Is India a Bull Market ?

The Indian stock market has been relatively weak for the last couple of months due to China factor. Also the fact that the ruling party BJP lost a crucial state election to an alliance of strong regional parties added to disappointment.  The regional parties managed to win as they combined forces against the BJP. Prime Minister Modi had personally campaigned extensively, but it failed to reap electoral dividends. This was the second major political loss (first being State of Delhi), after Modi's tremendous win in the national elections in 2014.  There are fears that the economic reforms might get slowed, as the government might have to focus on populism. Nonetheless, soon after Bihar elections, the government announced increased FDI limits in 15 sectors , signalling that it will not slow down on its economic reforms agenda.

A few reasons to remain bullish on the India stock market is given below:

1) Best among Emerging markets - India remains the most attractive emerging market. Brazil has gone into a meltdown mode due to the commodity price crash and the weakness of the current government.  China's economy remains extremely troubled, with growing credit stresses and slowing down of GDP growth. Massive overcapacity is leading to corporate defaults. Russia is not only seeing a GDP decline due to economic sanctions and lower oil prices, but will also have to pay large military costs now due to its war in Middle East. Compared to the other major emerging markets, India is a highly attractive destination. It's massive market, stable political situation and strong growth is already attracting a large number of investors.

2) Structural reforms - Make in India campaign- Changing a country with 1.2 billion people is not an easy task.  The government has been implementing major structural reforms (such as GST, etc) that are slowly starting to show positive effects. India is cutting down red tape and inviting investments from foreign investors. Foxconn recently announced $5 billion investment and other multinational investors are also increasing investments in India's manufacturing sector. The good thing is that the corruption has significantly reduced under the watch of Modi.
Next budget has to be closely watched as wit is expected to introduce a new bankruptcy law and reduce the corporate tax rate . The financial sector is seeing massive changes, with the central bank giving licenses to several new organizations. This will increase competition and improve financial inclusion in a country, where millions do not have a bank account. The defence sector is seeing massive interest, as the government has opened it to the private sector. The roads and ports sector are also humming, with the government increasing capital spending on infrastructure.

3) Falling Commodity Prices - India imports billions of dollars of coal, crude oil and natural gas every year.  The positive effects are already showing in increased profit margins of companies, as well as increased spending on cars and durable goods by urban consumers. Despite a poor monsoon, India's economy is all set to expand by 7%. With commodity prices not expected to bounce back any time soon, India will continue to save more than $100 billion a year from low oil, coal and gas prices. India remains one of the biggest beneficiaries of the global commodity price crash. With such reduced import bills, it is a possibility that Indian Rupee may appreciate as well in the near to mid-term!

Of course, there are a few risks, which we will discuss in another blog. 

Golden moment for Greeks

Finally, thanks to the left leaning Govt of Greece, the voters of Greece got an opportunity to wean away from the burden of Euro. The referendum on 5^th July 2015 is anxiously awaited by the financial world, especially those in Europe. The hyper volatility of European stock markets in these days evidences and captures the mood.

 

Financial thoughts have opined as far as three years back why Greece should get out of Euro, which is created to favour the dominant nations of Euro zone.

The basic reason for the instability is the lack of cohesion i.e. the attempt to have common monetary policy without uniform fiscal policies. Well, since Financial thoughts have mentioned about the same in another blog, we will not dwell much on it now. (Interested readers may please visit   http://www.financialstrategyonline.com/2012/02/lamentations-of-greece.html)

 

The real beneficiaries of Euro mainly includes Germany – who although lost two world wars has won the economic war in Europe just as Japan did it in Asia. The Euro is good for the large business houses of the Europe as it eliminated the foreign exchange risk and brought in more predictability to the turnover and profits.

 

Also for some, it gave a pleasure of a Europe Empire united under one currency, which is something Napoleon Bonaparte planned in early 1800s. However, let the practical considerations prevail rather than the romantic ideas of a United Europe – a Europe united under one currency.

