Sea of change in INR currency market

 I am writing this one with regards to a major sea of change that I envisage will happen in the global currency markets. The article below is very counter-intuitive to what has happened in the global markets over the past 20 years but then, as we know, there is always a tipping point in the markets, post which an idea starts becoming a phenomena

Here I am sticking my neck out to say that the EUR-INR or GBP-INR rate has already peaked and from now on Rupee will appreciate against both GBP and EUR. This seems like a strong and blasphemous view but then, there is a logical explanation behind this. It is against the interest rate parity logic and global macro-economic theories, but then theories are always created to explain the phenomenon rather than predict one. Here are the top reasons why I feel so

a.      Increase in investments in the Indian economy

Globally India is becoming a preferred destination for both FDIs and FIIs. This flow of currency leads to greater demand for Indian currency causing an appreciation in INR. Also, INR will be stronger with regards to EUR/ GBP as there is increased preference for India over the Euro zone and UK.

b.      Greater consumerism and demand drivers in India vs stagnation in Eurozone and UK

Greater demand in the economy leads to greater industrial growth and hence a higher demand for goods. This leads to more domestic focus from Indian organizations and also greater interest in FDI investments. Also, higher demand and growth will fuel more competitveness in the organizations in the country which would aid them go global.

c.      Stable to positive economic climate in India

India has one of the highest growth rates in major economies. The reduction in crude oil prices which are likely to stay due to oil glut and better demographics (bigger middle class, more young population), stronger impact of digitization and politics are all pointing towards sustained growth. The stable economic climate will further foster growth in India and hence appreciation in the currency

d.      More drive towards exports and reduction of imports

There is a strong push by the government to rely on domestic companies and reduce dependency on imports. Considering the cost competencies, there is a good export growth opportunity that India is likely to pursue in future.

e.      Poor economic policy and productivity in Euro zone and UK

Euro zone and UK are going through an internal turmoil where there are both political and economic downturns in progress. With issues like Greece and Italy debt meltdown, Brexit and banking crisis in Euro zone looming in, it doesn’t look very promising in Eurozone. Also, the demographics and the productivity information in the Eurozone and UK are going south which will further weaken their currencies.

f.       World looking east

There is a strong push towards focussing on India and China as they are considered to be the global growth engines which will drive the next wave of growth. This would ensure that most companies who are facing stagnation in the west will start making investments in India and hence will auger well for the country.

To conclude, though it seems highly counter-intuitive given history and interest rate parity logic, there is a strong case for an appreciation for INR vs GBP and Euro.

Rising Spending trends

Over the years, having been born and brought up in one of the biggest cities in India in both GDP and population terms, I have noticed a huge shift in terms of consumer patterns and the spending patterns in the city. I am talking about the city of Mumbai and how it has evolved in terms of the spends of population and a huge shift in the wallet of various consumers within the city.

Around 30 years back, a major chunk of the wallet of a family was spent on creating assets - may it be gold or real estate. I see that though the income levels have increased the percentage of wallet for these have actually reduced. More and more part of the Mumbai household income is spent on experiences, food and travel. Also, there is a major shift from basic means of living to convenience and luxury ways of living. More and more percentage of
a above average income consumers seek to travel by cabs rather than public transport. More and more spend on fine dining than basic fast food restaurants and this percentage is increasing rapidly. This can be attributed to a lot of things. Primary amongst them are as follows:

a. Mobile phone penetration - The extremely high penetration of smart phones in the city has resulted in easy access of all the sources of information. Besides, the targeted means of advertising has ensured that more and more percentage of consumers start buying these stuff as they have a huge amount of convenience and quick gratification value. Buying an expensive watch is much more easy and can be more impulsive than it used to before. Booking an airline ticket/ hotel is much more easy and hassle free leading to quick impulsive purchase for instant gratification.

