of Berkshires investments. Each of which are on display at the meetings, ranging from a live stream on Yahoo (a recent investment in 2016) to a special shareholder discount on GEICO insurance a display of books authored by them. Buffett light heartedly and wittily runs us through all that is on offer, adding a touch of his famed frugality by suggesting to fly to Kansas City (instead of Nebraska) to save on flight fares.


One of the other aspects is Buffett’s well thought out succession planning- where Ajit Jain and Greg Abel are elevated as Vice Chairmen to look at the insurance and non-insurance businesses respectively. While Todd Combs and Ted Weschler independently handle the investment fund (collectively managing USD 25 bn) as Munger and Charlie continue to manage the rest of the investment operations.


Another fact I have often noted in his letters is his ability to get the best leaders to do the job and his conviction to stand by them in trying times. This year he emphasizes that in spite of an unusual year in the insurance business, some of the best brains in the industry are running it. All of this not only enables him to invest his money efficiently in companies but also ensures that these companies (Berkshire included) are in able hands.


Yet again the Oracle of Omaha has taught us noteworthy lessons on life, and this year again I have savored the letter.

I would like to end with one of the lines which left the maximum impact on me was towards the end of the letter, where he states:


“There is no one more important to us than the shareholder of limited means who trusts us with a substantial portion of his or her savings. As I run the company day-to-day – and as I write this letter – that is the shareholder whose image is in my mind.”


And over the last 50 odd years they have successfully done just that.

Earnings to grow in mid-teens for first time in 7 years: ET Interview
February 12, 2018

Q. What do you think of the ongoing market fall post-Budget? What is your outlook?

After a fantastic year in 2017, there was a panic-buying-like situation unfolding in January. With the cost of capital going up, concerns about its sustainability have been around. When markets are positioned like this and most people are on the same side of the market, even a small development or event can lead to a sharp correction. This is what has happened. As we move to FY19, I think FY19 should see a mid-teen earnings growth, probably for the first time since FY12.

Q. Has the LTCG tax had an impact on the markets?

I don’t think so. LTCG, with the grandfathering clause, is not the reason for the current meltdown. The size of opportunity in India is just so huge that given the upside, LTCG is unlikely to discourage investors. Also, while markets such as Singapore and Hong Kong do not tax capital gains from equities, other developing markets such as Brazil, China and South Africa do levy this tax. Over five years, India is likely is likely to outperform other emerging markets (EMs), but this year, given macro headwinds and many elections, I think we might perform on par with other EMs.

Q. How much do you expect the Sensex to fall from the current levels? How comfortable are you on the market valuations?

It is always difficult to predict the extent of a liquidity led move on the upside and especially on the downside. It will depend a lot on global factors. I think lots of investors will find markets attractive around 9,800-10,000 levels of Nifty. I do not see this as a harbinger of a big meltdown. Nifty earnings (per share) are expected to be in the range of ₹580-600, which means it’s trading in the range of 17-18 times which is not expensive given the growth ahead of us.

Q. Do you think India Inc will rebound in Q4? Which sectors will lead the revival?

We saw good earnings growth in Q3 and this shall only get stronger in Q4. Metals, private banks and consumer (staples and discretionary) shall lead the revival. However, as we move to FY19, I expect earnings growth to be more broad-based. Last year, several distressed sectors like pharma, telecom and banks had taken a toll on earnings growth; excluding these, earnings grew approximately 15%. I believe, this negative contribution will now turn positive and a broad-based earnings growth is anticipated.

Q. What are the top macro themes that will play out over the next few years?

Among the long-run themes, there are four big changes which I am very bullish on. First, is the grey revolution embarked upon by this government. Over the next few years, we are going to see significant increase in spending on roads, railways, metros, etc. and affordable housing. One should certainly have exposure to companies in this space. Second theme is financialisation of savings. Today, there is an equity cult being developed among Indian households, and they are finally realising the importance of having financial savings, rather than physical. Third, is the fact that rural economy is on the mend mainly due to government support. The recent budget adds to my thesis that government realises the importance of developing the rural economy. It is only a matter of time before the rural consumption engine starts picking up. Fourth is the fact that global growth is picking up in a broadbased manner for the first time since the global financial crisis. This should help improve IT sector earnings – A sector which has massively underperformed and is trading on cheap valuations.