 

Now the common man in Greece, Portugal and Italy is suffering under the burden of the colonial Euro.  Under normal circumstances, Greece would have devalued its currency and attracted more exports (more foreign currency) or tourism mainly from the same Euro zone countries that would flock to Greece to enjoy sun and historical moments. Rest of the world would also flow into Greece. Now the rest of Europe has no added incentive of a devalued currency to plan a trip to Greece. A trip to Greece almost costs the same as a trip to France! This would not have been the case, if Greece have its own currency.

 

Hence, let the Greeks snatch the opportunity to obtain freedom from the yoke and tyranny of EURO.  Any such decision would lead to some financial turmoil; however it is worth it. Of course, many people in the rest of Europe may wish that Greece continue in Euro; however a wise decision may not be satisfying others wish; at the expense of yours.

Disclaimer: Our opinions are based on economic and other conditions now and such conditions may change significantly over relatively short period of time. Should circumstances change significantly after the issue of this report, the conclusions and opinions expressed herein may require revision. The statements and opinions expressed in this report are for academic purposes only and to provoke the thoughts of the reader.

Power of Vision & Mission Statement

Dubai is a fascinating city- a true oasis in the middle of Middle Eastern desert. It hosts all nationalities and the local UAE nationals are always ready with a smile and hospitality - unlike what you may experience in Saudi Arabia.

 

In today's blog, we will speak about Dubai Metro and how it shares some common features with yet another successful business story of GE.

 

Today at 9.30 pm I was sitting at Dubai metro, Burjuman station and it was crowded, which tells about the success story of the only metro in the Middle East. Copying Dubai, some of the GCC countries are trying to implement the metro, however it is slow and time consuming process. Nobody can repeat the speed and efficiency of Dubai.

 

My thoughts fly back to the days when the metro project was announced. It was the first such project in the Middle East. Many doubted its viability. Typical to UAE style, (Dubai in particular) it was built quickly and launched at the middle of the 2008 crisis. Even the promoters stated at the time of launch on 09-09-2009 that it may take more than a decade to see the metro profitable. However, the number of travellers in 2014 was around 160 million per year. Assuming average revenue of AED 10 person, it is whopping revenue of AED 1.6 billion per annum. Surely, the venture might have achieved the break-even levels already. No doubt, Dubai Metro is a thumping success and a winner. How has it achieved this? Amongst several other factors, let us focus on the ‘Vision and Mission’ that was set by RTA, under whose umbrella, Dubai Metro falls in.  

 

Vision & Mission

 

What is Vision and Mission? Is it so important? This was the question asked to me by some of the senior executives of a Singapore listed company on behalf of whom we conducted an internal strategic review of their operations in the UAE. Yes – they are now convinced based on our advice and they have moved ahead on this. We have not only provided them with a Vision that will take the company to fulfil its aspirations, but also prescribed mission, values and behaviours as well as an evaluation platform for senior management, who are in charge of implementing them.

 

Who is the best person who can describe the Vision and Mission? The best advocate of this is Jack Welch, who has been given the title “Manager of the Century” by Fortune Magazine. For those who do not know Jack Welch, he was the longest serving CEO of GE from 1981-2000. During his tenure the market capitalization of GE grew by USD 400 billion, making it the world’s most valuable corporation. How he did it? He changed the Vision and Mission after he became the CEO of GE.

 

A strong mission statement is not a mere announcement – it is a powerful tool for companies to make choices about people, investments, and other resources, and prevents them from falling into the trap of committing their resources into less fruitful ventures.

 

So let us see the Vision of GE put forth by Jack in early 1980s.

 

“The most competitive enterprise in the world”

 

This was an inspirational vision put forth by Jack in 1980s, when its market value was 1/30^th of the value in early 2000 when he retired.

 

So, how this vision was going to be attained? He defined the Mission

 

“By being No. 1 or No. 2 in every market— fixing, selling, or closing every underperforming business that couldn’t get there”

 

And both worked for Jack – and he created the most valuable company on earth when he walked out as the CEO in the year 2000.

 

That should silence the critics who may criticize the Vision and Mission is high sounding hollow words.

 

Vision & Mission of Dubai Metro

 

Another best example is the Vision and Mission set forth by RTA for Dubai Metro. Let us see the Vision & Mission Statement of Dubai Metro.

