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Curiosity Does Not Kill The Cat: What Can Jack Ma and Steve Jobs Teach You About Competitive Advantage?

Prof Tan Joo Seng

Culture

Jack Ma and his friends were once googling for beer when he realised that it was difficult to find Chinese beer on the internet. It prompted him to create a home page in Chinese. Within five hours of posting the page, he received five emails from various countries, including US and Germany. The power of Internet surprised him - one which he harnessed towards building Alibaba, a Chinese giant specializing in e-commerce, retail, Internet, AI and technology.     On 17 December 1903, the Wright brothers, with no formal training in engineering, defied gravity with their manned airplane flights, ushering in the era of flight.   After observing how apples always fell straight to the ground, Isaac Newton spent several years working on the mathematics showing that the force of gravity decreased as the inverse square of the distance.   If we closely look at similar moments of breakthrough, insight and innovation in life or in business, one characteristic stands out. Curiosity is at the core of all of them. They did not start out with an end goal in mind. They were just curious. Once piqued, they kept exploring things which intrigued them, which I call “explorative curiosity”. Often these were unrelated topics. In the end, the pieces that came together, bore fruit. You could say that curiosity connected the dots.   In today’s VUCA (Volatile, Uncertain, Complex and Ambiguous) environment, where nobody knows what might be around the corner and what the next big thing could be, curiosity is a key quality leaders and corporations need to have to stay ahead of the curve.   Curiosity knits the lattice. Louis Mobley, founder of the IBM Executive School in 1956, says curious people share one trait: an inexhaustible curiosity on everything from “NATO to Plato.” The more they learned, the more connections they saw… from history, psychology, philosophy, science, literature, and poetry that produced their greatest creative business insights. What we might dismiss as irrelevant and therefore uninteresting, a genius like Steve Jobs sees as pieces in an unfolding interwoven jigsaw puzzle. Pieces to be continually sifted until the piece that fits the problem finally emerges.” In the world of business, the Jack Mas and the Steve Jobs cobbled together bits of information they had chased and pieced them all together to create breakthroughs.   Executives agree on the importance of curiosity. In a 2015 PwC survey of more than 1,000 CEOs, a number of them cited “curiosity” and “open-mindedness” as leadership traits that are becoming increasingly critical in these challenging times. Curious leaders are more open to new experiences, more tolerant of ambiguity and are more likely to nurture curiosity in their organisations.   Yet, curiosity is lacking and not given due attention. According to MERCK's 2016 State of Curiosity Report, while 80% of workers agree that curious colleagues are most likely to bring ideas to life, only 20% of workers actually self-identify as being curious.   Most companies will argue that they have programmes to encourage innovation or funds for innovation projects. However, it is not enough to rely on programmes or funds if curiosity has not been aroused and awakened in the team. A lot has been written on innovation, but not much on curiosity. Curiosity has to start from the top. Leaders lead by example. This critical capability - leadership curiosity - comprises three key components: self-curiosity, interpersonal curiosity and environmental curiosity.   It starts with the self-curiosity - a desire, even obsession, to find out more. At 13, Jack Ma woke up at give 5am, walked to Shangri-La hotel to chat with tourists and take them sightseeing. That was how he learnt to speak English. He did this for nine years; learning along the way, Western ways of doing things. When Steve Jobs started studying calligraphy and the practice of Zen Buddhism, he had no idea it would lead to the design simplicity of Apple computers. He was only being curious.     Personal curiosity is crucial to success because a naturally curious person is more likely to learn from mistakes, try new things, explore new ideas, engage more deeply, be more adaptable, take risks and embrace change. In today’s digital age and Industry 4.0, where technological change is happening at an unprecedented speed and scale, and where disruptions and black swans abound, personal curiosity is critical in closing the gap between the human capability to change and the exponential change in technology.   A leader must also be curious about others. This interpersonal curiosity is the desire to learn about other people, including their life experiences, their thoughts and motives. When you are curious about what your customer's experience with your products or services, you develop greater empathy and a deeper understanding of your customer experience. You learn how to improve your product or service, understand what value needs to be created to get the customers’ needs met more effectively, and even find new ways to connect with the customers in today’s digital age. When you are curious about your colleagues, you will engage with them at a deeper level, and this could build stronger trust and collaboration.   Unfortunately, what often happens to leaders once they’ve attained a position of leadership is that, they may feel the need to project confident expertise. They are afraid of being seen as ignorant or incompetent. A truly curious leader is humble enough to acknowledge that they don’t have all the answers.   Eric Schmidt, CEO of Google, says: “We run this company on questions, not answers.” The Director-General of BBC goes to every meeting with employees and starts with the question: “What is one thing I could do to make things better for you?” Hal Gregersen, Executive Director at MIT Leadership Centre, says leaders have to learn to ask questions. When the leader is curious and starts asking questions, others will take the cue and follow suit.   Curiosity begets curiosity.   A truly curious leader is curious about the environment and ecosystem in which the company operates. Being curious about the business environment drives learning and innovation. Lack of curiosity about the business environment may lead to organisational stasis, stagnation, and even decline. Staying curious about new trends or new ideas that are at the edge or periphery, or being curious about weak signals that are not yet clear or coherent in an industry helps you seek out new blue oceans of growth opportunities.   An example of an exceptionally curious leader is the late Mr Lee Kuan Yew of Singapore, who embodies all three components of leadership curiosity. Mr Heng Swee Keat, his former Principal Private Secretary shares that the Mr Lee had a red box which: “carried a wide range of items. It could be communications with foreign leaders, observations about the financial crisis, instructions for the Istana grounds staff, or even questions about some trees he had seen on the expressway. Mr Lee was well-known for keeping extremely alert to everything he saw and heard around him - when he noticed something wrong, like an ailing raintree, a note in the red box would follow. We could never anticipate what Mr Lee would raise - it could be anything that was happening in Singapore or the world. But we could be sure of this: it would always be about how events could affect Singapore and Singaporeans, and how we had to stay a step ahead. Inside the red box was always something about how we could create a better life for all.”   According to Kishore Mahbubani (retired Dean, Lee Kuan Yew School of Public Policy, NUS), among the founding fathers of Singapore, Mr Lee Kuan Yew, Dr Goh Keng Swee and Mr S. Rajaratnam, all three shared an “incessant curiosity”; they always had questions to ask.   For country, corporation or self, being curious may be the only source of competitive advantage.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.) 