Q. Can you tell us about your upcoming Conference and the theme for this year?

This is the 13th Edelweiss India Conference 2018 and this year’s theme is ‘India 2025: Another Tryst with Destiny’. We believe India will make this tryst in 2025, when it becomes a $5 trillion economy, the third largest in the world. In the conference we are exploring the various themes and trends of opportunity over the next eight years. Our endeavor is to gaze into the crystal ball at the macro themes that will shape the India of tomorrow. We will have over 150 corporates and over 200 Institutional investors both domestic and foreign, deliberating on these opportunities.


General Governance Markets Politics Regulations
Budget 2018: Expect capex push through rural and infra spending : ET Article
January 30, 2018

Over the past couple of years, the significance of the Union Budget has slowly but surely diminished. Paradoxical as it may seem, this is good news. Let me enunciate why it is so.

Past governments have made major policy initiatives in the Budget, but this government has been legislating structural reforms all year round. Last year saw the Goods and Services Tax (GST) and the much-needed Real Estate Regulation Act (RERA) becoming a reality.

Further, indirect tax is now under the purview of the GST Council and not going see any change in the Budget. It is in the context of these factors that I feel that the significance of the Budget is going to be diminished.

As this is the last full Budget of the NDA government in the runup to the 2019 general elections, I would anticipate a slight spike on the expenditure front (as has historically been the case). At the same time, I don’t expect the government to breach its fiscal deficit target at 3 per cent of GDP as recommended under the Fiscal Responsibility and Budget Management (FRBM) Act; so it is most likely that the government starts looking for alternative funding sources.

Key beneficiaries on the expenditure front are likely to be the rural economy – especially since agriculture growth is estimated to have slowed down to 2.1 per cent (more than 50 per cent) from the last financial year and in the aftermath of the Gujarat election results, the governments proclivity for the rural economy is likely to be high.

One thing I have always maintained is this government’s serious intent to structurally mend the rural economy. This is manifested by the crop insurance scheme and productivity accretive measures like soil health cards, DBT of fertiliser subsidy and huge investments in irrigation among others. Therefore, I believe rural sector will continue be one of the key focus areas of the Budget.

In continuation to last year’s reforms and in line with the larger strategic vision of this government, infrastructure and affordable housing shall both also be a cynosure on the expenditure front. India is in the midst of its second grey revolution – an era of massive infrastructure capacity creation and the government is likely to continue expenditure on key Infrastructure projects.

Affordable housing shall also continue getting attention with more fund allocations to credit-linked interest subsidy schemes (CLSS) for housing loans, in line with the government’s objective of Housing for All by 2022.

On the revenue front, I expect a further rationalisation of direct tax rates – both corporate as well as individuals.

Indirect taxation as highlighted earlier is now under the purview of the GST Council, so the major scope for manoeuvring fund inflows would be on the non-tax revenues. Various ministries have conveyed that they will look at monetising their assets and not solely rely on budgetary support for their investments.

This is a trend which is likely to sustain over the longer term. Collectively, in the last financial year the government raised Rs 52,500 crore in this financial year through myriad divestment avenues, including listing of insurance PSUs and the CPSE and Bharat 22 ETFs. This goes on to show that non-tax revenue can generate good traction, if thought through well.

As the tailwind of oil prices gradually diminishes, and private capex growth remains relatively muted, the government will need to aggressively push forward on capital expenditure to boost the economy and induce private capex.

The government is likely to execute this through rural and infrastructure spending measures; which on the revenue side are most likely incrementally going to be funded through non-tax revenue.

In summation, I anticipate the Budget to be a fiscally responsible one with structurally sound policy announcements, striking a nuanced balance between populism and realism.