Dubai metro is a proof of Jack Welch’s belief in Vision and Mission statement.

You can also see the vision and mission displayed at almost all metro stations.

Spend 30 mts at 9 pm at Burjuman on any day to see the Vision and Mission of Dubai Metro in action.

Transcend Consulting, helps its clients to set our clear vision, mission, values, behaviours and strategies to become winners in the chosen field. To know more please contact at cj@consulttranscend.com or admin@consulttranscend.com  or call us on 00971-56-4805552

 

Berkshire Model – will it work for others?

Many investors and business people across the world admire Warren Buffet's business model and try to emulate. However, it has proven to be tough task. This article attempts to help whoever wants to try Berkshire Hathaway (holding company of Warren Buffet’s businesses) model.

Step 1: Become an Analyst

Buffett followed his master, Ben Graham, who taught him value investing. Through in-depth analysis he would find forgotten or discarded companies, trading at deep discounts to the value of their net assets.

He had passion for analysis & over time he became an expert. He would find companies which offered ‘value arbitrage’ i.e which he could extract a little bit of value.  These stocks were often ‘not so great’ companies, but were trading below liquidation value, so offered ‘value arbitrage’. Buffett called them “cigarette butts,” because like discarded butts—from which one could enjoy one last puff—they offered one last bit of value. While most investors looked for some great companies, Buffett mastered extracting that value from such “cigarette butts.

Step 2 – Take calculated ‘big’ risks

When Warren Buffet decided to go big, he decided to close his investment partnerships. Then he bought a textile mill in late 1960s and took charge as its main decision taker. He had no plans in dominating textile industry, but using the funds of the textile mill he bought and insurance company – but it was a brilliant move and the net cash outflow was zero.

After one year, the ‘cash floats’ from the insurance company and whatever surplus (cash) the textile company produced were channeled into ‘value investing’ . But in this second stage, Warren Buffet moved beyond “cigarette butts’ and focused on large companies.

Buffett might have started with unknown companies, but his analytical skills provided him with insights to make his fortune in brand names like Coca-Cola. When he accumulated Coco-Cola shares, the company was coming out of a bad phase – what looked for others as ‘big’ risk, was a ‘value arbitrage’ for Buffet. i.e. the value arbitrage in terms of future performance.  

Step 3 – Develop Passion for what you do

All successful entrepreneurs say this. You have to get passion so that you can be optimistic when everyone around you is pessimistic. This allows you to put more efforts despite initial failures. Buffett’s edge was similar. He was willing to put in the time reading Moody’s manuals and annual reports cover to cover when no one else bothered. It takes immense discipline, patience, time, and lots of energy to know a business inside and out, but the effort is worth it.

Step 4 – Become a Leader

While many books speak about Warren Buffet’s investing techniques, not many speak about his leadership skills. He is a fantastic leader, because he is able to find talented, skillful and passionate CEOs to run his 100+ companies. He rarely speaks to them or gives them guidance. In this auto-pilot system, the CEOs work for Warren Buffet’s holding company without the usual top management push and pulls. I think he trusts his CEOs and seems that if couldn’t trust some CEO, he would fire him and would get a man he could trust in the job. In some cases, empowering others leads to phenomenal results.

CLUELESS FED RESERVE - Marc Feber & Raghu Ram Rajan

Recently, the US Fed Reserve has decided to continue their liberal monetary policy (money printing + low interest rates) which they started 5-6 years back.

Financial Thoughts agree with Marc Weber (correctly pointed out some of the stock market crashes in the past) when he says

"I believe that the market is slowly waking up to the fact that the Federal Reserve is a clueless organization," Faber said. "They have no idea what they're doing. And so the confidence level of investors is diminishing, in my view."

