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Posted by VRIDHI on 11/05/2015
The Sensex and the Nifty gave unexpected returns since May’2014, after the BJP led, NDA led Narendra Modi government came to power. The situation has changed, portfolios which were in dark green seem to have been painted with red. Market has corrected and as usual new entrants who came into the markets just in past one year are thinking have they committed a mistake?
What happens when there is an electricity failure at your home in the night for just two hours? The night becomes darker, you feel as if hell has fallen. Then one of you from your family lights a torch or a emergency or just a candle. Suddenly in the dark you feel a sigh of relief. Though the power has not returned, you feel as if things have turned for positive!
Our Indian economy had passed the same phase. We witnessed a decade of miss-rule with corruption as the main agenda led with personal agenda of each minister, which led to infighting within ministries, leading to emergence of various additional taxes which were to be paid in suitcases to get anything and everything moving in the stalled economy.
Iam particularly very angry with the last government’s 10 year miss-rule since it ruined my peak career period. One can say the peak career period of any human being is between ages 25 to 40. This is the period when one can work hard beyond the physical and mental capacity, since the age is on our side. Very few yrs are now left for me to cross the above age bracket! Whatever Iam today, is on account of my own hard work. Had the government, which was supposedly led by an economist, performed its duties properly, I would have been atleast 5x of what Iam today!
What is happening now? These people were rejected badly by the masses, who have given the torch to a new person, person who has proven capabilities as a CM for many terms, to perform and light the dark economy back to brightness. He has to perform, he has the mandate to perform but the same people who were rejected are trying to cause hindrance at every stage. They are taking help of lies, frivolous and imaginary arguments, misguiding people so that a person who has credibility as a CM and now has become the PM can be dethroned and their prince who has done nothing in life till date can be made to sit on that constitutional chair.
Coming back from the first para… the Sensex and Nifty have corrected. If you have entered into the markets for the first time with no previous experience, please don’t think you have committed a mistake by investing in India story. The #ModiSarkaar will complete its one year in office in the 3rd week of this month. The dust seems to have settled now, the unreasonably high expectations that the economy will recover in the first year itself seem to have got tempered now. This is actually good for the markets.
You can read the latest two articles which got published in ToI website on what KV Kamath has to say and Rajeev Chandrasekhar article. Both can be read on my facebook id www.facebook.com/vkarwa/
The opposition is trying to halt every move of the government so that the growth doesn’t come back. The biggest examples are the GST and the Land Ordinance. The opposition is trying to paint the government as anti farmer and pro corporate. They seem to have forgotten that internet is a great tool today and they cannot stop the right information to flow to public. Will they finally succeed in painting the government anti farmer and anti poor or not is a different subject, but they have Already painted themselves as Anti-Growth.
The Land Bill was passed in a hurry in 2013, purely eyeing on elections. BJP also committed the same mistake since they didn’t want to appear anti-anybody. Then after the government got formed, even the opposition ruled state CMs started cribbing that the flawed law passed by their high command will lead to chaos. Hence the changes in the land bill was necessary.
What has been included in the land bill? These are:
(a) such projects vital to national security or defence of India and every part thereof, including preparation for defence or defence production.
*Defence if for safety of the country. It cannot be anti poor, anti farmer or pro corporate.
(b) rural infrastructure including electrification.
*The rural says it all, it’s not urban. Poor live in rural areas or Adani’s and Ambani’s?
(c) affordable housing and housing for the poor people.
*The definition of affordable housing is houses worth less than Rs.25 lacs. Does the opposition mean Adani’s and Ambani’s will live in those houses?
(d) industrial corridors set up by the appropriate Government and its
undertakings (in which case the land shall be acquired up to one kilometre on
both sides of designated railway line or roads for such industrial corridor).
*If we need to grow we need to create industrial corridors. This only can stop migration of rural population to cities!
(e) infrastructure projects including projects under public-private
partnership where the ownership of land continues to vest with the Government.
*Anyone except the opposition parties in India have a doubt that India needs infra? Even opposition knows it but there aim is selfish.
In spite of all these if the opposition feels its anti blah blah.. there’s a section in the land ordinance namely: Section 10A(1) which reads as follows:
10A (1). The appropriate Government may, in the public interest, by notification, exempt any of the following projects from the application of the provisions of
Chapter II and Chapter III of this Act, namely:— (Followed by all the 5 items mentioned above.)
Hence, the opposition can say: let NDA ruled states implement the bill and our states will use the power given and not let the bill get implemented in our states. They cannot say this… since the states implementing may show growth and their states may lose out and hence they may lose elections!
Thus it is in their selfish interest to create an anti-blah blah impression in the minds of public.
I believe my country, our country Bharat can get to the No.1 spot in the world. If we need to beat mighty China we need growth. Growth can come only when more and more companies start investing in India.
