Theme for 2016 - Stay Nimble

2015 started with a bang and ended with a whimper. All the hope and triumph was replaced with muted anticipation of the unpredictable. The biggest news of 2015 has been the fall in crude oil prices, and unfortunately crude oil prices will be one of the three main themes of 2016 as well. The second being interest rates and third 'Chinese growth'.

After a hiatus of over nine years, the US Federal Bank raised interest rates by 25 basis points. Most analysts spent all of 2015 waiting for the rate hike and it only came towards the end of the year. This hike came with the announcement that the Fed would step up rates during 2016. On first reading it appeared that there would be a hike in every quarter of 2016.  My view is that most likely there will be only two or a maximum of three hikes in 2016. And my reason for that is that growth is not strong enough to sustain these interest rate hikes. While the headline numbers for US economic activity are positive and indicate improving employment numbers,better housing market, higher car sales figures and relatively strong GDP numbers, it is important to pay attention to freight movement data, PMI, retail sales and consumer confidence as well, these numbers haven't been as good. Below the surface signs of an imminent slowdown are clear. Subsequent rate hikes may not be absorbed comfortably into the economy and may derail growth. The trouble that the Fed faces is that it has kept interest rates at zero for far too long. We cannot have an indefinite time horizon of a zero interest rate regime. This will and probably has already created asset valuation bubbles which will be harder to manage in the future. (Not saying that the current bubble will deflate easily). It's likely that we may see a cautious Fed raise rates twice in 2016, not because it wants to but because it has to. 

Globally, the growth revival theme is beginning to unravel. Europe never really recovered from 2008-09, partly because of the inter-linkages of economies and partly because there just hasn't been growth in population to drive economic activity. China continues to remain a black hole in terms of data accuracy. We know lots is happening in China, but we don't know how much and when exactly! The creation of mammoth capacities in all industries is just unsustainable once Chinese domestic demand slows. This scenario of idling capacity and slowing growth in China is likely to play out in 2016. The repercussions of this will definitely jolt the globe, after-all the 'engine' is stalling. 

Let's turn our attention to crude oil for a moment. It fell over 50% in 2015 and global oversupply was more than 1 million barrels of crude per day. 2015 also two seismic shifts; the US replaced Saudi Arabia as the worlds largest oil producer, and talks of lifting economic sanctions on Iran gained momentum. Most probably the sanctions will be lifted from Iran which would lead to an additional supply into the market. This coupled with increased production from Iraq and Libya will lead to an oversupply more than a 1.6 million barrels of crude per day. This will lead to a readjustment in prices (read lower) for the near future. The only way this impasse will resolve itself is by supply coming off. The high cost fields will necessarily need to shut down. Oil prices are unlikely to remain in the $20-30/barrel range for too long (not suggesting $100/bbl). At these oil prices economies will collapse and civil unrests will follow. No government will risk civil unrest, it usually ends badly for those in power. For now all producers are demonstrating a brave front, but it is a matter of time before they blink. I believe that by the end of the year we should see higher oil prices (~50/bbl range).

I do wish that 2016 is less grim than it is in my mind. 

Theme for 2015 – Spread the Joy

Typically, a new year ushers in a positive vibe and a feel good factor. The last couple of new years have not shared that sentiment. However, it seems that the buzz is back. Amongst other factors, people have just become tired of being negative. People just need a break from the tough economic environment.

2014 has witnessed unimaginable violence, bloodshed and loss of lives. Large parts of Middle East, Africa, Pakistan and Ukraine have been under attack by various organizations / causes. Violence doesn’t really solve anything. It festers a vicious cycle of revenge and further escalates the scale of damage one inflicts. Human minds are choosing to look at violence as the solution. Au contraire, it’s the only peace which allows progress.

On the economic front, 2014 has been positive. This positive sentiment makes the outlook for 2015 better. The wildcard does remain the impact of falling crude oil prices. Oil exporting countries have taken a huge hit due to the fall in crude oil prices from $110/bbl to $45/bbl. Whispers on Conspiracy Street talk about Saudi influencing prices to undermine Iran. Others talk about USA driving prices lower to weaken Russia and a few believe traditional drillers want to bleed the shale gas producers out of business. The simple fact is that USA now produces twice the amount of crude than it did three years ago, simple economics dictates that without increase in demand, surplus production will reduce prices. The fact is, no one is certain as to the cause, but the effects can be troublesome for oil dependent economies.

