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. 

Technology revolution - Gadgets which lost relevance in the past 10 years

Technology has moved over the past 10 years at such a frantic pace that there have been a lot of gadgets which were in during the late 90s have completely lost relevance and to say the least, got obsolete . Here is the list of top 5 gadgets which come to my mind.

a. The walkman/ Disc Man -
With the advent of I-pods as well other portable memory and music playing instruments including the mobile phones itself, the walkman has completely lost relevance for the consumer. Not only are they bulky but also they use technologies which itself have become obsolete like the cassettes / CDs.

b. Polaroid cameras/ Cameras with films -
With the advent of Digital cameras which can capture/ display/ save/ delete images at a click of button, traditional cameras which recorded them on a film have completely lost relevance. The advent of this technology spelled doom for the traditional cameras almost instantaneously.

c. DVDs / VCDS and Audio CDs
With pen drives/ Portable hard disk drives and cloud technologies available, DVDs and VCDs have already started losing relevance and its not long before they are likely to get obsolete.

d. Fax Machines
With E-mails and internet accessible easily across the globe, fax machines (which were once essential devices in any office) are no longer found in even those offices which have been slow to accept new technological trends.

e. Land Line telephones
Mobile phones can do everything that a land-line phone can do plus they have extra features which are way beyond the utility of a land line phone. Considering that, it is no surprise that land-line phones are losing market share at an alarming rate.

Investing & Contrarians

The million dollar question in investing is when is the right time to invest and when should one think about exiting. There are some theorists who say "Be greedy when others are cautious and be cautious when others are greedy." This is more of a contrarian way of investing. Then there is another school of thought which suggests "The trend is your friend." This is more of a buying when others are buying kind of strategy. The question which tends to be asked to most portfolio managers and investors almost every time they make an investment decision is which one is better.

From my personal investing experience, I feel the contrarian strategy works better for me which is - Invest when others are cautious.

Comparing with the other strategy mentioned above is as follows:

a. Invested at lower levels
The main advantage is that you will be invested at a lower level more often as you will be buying when the world is selling at much lower levels. Just for the recent example when the world was cautious about sub - prime crisis and worried about who much more it can spread and as a result how lower can equity prices fall, there were points when nifty (Indian benchmark index) hit 4000 levels and even lower. Investing at those levels would have meant that one is getting good stocks at good valuations. Also, with the global co-ordination of central banks and governments, more often than not, any major economic crisis would be controlled and so in such situations investing at lower levels makes a real good sense.

b. Value investing
The idea behind value investing is picking up good stocks at a good price and then staying investing in them for a very long time. Value investors tend to look for quality stocks at a good price. Picking stocks when others are trying to sell at lower prices gives one an opportunity to pick stocks at good prices. Value investors would rarely find a stock at good value when the markets are rallying.

c. Better risk/reward
Investing in stocks at lower levels gives one an opportunity of higher upside as compared to being invested at higher levels. So not just the risk is relatively lesser considering that quality stocks have a decent intrinsic value/ Book value, but also there is a possibility of greater reward compared to being invested when the up-trend has begun.

d. Trend need not always be your friend
Investing in a market which is going upwards need not always be a wise idea. As the trend may be upwards for a particular time duration. However, if you are a long term investor, you end up buying in the market at a higher price and when the trend reverses, since you are a long term investor, you will end up not booking a profit and hence would end up with a purchase at a very high price.

Timing the markets vs time in the market
There are people who believe that one should always try and time the market right. So one would enter only when a few criteria are satisfied. I believe, that the only thing one should look into when trying to invest in for the long term is the fundamentals of that economy in which one is investing. If those are in place and one sees a 20 year growth in it, then one should be invested. The second point in deciding is that one should look in for good valuation when investing. So buy when people say its time to be cautious and markets are making lows on a very long term chart.

