Saturday, August 4, 2018

Confluence of factors

2018 is interesting enough with some great lessons that needs to be documented for any investing career that is supposed to last long. What I mean by interesting can be gauged from the NIFTY midcap graph below.


LTCG
The whole tumble started from the introduction of the LTCG in Budget'18. Certainly a very poor move by the Govt of India that soured the mood for many large investors especially foreign investors with options to invest in multiple countries and India overnight started looking considerably less attractive investment destination. It was a sad moment because things had just started picking up and no one came out a winner from such stupid policy decisions. Investors lost wealth and there were no gains left to pay taxes on for a majority of the investors.
Now we cannot put 100% blame on the Govt and their stupid LTCG for sure. Soon afterwards started a confluence of multiple strong headwinds that shook the Indian market one after another and never gave it a chance to recover.

EM Exit
LTCG announcement was followed by a mass exit of foreign investors from emerging markets as a basket that included India. Why? Strong growth in developed markets like US made the riskier EM's less attractive. When you can earn at home why move the money around the world.
This was followed by increasing weightage for EM's like China in MSCI index, which meant reduced weightage for EM's like India which belonged to the same basket. Simply put India was left with a small share of foreign capital investment quota in a scenario where all the money was already fleeing back from EM's to US. The SGX Nifty controversy made matters worse for India. In a bid to disallow Indian instruments being traded more in foreign exchanges compared to local exchanges, India decided to stop sharing data with foreign exchanges like SGX and was perceived as anti free market and was being further threatened with lower weightage in MSCI as a retaliation measure.

We are just starting folks ....

MF Categorization Restrictions
SEBI introduced a new law that all MF can have only few broad categories in Large, Mid, Small cap and there can be no cross holdings, i.e a Large cap fund cannot hold even a small percentage in mid/small caps and if they do they must sell. Also they cannot come up with fancy categorizations to find a way around this. So you cannot call your fund something like Future Focus and hold stocks belonging to mid and small caps along with large caps.

Banking Mess and NPA's
Then came a series of NPA resolution mess. Indian Banks especially PSU had loaded up on several non performing assets for several decades on their books, however they were yet to recognize the fact that they have fucked up. New RBI guidelines (starting with Raghuram Rajan) went aggressively after the Indian banks to clean up their books. This lead to several decades of toilet being flushed from the banks in just last couple of years. NPA's soared from 3-4% to as high as 25-30%. Banks like IDBI, Bank of Baroda, Bank of India, Indian Overseas Bank went belly up. The list is really long and includes almost all the PSU banks. A special mention to Punjab National Bank that had handed over their SWIFT passwords to fraudulent loan takers like Nirav Modi to borrow as much money from the bank as they desire. After the scam broke out PNB swiftly lost over 50% of its market cap in few days. India's third largest bank was now trading in two digits. Several scams came to light after this one by one. Many of these fraud corporate had to make a run from India leaving the banks with very few options to recover their loan Nirav Modi, Mehul Choksi of Gitanjali gems and Vijay Mallaya deserve special mention here. Lakhs of crores of loan book had to be written off. A pretty alarming situation. Private banks were not spared either. A special mention to Chandra Kochar of ICICI Bank and Shikha Sharma of Axis Bank who provided their valuable contributions in destroying whatever little trust was left in Indian Banks.

Share jacking up and corporate frauds in mid/small cap
Then came the Vakrangee fraud. A company that had risen from Rs 10 to Rs 1000 per share. India's rural network poster boy was caught jacking up the share price of it's company. It got caught when it declared a substantial treasury investment in PC Jewellers that brought to light another mega scam in Indian markets, mid cap companies buying shares in each others company and jacking up share prices in collusion. After this several mid and small cap companies crashed. 70-90% loss in market cap examples became abundant.

ASM
Then SEBI introduced ASM or Additional Surveillance Measure leading to restrictions on trading of several midcaps. Many renowned and reputed companies got caught in ASM which lead to a mass panic exit from all counters. Dilip Buildcon, 8K Miles, Graphite stocks, one by one a large part of the midcap universe got hammered and started a bloodbath of lower circuits in the Indian markets.