On the original subject of happiness, I think the time has come to shed this negativity. The world has always been in turmoil, social media has just brought it closer. Embrace the New Year with hope and a pledge to live in the moment!

Behind the Curve

Stock markets across the world pride themselves as being models of perfect market. They provide a platform for large number of buyers and sellers, abundant liquidity, minimal transaction costs and diversified investment opportunities. All the ingredients of a perfect market, except a mechanism for uniform distribution of information. And this ingredient is privy to a few ‘informed’ participants before it is available to the world at large. This problem exists the world over, and though authorities try to crack down on it, it is very difficult to prove.

Let’s take the case of the Indian stock markets. It has given spectacular returns to investors over a period of time. However, the focus has been only on the top 100 liquid companies. The general perception is that they are safer. Liquidity does provide a safety net, and larger companies are scrutinized to a greater degree. Thus retail investor interest is justified.

Historically, retail investors have always been the last to latch on to any up move. The ‘smart money’ with the professional research moves in first. Let me not question the quality of research or raise any flags on the means in which these investments are made. The general perception of retail investors has been that they have been behind the curve in spotting an opportunity. This could be true for a host of reasons, lack of risk appetite, liquidity, investment horizon, low information availability etc. An important element to this feeling is that information always seems to trickle to retail last. I am not suggesting that having insider information is the only way to make money, but it certainly is the easiest. The average individual on the street only reads about corporate actions on the news, well after the impact of the action is built into the price. This only aggravates that feeling of missing out. This is compounded when he discovers someone known has capitalized on price movement due to news. It is a sentiment one cannot avoid.

The key here would be focus on your own investment strategy, detach yourself emotionally from news driven activity and do some research. Obviously, this is easier said than done.

Large Denominator Effect

India has been termed as one of the leading growth engines by many an economist. Rightly so, over the last decade India has witnessed strong economic growth. Fast growing economies attract business and capital seeking higher returns.  An unexpected benefit of this growth has been economic research done on the country. The spotlight has brought a whole host of economists, financial analysts, business leaders and politicians writing/talking about India. I find this very fascinating as it is always interesting to read about different view. You can always compare and contrast views between Indian authors and foreigners, between the optimists and pessimists, between the story tellers and the number crunching analyst.

A lot of these economic publications and analysts talk about low penetration of products thus implying even a slight increase in penetration would lead to explosive growth in the sector. Some of the charts below are rather interesting.

 

 

 

Let’s revisit the basic tenets of division. If the denominator is larger than the numerator, the resultant number is less than one (tiny is an accurate word to describe it in the context of India’s population being the denominator).

As the graphs above prove, on every parameter involving population, India will always have a low per capita number. And the reason is purely because of the large denominator effect.

To look at this number and then say that India has a large way to catch up with other countries, thus concluding that demand for the underlying product / service is bound to grow exponential is fool hardy. Yes, demand for products and services will rise as consumption and demand rises due to the growth in the economy. But the rate of growth for each product will follow a hierarchy of needs of the consumer.

To examine the potential for growth for each of these products we need to understand the income and expenditure pattern of Indians. The table below provides an indicative spending habit of an employed individual in an Indian metro city

Breakup of Expenses:

Total Income	100
Savings	30
Rent (Metro)	25
Food and Living expenses	30
Miscellaneous	5
Free Income	10

I have started with Savings first, because that’s the first thing an Indian thinks of. Over the past decade the savings rate has been between 30-40%. Save for a rainy day, is the clear mantra.

I have broadly tried to account for other elements of cost of living, resulting in a free income of around 10%. I tend to believe, that any reduction in other heads, usual creeps into savings.  

Let’s assume the above percentages are accurate, we are now talking of about a 10% figure. What this essentially means, is that all these products which do not fall under the necessary requirements of an individual are competing for a share of this 10% of the individual’s income.

Trust me there are a huge number of products competing for a share of that wallet. If an ice cream manufacturer is under the impression that he is competing with other ice cream manufacturer or even broadens his ‘competition’ horizon to desserts as a segment, he is mistaken. The positive though is that there is still a large denominator.