Factories, Bridges, Roads, Dams etc, etc., need land, they can’t be built above clouds!
Yes, farmer plight and the suicides are a concern. But that’s not new! More than 2.5 Lac farmers have committed suicides during the 10 yr miss-rule also! Hence it’s a concern which needs to be dealt with separately. Because of this you cannot hold the country to ransom. You cannot kill the patient in order to treat a disease.
People in political circles are just worried that if growth comes back, they will never be able to ask for votes again. Hence keep India poor.
Please don’t take this article as political. Majority of market movements happen on account of politics. That’s the Hard Reality! Everything mentioned above are facts. If the Modi government doesn’t perform I will be the first person to criticize it. As a professional I need growth, my growth can come only if my clients grow, my clients can grow only if they have good opportunities in work and life and that can happen only if Bharat (India in English) grows!
Trust the country. Remain invested, GST and Land Bill alone can take market above 30000 Index easily. Market is in panic due to the personal agendas of politicians. But when the civil societies opinions become more clear these people will have to mend their ways. And I believe both, GST and Land Bill will be reality soon. It will be sensible on part of the Modi Sarkaar to give excuses later. They have other constitutional power to pass these bills. Hence I once again say Invest, if you are scared to enter in one go use the Systematic Wealth Creation Plan: http://vridhi.co.in/2015/04/14/swc/
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Posted by VRIDHI on 05/05/2015
Is the market really upset with the government for not doing enough for the economy?
Rajesh Kumar, Mint 29/4/15
So far, the new government has done nothing but talk, and it is a shame because (Prime Minister Narendra) Modi had experience; he said he knew what needs to be done. He campaigned for many months saying he knows how to fix India, but he has done very little.” This is how veteran fund manager Jim Rogers, in an interview with Mint last week, assessed the performance of the Modi government, which will complete its first year in office next month. Rogers also added that he was getting disillusioned about India. (See: So far, the Modi government has done nothing but talk: Jim Rogers, 23 April.) Rogers is not the only one who is readjusting expectations; other investors, too, are doing so. The CNX Nifty, after touching an all-time high in March, is down about 10% since, and technical analysts are suggesting that it may fall further. So, is the market really upset with the government for not doing enough for the economy?
Many people in the market expected things to change dramatically after the Modi-led National Democratic Alliance government took office. In fact, the momentum in the market started building long before the first vote was counted on 16 May 2014. As a result, the benchmark indices gained about 30% in 2014, making it the best year for Indian equities since 2009. But in 2015, investor confidence seems to be dissipating, at least in some sections. Markets have fallen in recent days; the year-to-date gains for Nifty is almost nil. This is bound to make some investors nervous, especially those who came in late, and with hopes of making quick money.
However, the basic issue is that companies’ earnings haven’t matched the expectations of investors and analysts. The quarterly result announcements for the three months to March have so far been disappointing. An analysis published by this paper showed that the aggregate net profit of 101 companies that have declared their numbers fell by 9.23%, their worst performance since December 2012 (see: Fourth quarter results paint a grim picture, 27 April).
But this performance is not necessarily a consequence of what the government has done (or not done) since coming to office. For example, the uninspiring show by companies in the information technology business practically has nothing to do with how the government has performed over the past one year. The basic problem is that the turnaround in corporate profitability is taking more time than analysts had expected and, as a result, some investors are once again beginning to see other structural problems in the economy. “Even if Modi comes through, India’s bureaucracy is so entrenched, so powerful and so staggering. India does not have the education, infrastructure and work ethic that China does. India is a chaotic democracy—democracies can be extremely successful, but not chaotic democracies. In my view, India is not a terribly rational country. I would suspect more and more people in India will start to get impatient, and not just its youth who need jobs,” Rogers said in the above-mentioned interview. Clearly, these problems are not new, but if some investors expected these conditions to change in a year, they probably need to recalibrate their investment strategy.
Investors, overwhelmed by the Bharatiya Janata Party’s majority in 2014 election, had pushed stock prices and valuations in the expectation of big bang reforms and a possible cyclical upturn in company earnings. And both didn’t happen. On the economic reforms front, it is now clear that the government will move incrementally. In fact, the Economic Survey 2014-15 argued that big bang reforms normally happen in crisis situations. “Much of the cross-country evidence of the post-war years suggests that big bang reforms occur during or in the aftermath of major crises…. India today is not in crisis, and decision-making authority is vibrantly and frustratingly diffuse,” said the survey.
An incremental approach is not a bad thing, provided there is steady movement because in the end it all adds up. Investors can always argue that things could have been better, and they will not be entirely wrong, but it is also true that there has been progress on the policy front. In addition, lower oil and commodity prices have helped. But it appears that earnings revival will take longer than analysts have been anticipating. Crop damage due to recent unseasonal rains and the possibility of a poor monsoon can delay the process. This can also shift resources and government attention to the rural economy, which can affect market sentiment in the short run.