Central Banking Dilemma - Growth v/s Inflation

With the Indian economy apparently emerging from a situation of lower growth and higher inflation, there has been a widespread optimism about the country's economic prospects across the world. India has recently seen a relative pick-up in growth and improving outlook towards inflation, there has been an apparent shift in expectation from bankers as well as corporate houses in India towards a rate cut.

India is among the few countries in the high GDP group which is at the peak of its interest rate cycle with rest of the global central banks either having near zero interest rates or doing quantitative easing.

This leaves us to the question that why is there such a hugely deviant stance from the Indian central bank and the pros and cons of it.

A. The deviant stance

The deviant stance of India compared to rest of the Higher GDP group is as follows:

a. Difference in mandates of the central banks
While there are a lot of global banks who focus on employment or growth, the primary mandate of Indian central bank is Inflation. This primary mandate itself indicates that the main target is keeping the inflation low even if it leads to lesser growth or lower employment. Though this may be deemed as slightly defensive by most observers, it can be attributed partially to the stage of development of country's population most of which need low prices to ensure that they can satisfy their basic necessities.

b. Apparent demographic differences
While most countries in the "High GDP" bracket have a high HDI and great per capita income, India suffers from low (or rather extremely low) numbers in both these parameters indicating that the majority of population is near the poverty line and still focusing towards fulfilling their basic needs which mandates the central bank to ensure that they help in the process of achieving these goals by keep the inflation in check.

c. Internal and external factors
India has heavy dependence on oil and considering its volatility, it leads to huge amount of volatility in inflation and India's exchange bill which puts further strain on the central bank to ensure that that they do not react to short term movements in either and wait for a longer term trend to emerge which itself puts the bank on the defensive as the moves and decisions are generally lagging.

d. Background of the Central Bank governor
The central bank governor plays a very important role in decision making on rates and his overall background is a key element in the entire process. While the former RBI governor, Subbarao who came from a modest background and worked his way through the grass-roots, had been defensive and more inclined towards populist measures and targeting inflation. On the other hand, the current RBI governor, Raghuram Rajan who has been more exposed to global policies having worked with the IMF, is relatively more aggressive on rates.

e. Developed v/s Developing world
Generally it is observed that the interest rate cycle of the developed world leads that of the developing world by a few months as the effects of a developed rate changes generally lead to monetary outflows/ inflows from an emerging country and hence the central bank prefers having rate controls to prevent sudden volatility.

Implications and advantages / disadvantages  discussed in the next article.

Changing Indian consumerism

With the advent of the twentieth century, there has been a dramatic change in Indian consumerism- Specifically the urban consumers. The change has not been a gradual process but apparently has reached the tipping point recently and thus continues to happen at a frantic pace.

As generations pass the buying decisions to the next generation, there is always a pretty apparent change in the overall purchasing behavior. However, in India this change has been more drastic. Here are some of the elements of the changing consumer behavior in India and its impacts as well as implications on various industries and opportunities for various players to maximize their potential

a. Saving/ Consumption ratio - As the old saying went in India, Earn 100, Save 75 and Consume 25. With the baton for buying decision being passed to the new generation consumer, the ratio has changed to Earn 100, Save 25 and Consume 75. Combine this with higher earnings and you can see that there is huge amount of disposable income that an Indian consumer now has which he would spend in FMCG, Food, Travel, Consumer goods, Gadgets and Automobiles. Also this means a huge opportunity for credit services as there has been a stronger demand for buying on credit.

b. Shift in buying behavior
With the products demanded shifting from asset creation to consumption, goods which come in either of these 2 spaces need a huge amount of re-adjustment in their proposition to stay relevant to the consumer needs in India. For example- the demand for jewelry is likely to wane whereas demand for more expensive consumer goods and automobiles is likely to get a boost. Even in jewelry space, traditional gold demand is likely to wane and get replaced by fashion accessories. Similar re-adjustment is necessary in most industries and considering the frantic pace of this change, it is necessary for companies to be ready rather than be a laggard to stay relevant. The shift in mobile phone market share from Nokia (Less technology & Low cost) to Samsung/ Apple (Better technology & More innovation).