b. Social Media - The extreme penetration of social media has created a huge amount of awareness for various services and also has indirectly led to increased push for buying these services. People tend to visit expensive restaurants, buy expensive cars and watches etc simply to be able to show it off to their friends. Most times, it is very common to see people travelling to various places to ensure that they can upload their pictures doing "cool stuff" rather than for the real joy of travelling.

c. Convenience - Over the period, the urban society has shifted its decision making from economy to convenience. It has been observed that people tend to book a cab over travelling by a local bus/ train. Also, people tend to avoid walking these days due to the availability of door to door service. All of these services tend to cost more than the economical options.

d. Stress Levels - The increasing stress levels from corporate jobs to failed relationships has caused people to find ways to splurge on themselves. It is a very common phenomenon for people to find expensive alternatives to travel, food etc just to ensure that they do not have to stress about it. Also, the ever increasing stress levels have caused extreme spending to make people feel "good" about themselves.

e. Peer pressure - There is an increasing pressure from peers to spend. More and  more people are buying expensive mobile phones, cars etc and going to expensive parties and restaurants simply to stay in touch with other people or be a part of a social group. This has led to a lot of unwarranted spending which leads to lesser savings

f. Lack of alternative saving options - Various investment avenues have become very big ticket leading to people believing they are almost unreachable. For example, buying a home or investing in gold is very expensive and hence people postpone that buying decision leading to greater bank balances and disposable income leading to higher spending.

Over the last 2 decades, the percentage of savings as a percentage of income has drastically reduced from approximately 40% to around 15%. As it is said, "Create Assets" rather than creating negative cash flows. It is high time that the urban population starts realising this so as to ensure we do not waste the assets and the resources endowed to us both by our luck and our hard work.

Most important macro-drivers towards policy decisions

There is always a temptation to look at only one element in deciding on the monetary policy decisions. For example, the rates should be kept low to boost industries and from this perspective a central bank would have never raised rates. However there are multiple objectives that a central bank strives to accomplish using its monetary policy and hence there are multiple macro drivers that a global central bank looks at. The following are some of the key ones:

a. Inflation

Inflation is the primary concern of a central bank. It would always strive to keep inflation low so that the cost of goods and services does not exceed the normal growth rate of income. A higher inflation is disastrous to the economy and its participants. However a deflation, reduction in prices over time is also detrimental to the economy as it affects the consumption cycle as well as industry demands. People tend to consume less in deflationary environment and hence businesses tend to get affected. Hence a central bank tends to ensure that the inflation remains low but positive by hiking rates whenever there is a fear of higher inflation.

b. Unemployment

Unemployment is a major global worry these days as unemployment leads to lower demand, social unrest as well as poor outlook. Hence a central bank tends to ensure that the policy is such that it reduces unemployment which is either by driving demand and GDP or by reducing interest rates to ensure that corporations hire more and expand businesses. This is contrary to the policy of reducing inflation. Hence a central bank would need to maintain this balance.

c. Growth

A central bank though doesn't generally have growth on its mandate, it generally strives for it. Generally, it would strive to achieve higher growth as it helps reduce unemployment and also ensures a general positive outlook for various participants. Also, it ensures that businesses do well and hence there is smooth production and performance of the economy. A central bank generally reduces interest rates to promote growth.

d. Bubble formations

This has been a recent addition to the drivers that a central bank looks at. Considering the 2008 crisis, this driver is being looked at very closely to ensure that there are no major bubbles formed as a burst of this bubble would lead to serious repercussions for the economy. A bubble burst would cause economies to lose several years of growth. A central bank monitors this closely and ensures that there is prudent risk taking thus avoiding bubbles. Higher risk taking due to lower interest rates is generally curbed by the central banks by ensuring that they keep interest rate expectations under control.