The consequence of the note printing (QE) is that there is temporary boom in the US economy. China is the biggest taker of such notes as it holds USD 3 trillion (& China has its own justifications). You can also repeat this to boost your economic (financial) position by printing IOU notes to suppliers of various goods (house, cars, etc) to you. Only thing is that your creditor shall hold it in their reserves and shall not make a claim on you. That is what China is doing - the moment China decides to liquidate US Dollar holdings, that will cause the world to witness something no-one in the economics or finance has seen. Probably, that may even lead to World War III

Let us focus on Marc Weber views on US Fed policies and its consequences. Whilst China may decide to hold on to its IOU notes from USA ad infinitum,  such policies will have its own consequences in the near term

Weber goes on to add that as investors adjust to this fact, and valuations shrink, he predicts a massive decline in the market. He predicts 30% correction in US Stock Market in 2014 - this is not good news for world markets (including India) as the global financial markets are inter-connected.

That's where we can understand the question Rajan asked Ben Benarke in a recently gathering of Central Banks. Rajan asks an interesting question

 
"If the (Fed) policy hurts the rest of the world more than it helps the United States, should this policy be pursued?"

It is reported that Bernanke was upset - he got even more upset when Rajan mentioned that the benefits of QE will be less clear if its prolonged. Bernanke said something that Rajan and emerging market economies are worried about their exchange rates & according to him, the QE which is a monetary policy may not be mixed up with Foreign exchange policy.

However, Financial Thoughts believe it is better to listen to Rajan, who had correctly predicted the consequences of liberal monetary policy of Allan Greenspan before the Great Crash of 2008.

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A Travelers Memory of Kerala 'Gods Own Country'

For the past several centuries, Kerala was crisscrossed by travelers from East and West. Some the travelers included Ibn Bathuta, Marco Polo, Gundert , etc.

Financial thoughts is impresssed by the memory penned by Davin O'Dwyer. He has written an article summarizing his visit to Kerala, which is reproduced below 

  

Kerala, India: They don’t call it ‘God’s Own Country’ for nothing

By Davin O’Dwyer,

As grandiose slogans go, Kerala has one of the best: “God’s Own Country,” they call it, an assertion of divine provenance that’s loudly proclaimed on countless signposts and bumper stickers across the state. In most corners of the planet, such a boast would sound unbearably self-satisfied, tourist-oriented branding at its tritest. But here in this prosperous state on the southwest coast of India, it doesn’t sound smug so much as sincere, precise even. “Rest your eyes on our natural splendor,” it seems to say, “and believe.”

The phrase invokes the stunning natural beauty for which Kerala is renowned, of course, but also alludes to the variety of faiths that thrive here: The coexistence of Hindus, Muslims, Christians and even some Jains is apparent in the busy juxtaposition of towers, minarets and spires that sit cheek by jowl in every city, town and village. If for no other reason, the state can lay claim to the title of “God’s Own Country” because there are so many gods who might be inclined to choose it as their own.

My girlfriend and I arrived in Fort Kochi, a famously quaint heritage city filled with the vestiges of its Portuguese, Dutch and British colonial past, just before Christmas. One evening we stumbled upon aSunday school concert in front of the Santa Cruz Basilica, a grand edifice with a dazzling white facade and twin spires reaching to the sky.

If you go: Kerala, India

It was an arresting sight — glowing paper star lanterns hanging over a large, busy stage where a choir of small schoolgirls dressed as angels performed Christmas carols for a rapt audience of hundreds. “Silent Night” has never sounded so out of place and yet so universal. This was followed by a troupe of teenage girls in colorful Indian dress who performed an elaborate folk dance, arms and torsos waving in intricate patterns. The contrast of Christian hymns and traditional pageantry should have seemed jarring, but instead it appeared to be a seamless expression of multifaceted identity.

That identity extends to the countryside. From the stunning beaches along the Malabar Coast to the maze of backwater canals cutting through huge rice fields to the glorious rolling hillside tea plantations in the Western Ghats, Kerala’s landscapes are almost as diverse as its people.

But the most abiding quality of those landscapes is the way they unfold in varying shades of lush green, as though the color spectrum had been forced to expand to accommodate the state’s spectacular fertility.

The name Kerala is derived from kera, the local Malayalam word for coconut, and there is an abundance of palm trees across the state, the spiky dark green fronds acting as natural parasols against the glare of the sun. The coconut doesn’t just lend its name to the place, but also acts as a ubiquitous and adaptable natural resource from which countless products, such as coir, a versatile fiber, and toddy, a famous — and potent — local brew, are derived.