c. Travel & Tourism
This sector deserved a mention here as it is likely to shift gears rapidly considering the consumer behavior in India. Airline industry will get a boost and passenger transport services as a whole is likely to benefit as a result. Also the amount spent by an Indian tourist has increased manifolds. Besides, tourism and travel does not just include travel services and passenger transport systems but also includes food and recreation as well as oil and energy industry.

d. Technology
Technology has had a huge impact on both the buying process as well as the decision making process. With e-commerce taking on conventional retailers and technology taking over conventional buying, the consumer has been more information savvy and has the ability to compare before making a choice.Also, marketing and sales technology has changed and there has been greater emphasis on using consumer intelligence and data mining rather than direct sales. Also, payments shifting online has been good news for credit card companies.

e. Impulse v/s Planned
Think of a traditional Indian consumer, even the process of buying groceries or a light fitting etc were all been planned purchases. Compare it with today, an urban consumer buys a lot of stuff on the go without thinking much. Impulse purchase has taken over a lot of buying. This emphasizes the importance of point of sales marketing and ability to ensure that the product/ brand occupies the top spot on the mind map of the consumer considering the variety of products available.

f. Losers
Considering that there has been higher spending by consumers, are there any losers which one needs to keep in mind? Here are a few which are likely to face stiff competition and need to innovate to stay relevant. Gems and jewelry, Retail outlets, Greeting cards & Sms services etc.

Financial centers - Creation & Existence

When we look at most cities in the world which are the financial capitals of their respective countries, it is generally observed that these cities may or may not be the political capital but all of them have a common trait. 

New York, London, Frankfurt, Tokyo, Dubai, Singapore, Shanghai, Sydney, Sao Paulo, Auckland, Beunos Aires, Paris etc. are few of them in the list. 

Some of the above cities are central to business around the world too. All of these cities have one common trait. Each one of them is a "Port." Incidentally, many of these cities have never ever been politically important, but all of them are central to business of their respective countries. Besides, some of them have been important since their country came into existence and still retain the tag of " Financial capital" of their respective countries.

Delving deeper, it is not very surprising that each of these have this common trait. Port has been one of the most important center which connects a country to the external world in terms of goods. Since ages, business has thrived on the exchange of goods (Trade) and the most important facilitator for this is a good port. Indirectly, these cities have been the nodes that connect their country to the external world and also are the first recipients of external goods and or services. Business of the entire city in old ages would revolve around this.

With passage of time, despite a lot of transportation happening through planes, ships have still retained the prime spot for transfer of goods between countries and that too by a very huge margin. Most goods from oil to electronics etc. get transferred between countries through ports only. Hence despite the advent of more modes of transportation, business has still thrived on these cities having ports and are thus still the most important financial centers of the world. 

Trade has not only helped create a lot of opportunities for business but has also been responsible for creation of these mammoth cities of the world which act as the business nodes for their respective countries..!!

Analytics & Marketing - The Link

Analytics and Marketing - These two seemingly different words have recently found a common trait which has not only helped companies understand their customer better but also given them an opportunity to influence their buying behavior.

Analytics has grown and taken center-stage more recently with increased amount of data which has actually come into fore from the huge amount of databases created by companies like Google, Amazon etc. Companies, these days, track a lot of information right from your e-mails to your searches, from your travel details to your buying behavior to arrive at your mind map and gauge your interests and influences.

You would be surprised to see advertisements on your mail or even on your mobile. And the more surprising part is that most of the times these are very relevant. They are either on your top of the mind thoughts or based on your recent needs. For example: If you are planning to travel to New Zealand, it is very normal to see yourself being contacted by a tour operator or an airline website who would be more than helpful to book a ticket for you to Auckland. This kind of things are possible using the database of your interests as well as doing some analytics on it to arrive at your requirements.