Search for Best Equity Funds to Invest in India

Ravichand

Equities

Don’t look for the needle in the haystack, just buy the haystack. – John C Bogle   Many great investors like Buffett, Bogle, and Lynch have been consistent in their advice that a low cost index fund is a very good investing option for a vast majority of the investors. This advice was at the top of my mind when I began my search for an equity mutual fund to start a long-term Systematic Investment Plan.   A study from BofA-ML found that only 3% of the 1,600 equity funds actually managed to outperform the Nifty in first six months of 2018. 6% of them managed to outperform Nifty on a relative basis in the last one year and only 16% outperformed the benchmark in the last three years.   This set me thinking as to what this really meant for ordinary investors like you and me. Are there any equity funds, which have been consistently outperforming the benchmark indices for a very long time horizon? Or should we just heed to the advice of the investing legends and join the index fund investing bandwagon?    My search for funds to invest duly began by looking for the past performance data. I quickly found that the data for recent periods seem to be readily available but the information became progressively scarce as I looked further. The maximum tenure for which I could find the performance data was for a 10-year period.   10 years is definitely a long time frame but I believed that even the 10-year time horizon missed two crucial financial events: the tech bubble of the year 2000 and the financial crisis of early 2008. I reasoned that any fund which has outperformed over 15 to 20 years would have had to pass either one or both of these two very difficult tests. And those that have come out in flying colors surely have proved their mettle and stood the test of time. Hence they may have a better chance of having success even going forward.   But what about the data for more than 10 years? Thanks to Larissa and Himanshu at Morningstar, I could get the performance data for 15 years and 20 years. I spent many hours studying the data to find my answers. Hopefully my search for answers will also provide you with some food for thought.   Fund Criteria   Just as there are horses for courses, different categories of funds like Debt funds/Liquid funds/balanced funds are each suitable for different financial objectives. To meet my long-term goal of creating a retirement corpus via the SIP route, I came up with the following fund criteria:   1. Category Over a long period the general wisdom is that equity as an asset class tends to do better. Hence the focus was restricted to pure equity funds and even within equity funds, the scope was further narrowed down to the relatively less volatile large-cap funds. Pure Mid-cap, Small-cap, thematic funds were kept out of the scope. The goal was to build a corpus and hence only growth funds were considered. So the final scope considered and the fund criteria came down to: Equity – Large Cap (G) Equity – Multi Cap (G)    2. AUM To focus on funds with a reasonable size, the minimum AUM requirement was pegged at 500 crores.   3. Reference Date All data for ranking the performance of funds over 15 years and 20 years was taken as of 31st Aug, 2018.   Rules for the Road   Before we get into fund performance, a few very important ground rules:   The funds discussed here are not any recommendations to buy or sell. Please contact a registered Investment adviser before taking your buy/sell decisions. My findings are posted here for educational and informational purposes only.   There is no reason to believe that the underlying data is not accurate. However, no guarantee is possible towards that end.   The search is an endeavor to find a suitable fund to invest based on my set of criteria, which may or may not be applicable for you nor be the best criteria to decide.  E.g. pure thematic funds or pure sector specific funds were not considered since they were considered to be inherently more risky.   I am fully cognizant of the fact that past performance is NO guarantee that the future returns may also follow the same pattern. But I strongly believe that funds that have done well for 15 or 20 years have a greater chance of doing well in the future too.   There are other factors too, which are pertinent like the fund expense ratio, fund manager’s style, fund house which has not been explicitly considered in this exercise.   All set, let us dive straight into the findings.   Equity funds: Large-cap   A. Performance over 15 years This table gives you the top 5 Equity large cap funds over a 15-year period as of 31st Aug, 2018 and the relative out-performance against the benchmark index (Nifty 50).     HDFC Top 100 and Aditya Birla SL Frontline equity fund are the big daddies out there - both in AUM and in performance. A 6% approx. out-performance is massive.   B. Performance over 20 years This table gives you the top 5 Equity large cap funds over a 20-year period as of 31st Aug, 2018 and the relative out-performance against the benchmark index (Nifty 50).     HDFC Top 100 and Tata large-cap funds absolutely rock over a 20 year period with an out-performance of 8% approximately Tatas don’t market their cars well and that seems to be the same theme here with their funds too. Their AUM is only 5% of the second ranked HDFC Top 100 fund’s AUM. Beyond the top 3, the fund out-performance tapers off and in fact the 5th performing fund has not beaten the benchmark. Interesting.   Equity funds: Multi-cap   A. Performance over 15 years This table gives you the top 5 Equity Multi-cap funds over a 15-year period as of 31st Aug, 2018 and the relative out-performance against the benchmark index (Nifty 500).     B. Performance over 20 years This table gives you the top 5 Equity Multi-cap funds over a 20-year period as of 31st Aug, 2018 and the relative out-performance against the benchmark index (Nifty 500).     The Top 3 funds have outperformed the broader index significantly. The same set of 5 funds make up the top 5 over both 15 years and 20 years.   Equity – Index funds   The next crucial question was how the index funds performed. I looked at the 15 years data as on 31st Aug 2018 to come up with the top 5.     Key Insights   Having looked at the data for 15 years and 20 years, these are some of my observations:   Top 3 Equity Large Cap funds Let us get to the heart of the whole exercise. Based on 15 years and 20 years data, the top 3 funds in NO particular order: HDFC Top 100 (G) Aditya Birla SL Frontline Equity (G) Tata Large Cap (G)   A quick look at 10-year performance validates the above choices.   Performance over 10 years This table gives you the top 10 Equity large-cap funds over a 10-year period as of 4th October: Source: Morningstar     HDFC Top 100 performed consistently well over a 5-year, 3-year and 2-year time period. The top 3 funds namely HDFC Top 100, Aditya Birla SL Frontline and Tata Large-cap fund continue their out-performance even for a 10-year time horizon to be in Top 10.   Top 3 Equity funds – Multi Cap Based on 15 years and 20 years data, the top 3 funds in NO particular order: HDFC Equity fund (G) Aditya Birla SL Equity Fund (G) Franklin India Equity (G)   A quick look at 10-year performance validates the above choices.   Performance over 10 years This table gives you the top 10 Equity Multi cap funds over a 10-year period as of 4th October: Source: Morningstar   Top 2 Index funds   Based on 15 years data, the top 2 index funds in NO particular order: ICICI Pru Nifty Index fund (G) UTI Nifty Index Fund (G)   A quick look at 10 years performance validates the above choices.   Performance over 10 years This table gives you the top 10 Equity Index funds over a 10-year period as of 4th October:   Source: Morningstar   Actively managed funds have significantly outperformed the benchmark Indices The question that was in the top of my mind was answered emphatically. In the debate of active vs. passive investing, at least in the Indian context, I do not have any more doubt. The top performing funds have beaten the benchmark hands down and with a significant margin.   As seen in the table below, the top fund in the equity multi cap fund category, HDFC Equity (G) has outperformed the benchmark by a whopping 10.74% over a 20-year period.     Actively managed funds have beaten the best index fund too, by a wide margin The actively managed funds have outperformed not just the benchmark indices but even the best performing index fund by a wide margin.   The below table compares the returns of large cap funds Vs. the best performing index fund for 15 years, ICICI Pru Nifty Index Reg Gr fund:     Now let us say you had taken the systematic investment route and started an SIP. The below table shows the returns if you had started a monthly SIP of 10,000 for 15 years on 1st September 2003 in any of the top 5 large-cap funds against the returns you would have received if the SIP was done in the best performing index fund:     The result is as clear as night and day. The absolute return in the top 2 large cap equity funds is in excess of 16 lacs (1.6 million) over the best performing index fund over a 15-year period.   It is also pertinent to note that the out-performance tapers off as we go down the list and for the 5th best fund the excess returns is actually less than 1%. This implies that you have to be getting the fund selection absolutely right.   Multi-cap funds have performed better over pure large-cap funds Multi-cap funds by design may invest in mid-cap or small-cap stocks and that seems to give them an edge over pure large-cap only funds. For Long-term investors, multi-cap funds may also be a good investing option.   The below table shows the total returns of top 3 funds in both Multi-cap and Large-cap categories:     As can be seen above, over a 20-year period, the best performing multi-cap fund (HDFC Equity Gr) has a 3.55% out-performance over the best performing large-cap only fund (25.10% Vs. 21.55%).   Final Thoughts   It is very clear to me now that at least in the Indian context, there are actively managed funds, which have consistently beaten the benchmark indices, and there is no need to jump into the indexing bandwagon. The best performing actively managed funds have not just outperformed the top index funds by a sizable margin but also have done that over a very long time horizon of 15 to 20 years.   However, as seen from the data, the excess returns generated seem to be tapering off as we go down the performance list. The key thing then is to get the fund selection decision absolutely spot on. Hitching your financial bandwagon to the right fund is seen to be crucial as to where you will end up in your investing journey. To that end, approaching a trusted financial adviser to help you choose the best fund may just be the fine beginning you can make.   Happy Investing!!!   Originally Published in Stock and Ladder   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Why was Amazon’s Minimum Wage Raise a Home Run?