At a broader level, investors shouldn’t worry too much about the ongoing correction in the market as it will take out some froth and open up opportunities to buy good stocks at reasonable valuations. Seasoned investors, both domestic and foreign, would agree that India is a long-term story. Indian markets have satisfactorily rewarded long-term investors in the past and there aren’t sufficient reasons to believe that they won’t in the future.
In fact, conditions in 2014 weren’t as good as markets were portraying them to be and, perhaps, they are not as bad as some commentators are interpreting them to be this year.
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Posted by VRIDHI on 02/05/2015
The sense and nonsense of market cap to gross domestic product ratio
Punditry of all kind has jumped on to the bandwagon and this ratio has become one of the most used and abused in the financial markets
Rajeev Thakkar, Mint 23/2/15
Still, it is probably the best single measure of where valuations stand at any given moment.” So said Warren Buffett in December of 2001, in reference to the market capitalization to gross national product ratio (he used GNP in 2001 and GDP, or gross domestic product, while giving a talk earlier in 1999).
Buffett used the ratio in 1999 to illustrate that stock market returns were far higher than the rate of growth of the economy over a 17-year period and that stock valuations looked expensive. Sometime later, the Dot Com boom went bust and the rest, as they say, is history.
Since then, punditry of all kind has jumped on to the bandwagon and this ratio has become one of the most used and abused in the financial markets.
These days it is almost heresy to argue against what Buffett has said. However, the ways in which the market cap-GDP ratio is used these days is not right. Buffett himself has not given an unconditional support to this ratio. In the same article, in Fortune, he says, “The ratio has certain limitations in telling you what you need to know.”
When we use the market-cap-GDP ratio to do cross-country comparisons, we come to strange conclusions. Let us look at an example. Say, the US GDP is approximately $17 trillion and the market cap is $22 trillion.
The ratio of the two works out to 1.29. At the other end, let us look at Saudi Arabia. Here the GDP is about $745 billion and the market cap is only $483 billion. So, the market cap-GDP ratio would be 0.64. Does this mean that Saudi Arabian stocks are undervalued and American stocks are overvalued? (We are not considering oil prices here.)
What if I told you that the estimated market value of Saudi Aramco, the national oil company which is not listed, was estimated at $7 trillion by The Financial Times?
If this company were to be listed on the Saudi Arabian stock exchange, the market cap-GDP ratio of the country would immediately jump to more than 10.
In cases of communist countries such as Cuba, there may not be any market cap as there are no listed companies, while obviously there is GDP.
Hence, conclusion No.1: Cross-country comparisons do not always make sense. The ratio would get skewed because each country would have a different proportion of listed versus unlisted enterprises.
Let us do a thought experiment. Assume that all the states in the US are independent countries. Would it make sense to compare the market cap-GDP ratio of California (which has high-tech industries, entertainment, tourism, and more) to that of Nebraska (agriculture) or Texas (mainly oil and agriculture)?
In the same way, it does not make sense to compare Russia or Australia with India on this parameter.
Conclusion No.2: The composition of each economy differs. Some economies are material-led and have sectors such as mining and oil and gas. Some have manufacturing companies while others are services-led. In such cases, too, cross-country comparisons do not work.
Comparison across time
So what about comparing an economy over a certain period? Surely monitoring the market cap-GDP ratio of the Indian market over the years would indicate some trends on valuation? Maybe not. For one, the proportion of listed businesses versus the unlisted ones keeps changing over time. For example, we did not have companies like Tata Consultancy Services Ltd, Coal India Ltd and DLF Ltd listed on Indian stock exchanges in 2003. These businesses existed for many years before getting listed. But the fact is that even just these few companies may account for as much as 8% of India’s stock market’s market cap today.
And we still do not have entities such as Indian Railways, Life Insurance Corp. of India, Bharat Sanchar Nigam Ltd and Air India Ltd listed on the exchanges. If these organizations were to get listed, say, over the next decade, comparing the market cap-GDP ratio for Indian markets over a period of time would again not make sense.
This means that using comparing this ratio for the same economy over time is also fraught with risks. So, take the pontifications of gurus on this ratio with a pinch of salt.
Market cap-GDP ratio versus interest rates
Investors are looking at opportunity cost all the time. Some may patiently wait, keeping their money in a bank account till the right opportunity arrives. Ultimately the money has to be put to work and returns that one gets depend on the investing environment.
One of the important factors governing the investing environment is the prevailing level of interest rates on risk-free government bonds. Buffett refers to this in his 1999 and 2001 articles. The market-cap-GDP ratio was low at the time when government bond yields had gone up to 15% per annum. Conversely, when interest rates are down and are expected to stay low, the ratio increases.