The basic definition of marketing is to arrive at the consumer needs first and then design a product/ service based on that. This implies, that if you can somehow either understand the need of the consumer or be able to gauge his interests and be able to create a perceived need, you can influence design your product accordingly and thus influence his buying behavior. To get it in more simple terms, suppose from past database, a marketing company knows the following about you.

a. You are interested in sports

b. You like to buy expensive sport shoes

c. You buy it once a year at-least.

The above statements are not that difficult for a database analyst to come up with after studying your past behaviors.

So now suppose you are at a mall. It is easy to find that you are in which mall based on the GPS on your mobile phone. Now, a Nike outlet can actually advertise on your phone and incentivize your buying. This would mean that they could either send you details of their outlet, or send you details about their product or even more compelling - send you some discount vouchers while you are in the mall itself where this store is located. Thus the marketing process will be more targeted and would generally have a higher probability of influencing a purchase. 

The above example is just the tip of the iceberg. Analytics can generate a huge number of edges for a company using it and could very easily be the next big step for any marketing company. It helps you understand your customer and his needs better and catch him at the right time and the right place.

Analytics will soon change the entire marketing landscape and appears to be not just an edge but an increasing necessity for any corporation who needs to market its products/ services!

India - Time to invest from FII perspective?

The other day, I was talking to a person from a major UK multinational company managing investments, who was telling me about how there is a sudden buzz there in increased interest in investing in India.He suggested that there is a lot of money in the developed which is looking for good value investments in India as most people are relatively extremely optimistic about the country.

The sudden upsurge in increase in investor interest in India makes you wonder if India has suddenly turned around from being one of the least popular destinations for investments in 2013 to one of the most promising ones in 2014. To get more clarity on it, lets take the following things into consideration from the fundamental side to see if it really makes sense to be considering investing in India.

a. BRIC countries - The BRIC countries actually represent a very important chunk of investments for asset managers managing emerging market funds with allocations between 20-60% whereas the rest of the world gets the remaining pie. Now looking closer, with Russia and Ukraine tensions coming to the fore, and the west planning to strongly condemn it, Russia has lost a lot of popularity in terms of investing due to perceived political instability which could lead to under performance for the country. On the other hand, the Chinese data has consistently been below expectations and there is a growing consensus that the world's second largest economy is slowing down and is having some serious economic problems to solve. This leaves the emerging market asset manager to consider only 2 destinations in BRIC countries viz India and Brazil. Thus there is a possibility of higher allocation from these BRIC focussed funds to India. Though this is not a fundamental improvement, but it still brings greater investment to India.

b. CAD - The recent fall in current account deficit in India has made the world optimistic about the seriousness and intent of the government to curb it. Besides, the improving trend augers well for the country as it helps in improving the rating of the country as well as ensuring that the debt market remains stable. Also, the cost of funding reduces for the government and companies within the country. Also, India has been grappling with this problem since a pretty long time now and any improvement in this suddenly opens the gates to growth and development improving performance of companies.

c. Monetary policies - The RBI has generally been tightening the interest rates as the inflation has been stubborn within the country. RBI is currently being headed by a very prominent economist who has been clear in his intention to promote and support growth as soon as inflation comes under control. Also, considering a possibility of rate cut cycle commencing, there appears an opportunity that Indian companies would start seeing their cost of capital coming down. This could help post companies perform better and hence leading to higher returns on capital.

d. Company performances -There has been little improvement in the performance of companies over the past 2 years. Most of the times, the results have surprised to the downside rather than upside which makes one skeptical about a possibility of a rebound here. But the silver lining is that the equity markets are generally forward looking and there has been growing optimism that the performance disappointment has been bottoming out. Most Indian banks are focusing on improving their balance sheets and reducing NPAs which would bear fruit now. Besides, the IT companies and pharma companies have found themselves at advantage due to falling rupee. FMCG companies have consistently outperformed owing to the ever increasing consumer base. Infrastructure has been a very serious concern currently with little reforms and lots of project delays and higher costs of funding but these companies have little weight on most broad indices. Oil and gas as well as metals which are major components have started benefiting with supportive government policies and stronger intent to decentralization and increased transparency. 