Rohit Dhalaria

Welfare

After months of constant criticism directed at Amazon for its strenuous labour practices, the e-commerce giant finally decided to mend its image early this month.   At the outset, the decision by Amazon to raise its employees' minimum wage to $15 per hour seems motivated by social welfare considerations. Estimated to impact more than 250,000 employees, both full-time as well as seasonal workers, the optics surely appear non-commercial.    However, such a major realignment can't be without a strategic rationale.   Amazon has in fact managed to kill two birds with one stone. This is because not only would an increment in minimum wage socially and economically benefit Amazon’s workforce, it will also have a direct positive impact on the company itself. A behavioral economics theory known as “Efficiency-Wage Theory” is perhaps at work.     The Efficiency-Wage Theory suggests that when a firm decides to set 'wage prices' above the 'equilibrium market price', in response, the productivity of its workers increases. This theory primarily rests upon a two-pronged argument:   Increased wages will have a significant effect on the quality of life of the worker. The employee will be able to afford better healthcare, food, shelter etc. A healthy lifestyle enables workers to be more productive at work than the employees who are relatively under-paid.   If a highly-paid worker is fired from his job, it is likely that he/she would have to take up an equivalent job for less remuneration. Therefore, in an attempt to retain their jobs, workers will work harder and try to be more productive than under usual circumstances.   By raising its minimum wage to $15, which is more than double the federal minimum wage (i.e. $7.25 per hour), Amazon has set its minimum wage well above the equilibrium rate. Even minimum wage of Washington D.C, the highest in the US, falls short of Amazon’s new benchmark. Amazon’s biggest competitor i.e. Walmart also fails to match up at $11 per hour.   Efficiency-wage theorists believe that such a move would incentivise Amazon’s employees to work harder. The workers under the fear of losing their job and having to work for lower wages will start working harder to protect their employment. The average productivity should also grow because of the increased wellbeing of workers.    Amazon is leading the industry by example. This is precisely why the minimum wage increment is a home run. It is simply a win-win situation for all.   Moreover, in the era of rising automation where low skilled jobs are increasingly getting 'under risk', most companies would more and more depend on a smaller but much productive / efficient workforce.   Amazon's progression post its wage revamp would hence serve as a useful case study to assess the impact of flexing labour metrics on productivity.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Why Successful Companies Usually Fail