Mountains of tea

It’s the plant behind another beverage that gives the area around the hill station town of Munnar, in east Kerala, its famously vibrant shade of green. In this part of the Western Ghats mountain region, the steep hillsides are covered with about 60,000 acres of tea plantations — an industry begun by the British, who established the plantations in the late 19th century.

The result is a stunning vista: The vast swaths of tea bushes cling to the hills like a soft emerald carpet. The narrow pathways between the bushes, the trails followed by the tea pickers, lead to patterned grooves accentuating the topography, appearing from a distance as if some godlike cartographer had inked contour lines onto the mountain slopes.

We normally think of a physical colonial legacy in terms of architectural styles and urban design — the distinctive angles of the roofscape, the width of the boulevards, the patterns of the brickwork. But the colonizer doesn’t leave an imprint just in the city streets, and in the hills around Munnar, we see a different type of physical legacy, a landscape radically altered by the British.

The emerald sheen of the hillsides comes courtesy of the empire’s insatiable appetite for tea. Intrepid colonists such as John Daniel Munro and A.W. Turner made their way up to the High Ranges, as they called them, and discovered that the altitude, gradient and orientation of the slopes were particularly suited to the cultivation of tea.

And that wasn’t the extent of their impact. To provide enough wood to fuel the tea production process, eucalyptus seeds were smuggled in from Australia, and now the hilltops are covered with fast-growing, ramrod-straight eucalyptus trees, standing as if in severe vertical rebuke to the natural curves all around.

As a town, Munnar has been blighted by thoughtless overdevelopment, with large hotels springing up in shambolic fashion. But traces of its history as a hill station, or colonial mountain town, remain, such as a few Christian churches and the High Ranges club, the latter persevering as if the sun had never fully set on the empire.

As has happened so often in India, the imposed traditions of the occupier, from the Mughals to the British, have been subsumed into the local identity, assimilated with ease into the larger national narrative. Thus, Indians drink copious amounts of “chai,” usually sweetened beyond recognition, and the tea landscape, too, becomes absorbed into the local tradition, a proud part of the heritage rather than evidence of an alien legacy.

Grasses and goats

On Christmas morning, we made our way to Eravikulam National Park, about eight miles from Munnar, which stretches over some 37 square miles above the line of vegetation, the green giving way to yellow-tinged, tough grass and exposed rock.

The treetops and tea plantations are arrayed on the hillsides below, and from here you get an unrivaled view of the rolling countryside, with pockets of mist occupying some valleys while occasional lost-looking clouds skim the highest peaks. Looming over the reserve is Anaimudi mountain, which, at 8,842 feet, is the highest mountain in southern India. It’s a forbidding hunk of rock, earning the nickname Elephant Head with its imposing outline.

One of the chief attractions of Eravikulam is the Nilgiri tahr, a rare mountain goat that was nearly extinct a century ago but now numbers approximately 3,000, about half of them in this reserve. Unlike the wild elephants that you can glimpse in certain wide pastures in the valleys below, the Nilgiri tahr are happy to approach the pathway, mingling with visitors in nonchalant fashion.

Signs warning people not to stray off the track are in English and Malayalam, which uses a script peculiarly apt for this part of the world. The voluptuous letters, all round curves and looping twirls, beautifully match the landscape. Fittingly, the word Malayalam itself means “hill region.”

Every dozen years or so, the tough grass suddenly turns bright blue as the native Kurinji flower blooms across the hillside, adding another dose of color to the landscape, almost as if nature is offering occasional respite from the pure greenery below.

In the backwaters

Quite another shade of green characterizes the famous Kerala backwaters near the coast. Although the tea plantations are closer to emerald, the vast rice paddies of this area are an almost luminous jade, fringed with palm trees and banana plants. The wetlands area around Kuttanad is a dense maze of canals, rivers and lake, largely south of the Vembanad lake, one of the largest in India. The mythology has it that Kerala was created when Parasurama, an incarnation of Vishnu, threw his battle axe into the sea, resulting in this conflicted countryside, neither all water nor all land.