e. Oil and Gold prices - With Iran and Iraq increasing production and call on OPEC reducing, there has been an increased oil supply in the world. For the first time in decades, US has become self sufficient in oil. Looking at the oil supply demand equation - Demand - US (Rank 1 - Self sufficient first time ever in decades), China (Rank 2 - Going through slowdown), Developed economies (OECD/ IEA/ EIA all predicting near constant demand with little upside risk). Hence it appears that demand growth has been reducing significantly. On the other hand, comparing with previous year, US production has increased , Iran and Iraq have started supplying rapidly. Libya may soon come back into supplying which means that the supply could increase by as much as 5-6 mbpd very easily compared to previous year making it clear that oil prices may not go up in near future. Oil is one of the biggest component of import bill for India and hence a stable or reducing oil price augers well for India. Also, with possibility of Fed going into a rate increase cycle, gold prices might start coming down which would reduce the cost of gold imports too. The top 2 components of Indian import bill appear to be all set to come down which would improve the trade deficit for the country and improve the INR.

f. Currency - Despite the onslaught of the emerging market currencies, INR managed to hold strong its fort which indicates improving strength of the currency. Fundamentally too, reduction in oil and gold prices, inflows of capital, relatively higher interest rates, improving CAD all point to near term support for the currency. There is  however a possibility that tightening by the Fed could change the entire picture but then considering that India is better placed than most emerging economies, it appears that India would keep its attractiveness over other destinations. 

g. Optimism on the new government

There has been an increased overall perception and expectation of a stable government which is highly progressive and could lead to spurt in economic growth. If this does happen, it could lead to a sustained improvement in company performances as well as increase in GDP growth rates which could auger well for the country.

This entire picture can change in the following scenarios:

a. Unstable central government

b. Ukraine - Russia issue transforming into a serious diplomatic/ military conflict

c. Fed tightening more aggressively than expected

d. Spillover effect of China slowdown on the world.

Since the above reasons are currently defined and one would be able to see them coming, there is a valid case for India becoming an attractive investment destination for global asset managers! 

Inflation & Hedges

Inflation is the rate at which the price of a particular basket of goods increases. In India, the standard benchmark used is the wholesale price inflation. The basket of goods comprises of more than 600 goods polled from more than 5000 vendors. This gives an estimate of the rate at which the price is increasing in India.

The inflation figure is calculated using the following formula

WPI = ( Price of the basket in current year) - (Price of the basket of goods in same month of previous year)

                                    (Price of the basket of goods in same month of previous year)

India has among the highest rates of inflation in Asia which is not really surprising considering that it has a rapidly growing rate of consumer base and a rapidly increasing rate of money flows. Higher the inflation, faster is the rate of loss of value of money. To make it more clear, lets assume that inflation is 10%. Suppose you buy a package of goods worth 100. Next year, the same 100 rupees will be able to fetch 10% lesser goods. Hence, it would make more sense to buy goods today than to postpone the purchase to the next year as the prices will increase by 10%. This can be offset only by ensuring that the value of money increases by a rate greater than inflation so that despite an increase in the price of good, the money does not lose value and can still buy the same set of goods. 

This is generally done by investing in places which would either beat the inflation rate or at least give rate of return equal to inflation (Generally called as inflation hedges). This insinuates the need for investing as failure to invest would make your money less valuable.

The most preferred inflation hedges are considered to be precious metals essentially because the index of inflation itself has them as major components. Besides, real estate is also considered as a good inflation hedge though it does not reflect it as well considering a huge cost of entry and also a a large amount of overheads on it. Also, it is considered that equities give inflation beating  returns as generally valuation of most companies is based on the assumption that the company will at minimal grow at rates above the inflation rate.

                                  

5 Worst moments in World History

Since the beginning of civilization, humans have witnessed and experienced a tremendous set of ups and downs. Some of them have helped man reach the moon whereas some have been extremely brutal and tantalizing. Here is the list of 5 worst moments in human history. These are the lows which have either made life difficult for humans or fellow beings.