INSEAD Knowledge

Industrials

By Yves Doz, INSEAD Emeritus Professor of Strategic Management, and Keeley Wilson, INSEAD Senior Researcher.   The Dynamics of Corporate Collapse are Caused by Three Phenomena.   The annals of business history are replete with the names of once great companies that dominated an industry, only to lose pre-eminence and become shadows of their former selves or even disappear. Understanding why powerful companies fail and how to avoid such failure is one of the holy grails of business and management research, not to mention having spawned an enormous and lucrative consulting industry.   Yet, the very fact that successful companies continue to fail is testament to an incomplete understanding of the drivers of corporate demise. Some argue that strategic outcomes and ultimately a firm’s future are determined by the choices, commitments and actions of top management. In this logic, stellar performance is linked to incumbent CEOs (think Jack Welch at GE, Lou Gerstner at IBM, Alan Mulally at Ford or Andy Grove at Intel) as is poor performance, even if the leader has only been in office for a short time (like Ellen Kullman at DuPont, Fritz Henderson at GM, Christopher Galvin at Motorola or Jorgen Centerman at ABB).   Another school of thought puts the emphasis of corporate demise on an organisation’s structures, processes and business models which foster rigidity and so make adaptation and change extremely difficult, if not impossible. And finally, proponents of Schumpeterian creative destruction attribute corporate decline to a firm’s inability to adapt to a radically changing external environment – which has become all too apparent across a range of industries from bricks-and-mortar retail to publishing and communications in the face of technological disruption.   While all three of these arguments are compelling, none alone is sufficient in explaining why and how companies fail – this calls for a more holistic view of a company over its lifecycle. We have been very fortunate and privileged to have such a perspective with over 20 years of research at Nokia Mobile Phones; a business that shaped an industry it came to dominate with one of the strongest brands in the world, only to all but disappear in a fire sale to Microsoft.   “Ringtone: Exploring the Rise and Fall of Nokia in Mobile Phones”, our recent book which won the 2018 Academy of Management’s prestigious Terry Book Award, charts and analyses Nokia’s journey. But our findings are relevant far beyond the realms of Nokia’s experience in attempting to explain why successful companies fail.   We found that what leads a company down a competitive dead-end is a combination of management volition, organisation adaptation and industry evolution, with each playing a more or less prominent role over time, and the interdependencies between them becoming lethal.   Management Choices   Management choices obviously contribute to a company’s decline, but it isn’t just the decisions of the incumbent management team that play a role. The seeds of strategic stasis are usually sown by management choices made a decade or so earlier. It is these decisions that lead to the heuristics, creeping commitments and hubris that create a context in which future action is taken.   Strong heuristics, particularly from the unconscious or unintended learning a company experiences as it grows and overcomes crisis situations, become implicit ‘principles’ in decision-making. So, for example, in its early days, having invested huge sums in technology development, Polaroid found there was a very limited market for its expensive instant cameras and certainly not one large enough to sustain the company. In the face of this crisis, Polaroid adopted a film-first, ‘razor blade’ model whereby it sold cameras at cost but made a huge margin (around 70%) on the film for its cameras. This simple heuristic, that only film makes money, became entrenched and shaped future management decisions for the next 30 years. Even though Polaroid recognised the need to invest in digital technologies as early as 1985, successive management teams framed the challenge too narrowly in terms of ‘printing’ digital images rather than producing affordable cameras to capture images (as Japanese competitors Sony and Canon were doing). After numerous CEOs, restructurings and ‘new strategic directions’, Polaroid filed for bankruptcy.   Poor and inadequate cognitive framing can also result from ‘creeping commitments’ – past decisions to which a company becomes hostage and which sets them on a direction from which it is difficult to deviate. Here, Nokia’s Symbian operating system provides a good example. Initially adopted by a consortium of mobile phone producers in 1998 in a bid to stave off the threat of Microsoft entering the industry, over time Nokia’s commitment to and continued investment in this device-centric operating system had a profoundly negative impact on its ability to adapt to a platform and ecosystem approach.   Success tends to breed hubris and this, in combination with the voracious appetites of certain classes of shareholder, can lead to managers focusing on the operational issues which will drive greater efficiency for the benefit of short-term results and not long-term sustainability and growth. This is what happened at IBM under the leadership of Sam Palmisano, who was so focused on doubling shareholder returns every five years he failed to see, or acknowledge, that the competitive environment was changing. With no response to this shift, IBM was in serious trouble – although this wouldn’t become apparent to the outside world until a few years later.   Organisation Adaptation   Management choices lead to the implementation of structures, processes and business models which if left unchallenged can result in dysfunctional rigidity and become a formidable constraint to much needed adaptation further down the line.   At IBM, it wasn’t long after Ginni Rometty succeeded Palmisano as CEO that the depth of problems began to show. Fewer corporate customers were buying hardware in favour of cloud solutions and ‘software as a service’ (SaaS) and this had a significant impact on the firm’s performance. Yet IBM was trapped in a highly integrated, symbiotic business model in which hardware sales were tied to both high margin software sales and the proliferation of IBM consultants to install and maintain this. For years, this business model had stifled growth initiatives and made change extremely difficult. After brave choices and a long, difficult and painful reorganisation, IBM is finally beginning to re-emerge to fight in a new competitive environment.   Organisation structures can prove just as big an impediment to much needed change as out-of-date business models. Both ABB and Nokia found themselves mired in infighting and intense internal competition due to matrix structures which proved difficult (and ultimately impossible) to manage as different groups with vested interests sought to protect their corners. In this scenario, under performance pressure, misinformation from business groups tends to filter upwards giving senior management a false impression of how a company is faring. Combined with a lack of internal collaboration that prevents people from ‘connecting the dots’ which point to changes in the external environment, it becomes clear how structure can play a large part in pushing a company towards failure.   Changing Environment   When the very nature of an industry changes, this is bound to result in casualties and successful incumbent companies are perhaps the most vulnerable as they are more likely to be locked into a co-evolution with existing partners, suppliers and major customers when it comes to a vision for the future. In addition, both management choices and the level of organisational adaptation will make it more or less difficult for a firm to step out of its current business model and recognise the environment around them is radically changing.   Neither the board nor the management of Kodak understood how fast the environment was changing from film to digital photography, and so management choices fatally reinforced the importance of the core film business. With the support of IBM’s board, Palmisano was so focused on increasing shareholder returns that he failed to see the locus of competition was shifting to the cloud and on-demand. And Nokia was so locked into its product-centric view of the industry, its management couldn’t conceive of the platform-based future Apple and Google were creating.    Weathering the Storm   While external shifts in the nature of an industry clearly play an end-stage role corporate failure, it’s the interdependencies between these changes, management choices past and present, and the structures and business models a firm has adopted which ultimately determine whether a company has the ability to ride that change or be brought down by it. It is only companies that have made bad management decisions and have poor organisation structures and business models that succumb to the external forces of change.   Yves Doz is an Emeritus Professor of Strategic Management at INSEAD and the Solvay Chaired Professor of Technological Innovation, Emeritus. He is the programme director for the Managing Partnerships and Strategic Alliances programme.   Keeley Wilson is a senior researcher at INSEAD.   Follow INSEAD Knowledge on Twitter and Facebook.   This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How is RBI Deciding the Fate of Indian Bank CEOs?