Audit Compliance 
Indian Govt lead by Modi had made it clear that auditors and independent directors will be held accountable for company frauds. This lead to auditors of several companies resigning instead of agreeing to adjustment in accounts. Notable story here is of Manpasand Beverages

Policy disruptions
GST, e-way bill etc had lead to lot of disruptions in the SME segment leading to reporting of poor numbers and results in the previous quarters

There is still more...

Global Trade War & Currency weakness
Donald Trump wanted to even out America's trade balance with rest of the world which lead to a global trade war. Companies started imposing import duties on each other. Local manufacturing started taking hit. Businesses on the ground were now struggling for profitability and survival. The notable story in this trade war was China vs US. The two countries slapped each other with billions of dollars of tariffs and duties. Yuan tumbled over 8-10% from the start of the year.
Strong dollar made life even more difficult for countries like India which is a net importer, i.e pays in dollars but earns in rupees. For FII's also Indian market became worse because of forex conversion losses.

The Iran Saga
Donald Trump also does not like Iran. He imposed several sanctions on Iran a major importer of commodities and a major exporter of cheap oil and gas. This created havoc for the import export players and sent the crude price surging. By sanctioning Iran crude market is easy to control by Saudi Arabia that can then demand whatever it likes from crude importers. 

Poor Monsoon and Farm loan waivers
Poor monsoon this year is already sending jitters across the investing community and rural population. Huge protest by farmers on MSP and ensuing farm loan waivers for political gains by state governments is adding to the fiscal burden of the state and central governments and making the inflation more unpredictable.

RBI hawkish policy
Now when infaltion is unpredictable, RBI comes into action and has been steadily increasing interest rates making loans which is the lifeline of any business more and more expensive, just what we needed .. isn't it ?

Political Uncertainity
Add to this the political climate was aso heating up. Noises of Mahagatbandhan started becoming stronger after the Congress won the Karnataka election over BJP by forming an alliance with JDU. A minority party now ruling the state.

Investment sentiment 
And so the overall investment climate was bitter, people suffered huge losses. Technicals and panic threw the Indian market in the grip of bears. Bulls made a huge retreat. New investors got scared off. Mutual Fund inflows slowed down and everything went spiralling down. A point to note here is that all this is happening in the larger context where central banks around the world are tightening market liquidity by rolling back their QE program that started in the post 2008 world. While the markets have generally absorbed it well, at some point this might pinch hard.

Winds of change
Few things brought a turn around in the Indian market starting July
  • All countries ignored the US sanctions on Iran and continued to trade with Iran as exception. Ultimately US had to soften it's stand on Iran
  • Crude softened signalling a peak in crude prices. Iran has threatened to disrupt trade routes in crude if sanctioned and that remains a risk 
  • Donald Trump tweeted about being unhappy with strong dollar which signaled a peak in dollar as it puts America also at an disadvantage since manufacturing is cheaper in other countries
  • Developed markets were overheated due to huge inflows. The FANG stocks now have a market cap greater than the GDP of several countries. Apple is a trillion $ market cap company now. This should lead to some of the foreign investments coming back as they book profits in developed markets and look for value investments in EMs
  • Trade wars have become a common news and seems to be fairly discounted by the markets
  • Indian Bank NPA's seem to have peaked and a recovery is projected soon. Govt helped by using large capital infusions in several affected banks
  • Congress lost and BJP got a huge victory in the vote of no confidence motion against the govt which reinforced confidence in the future prospects of BJP 
  • The Congress debacle in no-confidence motion also helped to put in place regional leaders like the Shiv Sena and TDP in their right place who were becoming a bit too noisy for their own good. It also re-inforced that the winking Gandhi is at best a poor comedian and not a future PM candidate. 
  • Quarterly Performance and results by listed companies has been generally good and signals future optimism
  • Indian large caps held the investor flag high admist all the bloodbath.  RIL, TCS became the first two Indian companies to hit the $100 billion market cap. Few others who deserve a mention are M&M, Bajaj Finance Group, Consumer and IT stocks HUL, Page Industries, etc
  • Major relief was given in GST by reducing tax slabs for several goods
  • Poltical and policy uncertainties, global trade wars, and poor monsoon continue to be a risk 
Things are going to continue to be interesting atleast upto 2020 but we market players are not here only for the good times. We as much cherish the downs as we do the ups. That is what makes it thrilling, the bull needs a bear to fight and win ... so bring it on !





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