Rank 5 - Forced extinction of species

The Permian-Triassic extinction event at one point threatened to completely annihilate life on earth. It occurred some 252 Million years ago and was the worst ever extinction witnessed by Earth. It destroyed 97% of marine species and 70% of terrestrial vertebrates. The destruction was so severe that it took more than 10 million years for recovery from it. Though this has been mostly a natural phenomenon, humans have also contributed recently to extinction of a huge number of species right from tigers to black rhinoceroses. For more information on Permian-Triassic extinction, refer to: 

http://en.wikipedia.org/wiki/Permian%E2%80%93Triassic_extinction_event

Rank 4- The Black Death

The Black Death refers to the Bubonic plague’s rise to power in 1346.This could be attributed to Europe’s general belief on the existence of witches. This led to mass hunting down of witches and cats (as cats were considered to be related to them). This led to extreme increase in the number of rats which were infested by fleas. The fleas carried yersinia pests, better known as plague.

Without treatment, plague is one of only three known diseases with a mortality rate of 100%. The other two are rabies encephalitis and HIV. Given the primitive medical knowledge of the Middle Ages, the world didn’t have a chance.

It killed 40% of Egypt, 30% of the Middle East, about half of the 100,000 people in Paris. The worst hit area was Mediterranean Europe, including Italy, Spain, and southern France. There, about 75% to 80% died. England suffered about 20% dead. The total average was about 25% of the whole world, as evidence indicates plague deaths in sub-Saharan Africa, India, and the Orient. As much as 66% of Europe and Asia succumbed. Approximately 100,000,000 people died in 4 years.

Rank 3- Fanatical Terrorism

Terrorism is generally an act which is meant to harm fellow humans either physically or emotionally. It has many forms like bombings, hijackings, assassinations etc which are all meant to kill fellow humans. It is a form of guerilla warfare against the existing systems and governments. Over the past 20 years – 1990 to 2010, the world has witnessed an extreme rapid rate of increase of terrorist activities. Besides, it is not limited to only one part of the world but is experienced in almost every region of the world. Besides the huge amount of human and material loss, these activities have led to a huge amount of suspicion and caution in global diplomacy.

Rank 2- World Wars - One and Two

The World War 1, 1914 makes it to the list since it was one of the worst and most destructive wars in human history which engulfed almost all of Europe and a huge amount of world. It was evident that every country in Europe as harboring hatred for the other country and was looking for a reason to invade.

About 15 million, military and civilian, died, unless we include deaths from Spanish influenza, which was itself a direct result of the War. That puts the estimate at about 65 million.

World War 2, 1939 was the next war which engulfed almost the entire world leading to huge loss of human and material. It was initiated by Germany and slowly engulfed the whole world in it.

After 6 years, 71 million people were dead. Rome, Paris, Moscow, Leningrad, and London were smoldering. Dresden, Hiroshima, Nagasaki, Stalingrad, and Manila were obliterated.

The most infamous aspect of the War will forever remain the Holocaust. In this, they carried out the murder of 6 million men, women, and children, by poisonous gas, shooting, beating, torturing, “scientific” experiments, systematic starvation, and overwork. More than 3 Million people were murdered in the camps simply because they were Jews. Meanwhile, at least 750,000 soldiers and civilians died in 199 days in Stalingrad. That was one of the battles of the war!

Rank 1- Crusades

The Crusades was a war based on religion. Though religion has been one of the most common reasons for war, it was also the reason for the bloodiest act in the history of human civilization – The Crusades. It was a war between Christians and Muslims whose sole objective was destruction of the other group in the bid to glorify their God. It lasted from 1063 to 1434 – Nearly 350 years!