Nikhil Arora

Financial Institutions

To say the Indian banking sector is in turmoil is an understatement. The NPA crisis has only snowballed since getting started with no end-point in sight. Lawyers, insolvency professionals, borrowers, and banks are having a field day in and around our country’s bankruptcy tribunals. What was condescendingly declared as an issue sitting within public sector banks quickly morphed into something much broader, catching private sector banks off guard.   Side drama is not in short supply, with intermittent episodes showing newer governance lapses. In an almost seasonal fashion, we had the PNB scam end of winter, Chanda Kochhar’s conflict of interest saga early summer, now the IL&FS debt crisis kicking off autumn.   Whips are being cracked, albeit selectively. Case in point being RBI’s actions on private bank CEOs. First casualty was Shikha Sharma, Axis Bank CEO, whose term extension was reduced to year end (instead of the original request which would have lasted her tenure till 2021). Surge in bad loans and systemic lapses were reportedly cited as reasons by the Central Bank. More recently, similar fate befell YES Bank’s promoter and CEO Rana Kapoor, whose tenure was also shortened till Jan 2019, a position he has enjoyed for 15 years since founding the financial institution. Weak compliance culture, weak governance, and wrong asset qualification reported as drivers.   Mr. Kapoor’s ‘dismissal’ is different from Ms. Sharma's. Unlike the latter, he is in effect a 20% shareholder in a ‘not so much’ widely-held stock. No wonder the share price tanked -29% the day after, partly due to the shock value of dismissal, part because of fears around regulatory over-reach and the possibility that the RBI may know something about YES Bank’s asset quality that investors don’t.   In any case, it is interesting to assess if the Central Bank is following any recognizable logic while dismissing top management. Let us first ignore that a similar crackdown hasn’t transpired across public sector banks. But that question, to start with is too distant from the doors of logic, so better to ignore.   I map India’s 6 biggest private sector banks on a few common criteria. Aside from type of ownership and entrenchment of CEO, former denoted by share of promoter holding and latter by length of tenure, I also lay down the bank’s expected Return on Equity and Loan growth (to indicate management’s ability to generate profitability and grow) and its forward P/B or price to book ratio (indicating investor’s perception of the bank’s valuation). Lastly, have included the bank’s net NPA ratio to indicate the size of its bad loan problem. The results of this exercise and its comparison against RBI’s recent decisions have been revealing. Source: Market data and Company disclosures Interestingly, YES Bank and Axis, whose CEOs have been shown the door are not the worst when it comes to NPAs, ROEs, P/B and loan growth. In fact, YES Bank has shown best-in-class growth and returns and the second lowest proportion of NPAs.   Though Axis Bank is an underperformer and perhaps Ms. Sharma as a result deserved the action taken against her, she would perhaps sit in the same category as ICICI/Ms Kochhar, the latter demonstrating the slowest growth, the highest NPAs, and a much more questionable reputation.   The logic behind Mr. Kapoor’s dismissal is elusive. Based on this framework, it could might as well be Mr. Puri, Mr. Kotak, or Mr. Sobti, all enjoying equivalent terms in their respective institutions, equivalent performances to Mr. Kapoor, and a certain degree of entrenchment.   It is good that the RBI is cracking the whip to resonate across D-street, but it needs to demonstrate a certain degree of fairness and transparency while it does so. Managing expectations could go a long way to maximise shareholder interest, instead of delivering shock value which has become its norm lately.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Smart Investment Lessons Over a Chat with a Value Investor