Global Melt down on the cards

There are numerous articles being published about how the world economy is coming out of recession and that there is going to be growth and development. I believe, that the contrary is true. That there is a possibility that the world economy is going to crumble and this could be one of the most severe economic crisis, the world has ever seen. The following are the main reasons which I believe can take the global businesses and economy into a downward spiral.

a. China Hard Landing
With China, the world's second largest economy facing a slow down in growth, there is a clear evidence of reduction in demand of all goods and services right from commodities to electronics. The shrinking market size would not only lead to lesser profitability and greater default rates but would also dent the global growth numbers severely. Besides, China has an over leveraged equity and housing market both of which are facing serious downward pressure. Also, many mining and commodity companies are staring at huge losses as China's demand has gone down. At 6% growth rate of China, the world is fretting. If its growth reduces below 3-4%, it could lead to severe hiccups in global economy. China is facing its most severe economic pressure in the past few decades.

b. Euro Zone sovereign crisis
With Greece still not being able to pull out of recession and the famous PIIGS still in trouble, Euro zone is one of the most serious threats to global economy. Italy and Spain have ever increasing unemployment rates. Also, these countries are too big for even Germany or ECB to consider bailing out. If Italy fails, it can set shock waves not just to ECB and euro zone but the whole world. ECB's QE has hardly had any impact in improving the GDP or consumer confidence or unemployment. Any shock in them and ECB might just run out of measures to shore up their growth. Greece is still burning cash and there is little improvement in its fiscal situation.

c. Oil Shock
Oil is the most under estimated of the shocks for the global economy. Not just oil price fall help the consumers but it also destroys the producers. Right from major oil companies which are still one of the biggest industries in the world to the oil producing nations, all are facing pressures. Oil single handedly drives the highest percentage of global trade. There are hosts of industries which are heavily dependent on oil price and a fall in it could lead to their complete collapse. Most of the biggest oil companies in US and the world are AAA rated and banks have severe exposures to them. A fall in oil prices make their business unviable and continued pressures on oil prices could lead to domino effect from these companies to banks to overall global business. Also, oil producing countries are facing unprecedented loss in revenues and are finding it hard to balance their budgets. If one of the major countries defaults, it could lead to ripple effects across the world.

d. Global Banking industry
The global banking industry is in a state of uncertainty due to multiple reasons. Firstly, most banks globally have huge derivative exposures which are vastly dangerous and carry a huge risk. Some of the banks have such huge exposures that if not corrected on time, they can bring the whole bank down. Besides, increased regulation have made their business unprofitable. Combining this with litigation charges, most of the major banks in the world have posted losses this quarter. Banks are aggressively down sizing and it seems that some of the banks might not see the turn of this decade due to their over leveraged balance sheets and unprofitable business strategies.

e. United States of America
With US going into elections, there is a huge amount of policy uncertainty. This could lead to severe confidence crisis in an already worried global macro-economic scenario. Also, the rate hike cycle of Fed could very well dry up the liquidity and make the cost of doing business more expensive across all companies. This can have serious repercussions.

Overall, I feel there is severe downside risk for global growth and there is a possibility of the most major economic setback of the century being just around the corner.

Cross functional exposures and expertise - A must have for an organization

It has been observed that very few industry veterans/ CEOs prefer to hire people with expertise in an unrelated industry. This trend is somewhat changing though. A giant electronics company recently hired an ex FMCG veteran for a top job within the company. This makes one wonder about how should one decide on hiring especially for the top jobs within the company. Is it useful to have an industry veteran or is it good to have someone from an unrelated industry take up an important job within your company??