The land which suffered this war was Jerusalem. The sole objective of both Christian and Muslim extremists was to capture this land and destroy all the religious observers of the other religion staying on it. There were 9 wars and in every war Jerusalem changed hands between Muslims and Christians. The war suffered severe loss of humans and also acts of mass killings. It was in the name of religion, immense cruelty and destruction was inflicted on fellow humans which led to extreme hatred which has continued even today.

Effective Promotion - Educate, Engage and Engross!

With the ever changing world of marketing, there is a need to evolve the strategies to achieve effective and lasting communication to generate a loyal customer base. 

With the new generation of customers taking center stage, there is a need to understand their usage and behavioral trends. This would enable creation of strategies which would in turn lead to lasting effects.This new generation customer is been constantly looking at active modes of entertainment (which necessitate getting more involved) over the passive ones (like just sitting and watching or reading). To examine this further, lets look at trends in the entertainment and communications industry.

The ever increasing share of active methodologies of entertainment like social media and gaming or pursuing adventure sports in the mode of entertainment over the passive ones like watching movies or reading books clearly insinuates on this evolution. Most surveys and research highlight increasing trend towards modes of communicating which are more engaging and involve more active response. With mobile phones and laptops surpassing televisions in sales and people accessing more facebook than reading books/ newspapers, clearly there has been a greater reception for modes of media which are more engaging.

Hence any corporation looking at effectively promoting their goods or services should essentially focus on ensuring that their promotion contains the 3Es - Educate, Engage and Engross to make sure that their promotion achieves a lasting effect and generates a loyal customer base.

Educate - Educating the consumer helps in two ways. It helps in not just helping create a newer market and creating more market segments. But most times, a customer who has been educated by a particular brand/ product tends to remain loyal to it. Also, it helps in ensuring that the product/ service is used in an optimal way as it has been designed which rather helps in creating higher customer satisfaction too!

Engage - Engaging a customer by games/ events/ contests etc help in getting a mind-share of the customer as well as ensuring greater recognition considering that there is a lot of clutter in the market with constantly increasing product varieties. Also, reports show that higher ability to recollect a particular brand influences buying behavior and which would in turn boost sales.

Engross - Engrossing a consumer would work exceptionally well for goods and services which are big ticket purchases. Big ticket purchases unlike FMCG are made at a lesser frequency and hence engrossing would enable better remembrance and recollection. The most commonly employed mode is loyalty programs. However with ever reducing cost of marketing on internet, engrossing could assume more methods and strategies to ensure that the product stays in the consumer's TOMA.

The success of lot of the companies can be attributed to their ability to engage their consumer. In some companies like Apple, Facebook etc. their product itself is engaging. Whereas automobile companies like Mercedes, BMW etc. go at length to engage their consumers and retain TOMA or influence buying behavior.

Valuations - A myth , A calculation , Or Just a random number

For generations, human mind has been perplexed by a question which looks simple but is still unanswered!
What is the value of this??

This question applies to everything from an electronic gadget to a house to even company valuations!

For products, it gets a little simpler, as the answer to this question is given by the manufacturer itself by attaching a price to the product. Despite that, the human mind still evaluates if the price is greater than the value or not and based on that makes a decision whether to buy it or not.

However, even in this case, the value is more or less a perceived value of it and would vary from one person to another. Someone might value a product at 100 dollars while someone else might value it at 500 dollars.

Lets look into this with an illustration - A bag made by a local vendor priced at x. Now suppose this local vendor becomes famous and besides starts using a better quality of raw material and as a result produces a better quality product. Also, he creates a loyalty program to benefit loyal customers, how should I value it?

Mathematically

Original price of the product = x
Add better quality of raw material ensuring the bag looks better and life of it increases twice = x
Add loyalty benefits = 0.25 x
Brand value (Esteem value for using that brand ) = y

Nett price = 2.25x + y

However it is common to see people paying a price of 10x ( or even 30x).Does it make sense for the same product. Look at Rolex or LVMH etc.

Now Isn't paying this amount a blunder for a value buyer! However this segment still exists and its pretty commonly perceived that the owners of such products are generally perceived as more successful people. This is an irony that these successful people are rather the most foolish value buyers!