Ravichand

Investment

 A single conversation with a wise man is worth a month’s study of books.                             - Chinese proverb   Continuing with my investing chat series with smart minds, I had a deeply thought provoking conversation with Anshul Khare.   Anshul Khare works as a software freelancer in the IT industry in Bangalore. He studied engineering at IIT Bombay. An avid reader of books from various disciplines including investing, business, personal finance, human behavior, and decision-making, he is a guest blogger at popular value investing blog www.safalniveshak.com. Anshul has also authored a book called Mental Models, Investing, and You. He can be reached on Twitter @anshul81.   Anshul is an engineer, value investor, author and blogger- all rolled into one! When I reached out, Anshul was gracious enough to spare some time for a chat. I believe that many hundred hours spent on reading, thinking and blogging has permeated into this conversation. So dear friends, please grab a cup of coffee; sit back and (hopefully) enjoy the conversation.   Ravi: Hi Anshul, Please tell us something about yourself and how you got into the world of investing/behavioral investing with an IIT background. Anshul: Hi Ravi. Thanks for inviting me. I come from a place called Bilaspur — a small town in the state of Chattisgarh. In 2003, I graduated with a B.Tech degree in chemical engineering from IIT Bombay. Few months into my first job, which was in a chemical manufacturing company, I figured that I didn’t want to pursue a career in that industry. So I came to Bangalore and joined the IT industry. Since then I have been in here and have worked with companies like AOL, Symantec, and Paytm. Currently, I work as a freelance software consultant. Around 2010 I chanced upon a book named "The Warren Buffett Way" and instantly got hooked to Buffett’s way of life, business, and investing. But do you know what a bigger discovery than reading about Warren Buffett was? Finding Charlie Munger. Munger’s insights on multidisciplinary learning and behavioral finance punched a big hole in my worldview. The more I studied Buffett and Munger the stronger I felt that my temperament suited their way of investing — the value investing way. Their philosophy on making investment decisions and the way they defined risk, made a lot of sense. That way, my initiation into the stock market was a bit unusual. Until I discovered Buffett, my exposure to equities had been approximately zero. I got pulled towards value investing as a result of my fascination with Warren Buffett.   Ravi: There is a popular saying which goes like this “When the student is ready, Master appears”. I believe that is what happened here and completely agree that Buffett and Munger have been an outstanding source of inspiration to investors all over the world. I am now curious to know how has your investing philosophy/process evolved over the last 8 years. What has influenced your present line of thinking? Anshul: I started investing in the stock market in 2010. So I am yet to witness a severe market decline first hand. And I believe, to really call oneself a long-term value investor, one needs to experience one full cycle of the stock market, which includes a bull run as well as a severe market crash.  So I’ll only know how fragile or robust my investing process is when I find myself in the middle of a market panic. Which means, it’s highly likely that my investment process might change significantly once I see a crash. With that disclaimer, let me share a few things about what has changed in the way I invest today as compared to a few years back. I started out looking for bargain stocks. Which means I focused a lot on the numbers and didn’t think much about the qualitative factors. And part of the reason is that it’s easy to focus on what’s easy to measure, e.g., financial numbers. Quality and the intangible aspects of a business are difficult to quantify. However, that strategy didn’t work well and I ended up investing in quite a few value traps, i.e., businesses that were cheap because they deserved to be cheap. Bartronics is one name that I can recall. Fortis was another. In last few years, I have slowly gravitated towards stocks where the underlying business is of high quality. For example, companies that own consumer brands or companies run by people who are intelligent, smart and have a long history of being ethical and shareholder friendly.     Ravi: Completely agree on investing in quality business run by honest management. Buffett put it best when he said “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Based on your current thought process you have mentioned, what are the criteria’s or characteristics you look for in a business for it to be considered investment worthy? Anshul: Being a part-time investor, if I expect to generate investment returns similar to what Warren Buffett did then I would be fooling myself. It’s maddeningly hard to beat the average market return by more than 10% over the long-term. And that’s true even for a full-time investor. Which means it’s virtually impossible for someone like me who has only a few hours a week to spare for investing. With those constraints, I think it makes a lot of sense to leverage others who I respect for their investing wisdom. Great scientist Sir Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of Giants.”  Which brings me to Cloning — an idea made popular by famous value investor Mohnish Pabrai. Cloning simply means that you begin with companies that other smart investors are buying, and then you see if those investment ideas fit into your own investment framework. Remember, the gap between cloning and blindly acting on a stock-tip is ten miles wide. Still, many investors miss the difference and invest based on the news on what other famous investors are buying and selling without really understanding what they are getting into. Even I am guilty of making this mistake. Copying an investment idea is just the first step. So that’s the first characteristic I look for — is this company owned by any of the smart value investors that I know? After that, I look at numbers. Has the business grown its revenue and net profits consistently over the last few years? I prefer more than 12-15% CAGR over 7-10 years. How does the return on invested capital look like? It should preferably be more than 15%. Does the company generate consistent free cash flows and are they growing? How leveraged is the balance sheet? A debt to equity of more than 1 makes me uncomfortable. All the things that I have listed above are like screening tests. Very few businesses that I pick up for analyzing pass all the tests. Once a business is through these filters, I read the annual report and try to understand what drives the business engine for the company, i.e., I try to answer questions like — how does it generate revenue? Who are the customers and the competitors? I also try to wrap my head around the industry. Is it growing? Is it an organized or unorganized industry? Who are the major players? And finally, I try to figure out if the people running the business — the CEO or the promoters — are ethical and shareholder friendly.   