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.