The same is the case with company valuations. A company is valued at x. A sudden increase in someone's interest in buying that company pushes it valuation by 5x too! Besides, higher is the desperation (Rather foolishness) of the acquirer, the higher is the value it fetches despite any change of underlying fundamentals. Essentially, this simply shows how the so called smarter CEOs and investment bankers ( who show off complicated excel sheets and business fundas) are rather foolishly wasting time on valuing a company when the value of the company is simply the buyer's perception (desperation) for buying it.

Broadly looking at it, one could conclude that valuation of a product/ company/ service or anything for that matter is just a random number which comes from elaborate calculations which generally are simply based on one's perception and need.

Investing - Fixed Deposits v/s Equities

Over a period, I have heard people debating between investing in the so called riskier equities v/s the less risky fixed income investments. Here is a perspective on how you should allocate your capital between the two depending upon your investment horizon and goals. Here, I would rather focus on fixed deposits as an investment vehicle for Fixed income and equity mutual funds for investment in equities and India as the country.

So lets consider the case that the investor has an income such that his return on investment income falls in the 30% tax bracket. In such cases, the return on Fixed deposit = 9% (-30% tax) =6.3% risk free!

Now on the other hand, if the investor invests in equities with a horizon greater than 1 year, he is exempted on long term capital gains tax. Hence if the return is greater than 6.3%, it would make sense to be invested in equities. However, looking at the inherent risk, the overall return one would expect is in excess of 8 percent.
Generally, it is expected that equities return more than that as the inflation rate in India itself is around 8 percent and the basis of investing in equities is that it should at least beat inflation in terms of returns.

Considering this, it is pretty obvious that investing in FD does not make any investment sense in terms of returns. However, one should allocate a small chunk of one's portfolio to such products(15-30%) based on risk profile to ensure that the risk is partially managed in case of severe shocks in the economy.

To conclude: If you are long term investor, your equity allocation should be at least 2-3 times your fixed income allocation. Else, you are likely to be outrun by inflation in your investments.

Top Mountain Peaks...!

Mountains are generally classified into four types based on the process of their formation. They are Folded mountains, Domed mountains, Volcanic mountains and fault block mountains. This classification is done based on their process of formation. The adjoining image gives visual representation of each of these types. 

Here is the list of top 10 mountain peaks in the world.

Peak	Mountain	Type	Height
Everest	Himalaya	Fold	8848
K2	Karakoram	Fold	8611
Kanchenjunga	Himalaya	Fold	8586
Lhotse	Himalaya	Fold	8516
Makalu	Himalaya	Fold	8485
Cho Oyu	Himalaya	Fold	8188
Dhaulagiri	Himalaya	Fold	8167
Manaslu	Himalaya	Fold	8163
Nanga Parbat	Himalaya	Fold	8126
Annapurna	Himalaya	Fold	8091

The Himalayas and Karakoram are thus the home of the highest peaks in the world with no exception. The list of top 100 also contains only Himalayan/ Karakoram peaks! 

The highest non Himalayan/ Karakoram peak in the world does not even feature in the top 100! It is mount Aconagua in South America and is below 7000 metres. Both the himalayas and Karakoram are fold mountains viz they are formed by relative movement of earth plates leading to their formation. Hence it is clearly evident that fold mountains are the ones with highest potential of high peaks.

Besides, all these peaks are located in the Indian subcontinent or adjoining areas. There is a theory which says that there was relative movement which actually lead to movement of Indian subcontinent from Africa into Asia and this collision led to formation of Himalayas. Had this relative movement not happened, the world might not have seen these big peaks getting formed.

The Earth plates keep moving un-noticeably and once in a few 1000s of years lead to formation/ destruction of some of the highest and lowest points in the world history.  Going to the extreme imagination, one should say, Don't take the land under you for granted, it didn't exist sometime in history and has a very high probability that it will not exist sometime in future!