Ravi: Scanning the portfolio of successful investors is a great starting point for sourcing of your investment ideas. Corollary to the above question, if there were to be “Anshul’s 5 rules for successful stock investing” then what would that be? Anshul: Before we can discuss any rules, it’s important to lay out two things. First, investing is a field where rules are very subjective. What works for me may not work for others and part of the reason is that the definition of success differs from person to person. Are you investing to build a retirement corpus? Or are you comfortably wealthy and investing just to preserve the capital? Maybe you are doing it for the thrill because you’re fascinated with the idea of compounding money rapidly. So the term “successful stock investing” is very broad. That said, my reason for investing is to beat the inflation. So if I can manage to compound my money at a CAGR of 15-18% over the long term (30+ years), I would consider myself a very successful investor. Second, even if you have defined what success means to you, there are several methods and strategies to be successful in the stock market. In this regards, I had an epiphany when I read the book called "What I Learned Losing a Million Dollars." Let me reproduce an excerpt to make my point – “Why was I trying to learn the secret to making money when it could be done in so many different ways? I knew something about how to make money; I had made a million dollars in the market. But I didn’t know anything about how not to lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person’s method was making money, another person with an opposite approach would be losing — if the second person were in the market. And that’s just it; the second person wouldn’t be in the market. He’d be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money. The moral, of course, is that just as there is more than one way to deal blackjack, there is more than one way to make money in the markets. Obviously, there is no secret way to make money because the pros have done it using very different, and often contradictory, approaches. Learning how not to lose money is more important than learning how to make money. Unfortunately, the pros didn’t explain how to go about acquiring this skill. So I decided to study loss in general, and my losses in particular, to see if I could determine the root causes of losing money in the markets.” This idea — learning how not to lose money — rehashes Charlie Munger’s unconventional advice for dealing with problems in life and business. Some problems, Munger says, are best solved backward. So to answer your question, let me use Charlie’s inversion trick and talk about “rules for avoiding loss in the stock market.” And instead of five, as you asked, let me list only three; for in investing less is more. First rule: Avoid debt.  Personally as well as in the companies that I invest. I never borrow money to invest and I stay away from companies that have unreasonable debt on their balance sheets. Rule Deux: Avoid bad partners.  Remember, a man who steals for you will steal from you. I avoid investing in companies where the management has a history of corporate governance issues. In this context, I consider government also a lousy partner. Not that government has bad intentions, but the government’s interest is usually misaligned with minority shareholders. So I avoid all PSUs. Rule number three: Avoid dogmatism.  All my beliefs, views, and rules can change in the future. The famous British economist John Maynard Keynes is often quoted as saying: “When the facts change, I change my mind. What do you do, sir?” Strong opinions loosely held are a very useful principle to follow.     Ravi: I had previously done a compilation of investing rules by successful investors. I must admit that your set of rules is refreshingly unique. Next up, what has been your best investment idea (need not be the most profitable) till date? Can you also elaborate on the thinking that went behind the investment idea? Anshul: Thanks for pointing out that the best investment idea doesn’t need to be the most profitable one. And it took me a long time to understand this concept. Investing is a lot like poker. In the world of poker, the quality of the outcome of each game is loosely connected to the quality of decisions. A right decision can result in an undesired outcome and vice versa. But over a long term, i.e., over several games of poker, the player with better decisions will come out ahead. It’s not very different in investing. Which means, a better way to think about your investment decisions is to look at them as a series of bets instead of analyzing every decision and its outcome in isolation. Here’s an excerpt from Anne Duke’s book "Thinking in Bets" that I strongly recommend for every investor. “Decisions are bets on the future, and they aren’t ‘right’ or ‘wrong’ based on whether they turn out well on any particular iteration. An unwanted result doesn’t make our decision wrong if we thought about the alternatives and probabilities in advance and allocated our resources accordingly…Poker teaches that lesson.  A great poker player who has a good-size advantage over the other players at the table, making significantly better strategic decisions, will still be losing over 40% of the time at the end of eight hours of play. That’s a whole lot of wrong. And it’s not just confined to poker.” In light of the above insight, if I were to talk about my best investment idea, I would say it was Noida Toll Bridge. I never made any money on the stock. I ended up selling it at no profit and no loss. It had qualified in all my investment filters, which I have mentioned earlier in this conversation. However, it turned out to be a bad investment because of things outside my control. Government intervention was a low probability event in this case, but it did happen. In my view, it was a case of “good-decision-bad-outcome.” In future, if I get to make that kind of investment again, would I do it? Yes, absolutely.   Ravi: Talking of “Thinking in Bets”, my thoughts went to Michael Mouboussin’s 10 attributes of great investors where one of the key attributes is to “Think Probabilistically” (there are few sure things). From masterstroke let’s move on to mistakes. Mistakes are sometimes referred to as “unexpected learning experiences.” Can you share any investing mistake(s) you have made? Anshul: Mistakes indeed are potential learning opportunities. But when I repeat the same mistake, it means I didn’t learn anything from it. So I want to take this opportunity to talk about those “mistakes’, the ones that I continue making even now. The ones which I should be learning from, but I fail, again and again. It’s the mistake of omission. There have been many instances where I should have bought a stock, but I didn’t because I let the behavioral bias dictate my decision. Anchoring bias is one where I got fixated on a particular price and waited for the stock to drop to that number. Unfortunately, the stock didn’t know that I was waiting for a certain price tag. Not allocating sufficient capital to a high-conviction stock is another mistake that I continue to make. Some stocks that fall in this category are Cera Sanitaryware and VST Tiller. In both the cases I started with very small positions and then kept waiting for the stock to come back to my buying range. Mistakes arising out of behavioral biases are hard to correct. But I am working on it. I know I can never eliminate them completely, but I hope I can minimize them.   