P.S: Just because you can use excel, doesn’t mean you pass of numbers as analysis

Theme 2013 – “Keep Calm”

In the last five years, the world has survived the financial crises, European debt crisis, fiscal cliff, recessions and the Mayan doomsday prediction. Maybe, just maybe the world is not going to end just yet. Yes, we have panicked, behaved irrationally even, but ultimately survived the onslaught. Of course there has been damage, pain and a bit of suffering. But the important thing has been that we are making it through. The pessimists will insist that a calamity is impending and the end is that much closer. Let’s ignore them for now, and try and be positive. The theme for this is year is to ‘Keep Calm’.

I think we can now believe that Mother Earth is not going to collapse just yet.  Look around now; there are more than a few positives. The Middle East has witnessed revolutions overthrowing tyrant dictators. Starting from Tunisia to Libya and Egypt have begun a new chapter in their destinies. Syria is in the throes of a civil war. Palestine and Israel have agreed to some semblance of peace. One can only hope for a better year for these countries and the hopefully the start of many more.

Now, let’s focus on the economic outlook for different regions. Things largely look stagnant across the globe. The fast growing countries (read Asia and Africa) will moderate this year. The laggards (read Europe) will continue to chug along till they find some more stability. The basic problem of excess leverage remains. Economist and politicians are searching for the magic pill to cure the malaise. But borrowing further is definitely not the solution. Neither is a whimsical quick fix remedy fix the issue. (Read: Trillion dollar coin). It is going to take time to resolve, but we now have the confidence that we will not fall further.

Let’s be positive for a change. And in face of adversity, let ‘Keep Calm”

Mental Earthing

The human mind is an electromagnetic minefield, filled with ideas, anxieties, aspirations, desires and millions of other thoughts. This is only the conscious part I speak off. The sub conscious part would contain a different set all together. They say the human mind is capable of handling infinite thoughts.

In the information age we are constantly fed with data, through the internet, TV, newspapers, millions of apps incessantly feeding information. The digital data age is causing an overload on the mind. When does the mind get an opportunity to pause and reflect?

I speak of both the psychological and the physical impact. When an electrical system overloads, it tends to get damaged due to short circuit. This is true of the human mind as well. Applying the same principle, a mind burdened with excessive information / stress suffers similar consequences.

So how does one tackle this deluge? I only offer a few suggestions.

For the mind to function at its best potential, it’s important to focus at one task at time. Multitasking only sounds good. For better quality, absolute and complete attention is vital. It is harder than you can imagine focusing on only one thing. What, with all the distractions and numerable tasks to be completed.

Taking a break is more important than we realize. Often times we push ourselves to stretch longer hours, but a few minutes away from go a long way. Obviously, timing the breaks is as important as the break itself. Switching off; I am not sure if people today actually ever tune out. I find that keeping the mind blank for some time is extremely refreshing.

As for the physical component, some mental earthing is not a bad idea. It lets the ‘electricity’ dissipate. Sticking your head on the ground / desk may do the trick.

Eventually everyone has their own little tricks to help them relax. The important thing is to practice them.

Sustainability

Imagine a commodities trader. Flashy car, big house, fat pay cheque and a healthy bank balance. Circa 2005, the feeling is nothing can go wrong. You touch anything it turns gold. In fact, if you touched gold and it turned gold (sorry, could not resist that).


Cut to 2009, the car’s gone (trains work just fine), the house has gotten smaller, the pay cheque is not guaranteed and the bank balance is no longer healthy. Something changed, and swept away the basis of success.

Life is hardly predictable. The world is changing at a faster pace than it ever has. If you are standing still, you are actually moving behind. You may wish you were born in the times of horse carriages and sword fights but here we are, in the information age.

Stability in the time of change is a distant oasis of calm. But it is necessary for mental peace. The need is to search for a sustainable proposition. Something that will be enduring and withstand turmoil. Obviously nothing remains constant or everlasting without adapting. But rather than riding constant volatility in lifestyle and relationships, it is better to enjoy some stability. This is true for both work and life.

But hey, that’s just my perspective. Some people live for the bumps!!