This brings us to another conclusion, that the ratio also has to be seen in the context of the prevailing interest rates and the opportunity cost of capital.
The ratio is not something that can be used to pass judgement on where a market is in terms of valuations and whether it is attractive or not. Many people use the ratio to call market tops or to give buy advice. It is incorrect to do so.
Rajeev Thakkar is chief investment officer and director, PPFAS Asset Management Pvt. Ltd.
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Posted by VRIDHI on 29/04/2015
Swaminathan, Times of India 26/4/15
Rahul Gandhi wants to escalate the suicide of a farmer at a Delhi AAP rally into a national election issue, painting Modi as pro-industrialist and anti-farmer. Mamata Banerjee leveraged resentment against land acquisition in Singur and Nandigram to unseat the Marxist government in West Bengal. Can Rahul do something similar?
Some BJP stalwarts want to dilute the new land acquisition bill to win over enough opposition parties to ensure success in the Rajya Sabha. But hardliners call this submitting to blackmail on an issue that can, with proper communication, place the BJP on the moral high ground. They would rather risk defeat in the Rajya Sabha, and then clear the bill in a joint session of Parliament, where the NDA has a majority.
The hardliners are right. The analogy with Singur is false. The new bill will gain votes, not lose them in the 2019 election. The 2013 land acquisition act of the Congress had so many onerous clauses that acquisition (and related projects) came to a virtual halt across India. Economic growth and job creation crashed, so voters turned against Congress with a vengeance. Its supposedly pro-farmer measure boomeranged.
Modi has raised high job hopes. He cannot get re-elected without fast economic growth that creates jobs and business opportunities galore. For this, he must change the 2013 law to ensure smooth, speedy acquisition for government infrastructure and industrial corridors. Without that, the economy will not accelerate, and voter resentment at slow growth will far exceed any anger over cases of faulty acquisition.
Besides, faulty acquisition typically hits the electoral fortunes of chief ministers, not New Delhi. Maybe 90% of rural Indians have never met a central government official. Those they know — the police, revenue and administrative staff, canal and electricity staff — are all state officials. Even New Delhi’s programmes are implemented by state officials. So, if implementation is good, voters applaud the chief minister, not New Delhi. Similarly, bad implementation sinks the CM, not the PM.
The Congress claimed that its farm loan waiver and MGNREGA (its rural job scheme) won it the 2009 election. Really? Congress won only nine of 72 seats in three very poor states where these schemes should have helped most — Bihar, Chhattisgarh and Odisha. Seminal research by Poonam Gupta and Arvind Panagariya shows that voter behaviour in 2009 was explained overwhelmingly by the acceleration or deceleration of economic performance in a state, not doles or write-offs.
State GDP growth shot up between 2000-04 and 2004-09 from 4.5% per year to 12.4 % in Bihar, from 4.8% to 10.2% in Odisha, and from 6.1% to 9.7% in Chhattisgarh. Despite big overall Congress gains, voters in each of these non-Congress states voted overwhelmingly for their CM’s party. By contrast, the Congress gained 42 seats in opposition-ruled states where economic growth had not accelerated — UP, MP, Rajasthan and Punjab.
Examining state GDP growth between 2004-05 and 2008-09, Gupta and Panagariya divided the major states into three growth categories — high, medium and low (relative to national growth). In high-growth states, a whopping 85% of candidates of the incumbent state party won in 2009.
The winning rate dropped to 50% in medium-growth states and 30% in low-growth states. Clearly, fast growth mattered most of all, though other factors (alliances, caste, regional pride, inflation) remained relevant. Rahul Gandhi can pretend that fast growth benefits only a few rich industrialists, but India’s high-growth era lifted a record 138 million out of poverty between 2004-05 and 2011-12. Fast growth reflected good governance — less thuggery, corruption and leakages — and hence more satisfied voters.
In 2014, Rahul hoped to win mass votes through the food security act, promising wheat and rice at Rs 2-3/kilo for two-thirds of the population. This failed, mainly because implementation depended on state governments. Besides, many state governments already provided food at Rs 1-2/kilo, so Rahul’s reduction of the central price merely subsidized the state governments, not consumers.
Some elections are won by a popular wave, as in 1984 and 2014. Gupta and Panagariya’s fast-growth thesis does not apply to such elections. But nobody expects a fresh Modi wave, or Rahul wave, in 2019. So, the performance of chief ministers will once again be critical.
What does this imply for the land acquisition bill? All land acquisition is done by state governments. Farmers whose land is acquired will be happy or angry depending on the honesty and sensitivity of acquiring state government officials. Congress-ruled states can add the extra onerous conditions Rahul swears by — this will stall projects and ensure Congress’ defeat in these states at the next election. Modi has nothing to fear, and much to gain.
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