Essentially I believe that the following things need to be taken in to consideration before deciding if one should be hiring a person from within one's own industry or one should go for cross functional individual.

a. Company requirements & job description
Firstly, the need of the company in terms of the job description would play a crucial role in determination of whether the company and the role is open for a person with cross functional expertise. It is necessary to ensure that the job description is not looked upon with a myopic view but a wider dimension of the overall expectation from the candidate is taken into consideration. Many organizations tend to give more importance to routine tasks for a candidate taking up a role to decide on the job description thus reducing the opportunity to creatively look upon the positive impacts that a person can bring in.

b. Team composition
If there is a team who would be managing that role/ project/ task that the person is going to be appointed, it is always more beneficial to have at least 20% of the team to be composed of people with diverse experiences. This, one should remember not just works in a business school classroom, but also in every organization. It brings a fresh perspective and offers an opportunity to look at a business case with a diverse view. This would ensure that the team is better equipped to solve a business problem rather than having people with similar background giving the team a one dimensional approach.

c. Inter industry relationships
Seemingly unrelated industries tend to have a common thread. For example - Apple & Louis Vuitton, though they appear to have completely different businesses at first glance, there is a common element. Both tend to produce luxury goods and tend to target customers who are willing to pay a premium to own their products. So a person who has worked with Louis Vuitton may still find his expertise to be relevant for Apple.

d. Ability to bring a positive impact
As with most tasks / businesses, the primary thread is trying to find people who can bring an impact. So identifying a good resource is essentially about identifying the inherent capabilities of the person and his ability to positively influence one's business. Its essentially saying " Find good people (From your industry or different industry)- They will make it happen for you"

Online retail - A sunrise industry..Or A sunset business!

Go through any industry articles or job fairs or articles on business or Private equity websites...one thing which has created the highest buzz is  e-commerce / online retail. Here is a sneak peek into the industry and my views on it and how I feel that this industry is somehow going to spell doom to a lot of industries before eventually spelling its own doomsday.

A. Only industry which has not made money before getting sky rocketing valuations

Lets look at any industry in the world which was in a start-up phase. (Oil industry, Automobile, Engineering and construction or even services industry like IT, financial services etc.) Not even a single of the current biggest global industries currently started up with a business plan which would burn the pockets of their own investors without having any substantial revenues. Most of the e-commerce companies in India offer only a single value add - Lower prices !! That is essentially because they are burning their own cash. Its like, I buy something for 100 and then sell it for 85. Obviously, there will be a huge demand for it because I am myself making a loss to ensure that I get customers. No single industry which has survived since inception, has had such a business model. Look at any of the biggest companies across the world for that matter, all of these companies have serious revenues and operating profits not because of their cost competitiveness but because of their ability to cater to a certain market demand at a price which does not make them lose their own money. Funnily though, venture capitalists and private equity funders are going crazy assuming that they can sell it later to someone who is crazier!

B. Almost negligible revenues for some companies valued at a billion dollars

On one side of the spectrum are some giant e-commerce companies like flipkart, snapdeal or amazon who have few billion dollar revenues whereas on the other side there are a lot of e-commerce companies who have negligible revenues and are still commanding really huge valuations. The other day I was looking through zomato numbers - their revenues 30.6 crores (5 Million dollars) and operating loss 41 crores! wow...revenues lower than operating losses and the company commanding a valuation of nearly a billion dollars! Even a novice would say that this is absurd!

C. Huge overheads

Though these companies claim that they have lesser overheads in terms of store space etc, they have serious overheads in terms of employee compensation and rentals that they pay for their plush offices. Most of the employees in the middle and top management are grossly overpaid due to the huge amount of funding that they have got. Also most of these employees have little or no knowledge of the industry as the industry itself has just started building. An MBA employee with 2 years work experience in these companies would be paid at least 3 times higher salary than a 5 year work experience MBA at a company like L&T or Infosys.

D. Funny discounts vs spreads

Typically the spread between a retail outlet and an e-commerce website selling products is 5-7% considering the costs of real estate vs courier. This spread narrows when we move into tier 2 cities in India as the cost of real estate is lower whereas cost of courier remains almost the same. So an average of 5% lower prices is justifiable. Most of these websites offer 20% discounts and on some days even 40-60% discounts! Unjustifiable!

E. Retail killers

Their self destructive model is not just burning investor money but also killing a lot of smaller retail players who would not have deep pockets to keep burning such money. Hence some of them are already closing down and in time most of them would. Essentially this would not only lead to destruction of their own industry but also that of the traditional retailers.