A voyage along the backwaters on one of the traditional thatched boats is one of the quintessential Kerala experiences; the kettuvallam, as they are known, were once used to carry rice and passengers around the waterways and are now being adapted as houseboats, many extremely luxurious. They come in all shapes and sizes, the roofs usually bowed, curving gracefully toward the water.

We take an overnight cruise, meeting our charming crew of three at the busy coastal city of Alleppey. It is one of those chaotic, choked Indian towns that thrum with an anarchic energy, where speeding rickshaws and mopeds play real-life dodg­em on the streets before being held up by the occasional elephant progressing along in stately fashion.

The contrast with the waterways couldn’t be starker. Once you’re on the water, the delirium of Alleppey fades to a dim memory, replaced by a pervasive calm. A cruise along the canals is captivating — so serene, so tranquil that it weaves a kind of meditative spell, like a deep-tissue massage for the soul. We slowly glimpse the quotidian charms of local life here — the beautiful little cottages along the waterways, with moored boats instead of parked cars; small shops and toddy bars; numerous churches, some daringly modern in style, others tracing their roots back to the time of St. Thomas, the doubting apostle, who is said to have arrived in these parts in the 1st century.

As the houseboat chugs along, we regularly hear the slap-slap-slap of cloth smacking against stone as mothers do the family laundry by the water’s edge while children pause in their games and wave in our direction.

The captain docks the houseboat beneath some palm trees as we stop for lunch, and we become distracted by a most unusual sight: A lone duck herder on a canoe is expertly chaperoning a flock of hundreds of quacking ducks along the water, steering them this way and that with the use of a very long stick, both paddle and conductor’s baton, with which he propels himself and splashes the water to keep his charges on course, corralling them toward his colleagues on the riverbank. With the ducks safely home, the herder moves on to do it all again with another flock, an act of Sisyphean patience.

Later, we pass a cramped cricket game unfolding in the space between some palm trees, a scrawny wicket worn on the wiry grass. The boys wield their bats expertly, accounting for the tree trunks as if they were rival players. They, too, stop and smile and wave, the sense of hospitality boundless.

As the afternoon draws to a close, we take a canoe along a narrow canal, passing small, pretty cottages, and then walk along the small dams near the rice paddies, bending to duck beneath the broad leaves of banana trees. With the sun setting to the west, the rice paddies before us glow an iridescent green. It’s a dazzling sight, a vivid example of Kerala’s natural beauty.

We return to the houseboat as darkness falls and the vibrant colors fade to black. Whirring bugs accumulate in the air around us, and we catch a faint call to prayer echoing from a distant minaret and enthusiastic singing drifting over the water from a nearby church.

God’s own country, they call it. We close our eyes on the natural splendor, and believe.

O’Dwyer is a freelance writer based in Hamburg, Germany and Dublin. His Web site is davinodwyer.com.

Letters to Investors by Warren Buffet

The much awaited 'Letter by Warren Buffett to Shareholders' is out. Such letters are famous for its education content and insights:

Some of the highlights of 2014 Letter are: 

• Whilst many equity managers found it impossible to outperform the S&P 500, the two portfolio managers of the Berkshire Hathaway (Todd Combs and Ted Weschler) out performed S&P 500. Each manages a portfolio exceeding $7 billion. 
• Berkshire Hathaway increased its ownership interest in the following companies

- American Express, 
- Coca-Cola 
- Wells Fargo- (increased ownership to 9.2% versus 8.7% at yearend 2012)

- IBM (6.3% versus 6.0%)

Stock repurchases at Coca-Cola and American Express raised their % ownership

• Berkshire book value per share gained 18.2% in 2013, underperforming S&P 500 by 14.2%. Berkshire’s gain in net worth during 2013 was $34.2 billion. 
• Over the last 49 years (that is, since present management took over), book value has grown from $19 to $134,973, a rate of 19.7% compounded annually.
• The letter says that Berkshire’s intrinsic value far exceeds its book value. They repurchase of shares at 120% of book value . However, they did not purchase shares during 2013, however, because the stock price did not descend to the 120% level. If it does, we will be aggressive.
• They made two large acquisitions during 2013, spending almost $18 billion to purchase all of NV Energy and a major interest in H. J. Heinz.