F. Price sensitivity

The Indian consumer is very price sensitive. If for some reason, any of these e-commerce websites start commanding a premium for their services, there is zero switching cost to another retailer. That would mean that however hard they try, they will never be able to generate a loyal customer base. So the typical valuations which come from sales ratios or per customer numbers are all likely to go for a toss as soon as they try to command a premium.

G. Burning pockets

The pockets of these investors are burning rapidly and it would be soon that they would run out of cash. Most of these investors are able to survive currently due to perceived increase in valuations which would collapse as soon as the non sustainability of this business model becomes apparent.

H. Other stakeholders

A successful business not only generates revenue for itself but also for other stakeholders in the business. For example, TCS would not only make money but will also give solutions to their clients which would help them save/ make money. On the other hand, other stake holders in this business like the local vendors or sourcing agents in this business themselves are losing money thanks to seriously huge discounts they tend to offer. So it would soon run out of this support system too and would make it even more difficult for them to survive.

I. Not even operating profit

Not even a single company has been able to clock Net Profits in this industry. Forget Net Profits, they cant even have operating profits! Some companies are more than 5 year old and few are as old as 8-10 years! If they cant even clock operating profit, how will they ever get into net profit considering their ever increasing over heads. Had this industry been funded by debt rather than equity, all these companies would have filed for bankruptcy by now!

J. Market stagnation

The current size of Indian online retail is around 4.5 billion dollars compared to the total retail size of 500 billion. That is around 3%. Even in US which has higher internet penetration, more urbanization, greater net literacy, the online retail size is less than 2.5%. Considering that Indian retail industry penetration has exceeded US, it is likely that over a few years, the industry will go stagnant. Tier 2 and Tier 3 cities in India are less likely to be penetrated by them considering the above mentioned background about the real-estate vs courier cost spread.

Looking at the above factors, I feel that this bubble of valuations of e-commerce is likely to burst and with it, it would lead to serious crises in cash and credit markets considering the amount of investments that have gone into this black hole sucking cash at a rapid rate!

Great Business Management Practices

There is a lot of research about what makes a successful business manager / CEOs. Here is my perspective on some of the essential elements which are in grained in the personality of a successful business man/ business manager.

a. Strong work ethic

Practice what you preach not only applies to life but also to your work. A good business manager not only expects his employees to work hard for him but works harder than most of his employees. Generally, he would never cut corners to success and understands that anything less than 100% is not sufficient. They do not mind burning the midnight oil for their work and also ensure that they are highly disciplined about their work. To cut it short, they worship their work.

b. People management

People management is one skill which is required in all walks of life but more so in management of a business. A business manager not only manages his customers as well financiers but also his employees. It is almost impossible to find a successful business manager who is not good with people management. He has to communicate the right stuff to the right people at the right time in the right way. He needs to know how to keep his employees motivated and aligned to his goals. Besides, he should be able to delight all the other stake holders of his business to run it successfully.

c. Great listeners

Listening is a skill which needs special mention here. Listening is not just about actively hearing all the stake holders in your business and giving their views due consideration but also about trying to pick hints from the environment. A good listener listens to words as well as trends. He actively seeks information and acts upon it.

d. Amazing analysts

Successful business manager who constantly excel are always great analysts. They are able to analyze situations and trends and able to take decisions effectively to make the most of them. They can look at data/ information/ trends/ behaviors and come to the right conclusions on what is brewing. Besides, they can add the right ingredients to make the most of that condition and ensure that the business is able to capitalize on that opportunity.

e. Risk appetite

You cannot succeed at anything if you are not willing to take risk. Only those people who are willing to lose the sight of the shore can discover new lands. That doesn't mean one needs to keep taking risks every time. Businessmen have an acumen to be able to take calculated risk and have a plan to mitigate them if they don't pay off.