Ravi: John Templeton put it nicely “The only way to avoid mistakes is not to invest — which is the biggest mistake of all”. Mistakes are a proof that we are at least trying! Related to this, what has been the most important investing lesson(s) you have learnt from your time in the market? Anshul: There are many. But let me talk about the one that I keep reminding myself frequently. After a few years in the stock market, I learned that there are broadly three types of edges that any investor can exploit to generate superior returns. First is the informational advantage, i.e., having privileged information. Earlier, only large institutions had this advantage. But today, in the Internet era, everyone has access to almost all the information instantly. When everybody has the advantage, it ceases to be an advantage. Second is analytical advantage. If you can draw unconventional insights from the public data then you decidedly have an edge over others. But very few people (like Warren Buffett) are wired to have that kind of deeply analytical mind. Moreover, the large institutions (with armies of analysts poring over mountain of market data using sophisticated tools) leave very little chance for a part-time investor to discover any unnoticed insight. So that leaves the small and the part-time investors with only one thing to capitalize on; the time advantage. As a small investor, if I am investing my surplus cash, nobody is looking over my shoulder and pushing me for quarterly performance targets. Which means, once I have bought a good quality business, no one can force me to sell it if I don’t want to. That gives me the staying power and that creates opportunities for small investors. Patience and willingness to hold for the long term — that is our edge. This is a valuable lesson that I have learned in the stock market in last eight years.   Ravi: Thinking in terms of years rather than days or months to have a long-term orientation is definitely an invaluable lesson for an individual investor. Seth Klarman put it eloquently when he said, “The single greatest edge an investor can have is long term orientation.” From investing lesson let us move on to investing advices. What has been the most important investing advice(s) you have received on investing? How has it influenced your investing process? Anshul: It’s hard to single out anyone as the most important. Developing an investment philosophy is an incremental process. Every book I have read, every investor I have interacted with, every investing video I have watched, had some impact on the way I think about investing. One that immediately comes to mind is a post that Prof. Sanjay Bakshi wrote a while back. It was titled "Return Per Unit of Stress." I always assumed that as investor, my primary goal was to maximize the risk adjusted return on my portfolio. However, I never gave importance to intangible factors associated with that goal, i.e., the stress it brings. If I have stocks in my portfolio that give me sleepless nights, even occasionally, it’s not worth it. And that may not be true for every investor. It’s been an advice that resonated a lot with my temperament.     Ravi: This is the first time I have come across this idea/advice of thinking in terms of 'return per unit of stress'. Sounds interesting. Moving ahead, are there any particular investor(s) or author(s) who have had a significant influence in your investment thinking? How? (In terms of say mentoring or inspiration.) Anshul: I think what I said for the previous question holds equally well for this one too. Consciously or subconsciously, every single investor or author I’ve met in my life has had some influence on my thinking. But if I had to take few names I would say Nassim Taleb is one author who has influenced my thinking a lot. Although he is a trader, all his books have refreshing insights on value investing and decision making in general. Mohnish Pabrai is another author/investor who I admire a lot. He is a great simplifier not just in words but also the way he has structured his investment philosophy.   Ravi: Next up is one of my favorite questions. Let us say a bunch of enthusiastic beginners approached you for advice on how to be a successful stock investor. What would your advice for them be? (If you could elaborate on the Do’s and Don’ts, it would be really helpful). Anshul: In the movie “Wall Street” (the older one), Charlie Sheen’s character — a promising big shot in the stock market—tells his girlfriend: “I think if I can make a bundle of cash before I’m 30 and get out of this racket, I’ll be able to ride my motorcycle across China.” Riding a bike across China is passed off as such an impossible dream that most people would believe that one needs to be a retired millionaire before he can live that dream. First, this “riding a bike across China” dream doesn’t really require you to be a millionaire. Second, “riding a bike across China” isn’t all it’s cracked up to be. Most of the times our goals and ideas of success are borrowed ones. So the first thing I would urge the bunch of enthusiastic beginners is to define what success means to them. Are they really after success or is it something else? Perhaps being a successful stock investor is a stepping-stone to a larger goal. Have they figured that out? It’s extremely important to be clear about what we want. And what we want may keep changing with time and that’s absolutely fine, I guess. However being aware of what is it at this moment, is very crucial. Am I evading your original question? Yes, because I want to nudge those enthusiastic beginners in the direction of asking a more important question. If they begin chasing the wrong rabbit, it doesn’t matter how well they do it. Once a person has zeroed on what exactly he’s looking for — the true north — then it’s just a matter of navigating through a maze of trial and error and incrementally stacking the odds in his favor for achieving the goal.   Ravi: Finding “the true north”!! Brilliantly put, Anshul. Remembered the following lines from Lewis Carroll’s masterpiece Alice in Wonderland: “One day Alice came to a fork in the road and saw a Cheshire cat in a tree. ‘Which road do I take?’ she asked. ‘Where do you want to go?’ was his response. ‘I don’t know,’ Alice answered. ‘Then,’ said the cat, ‘it doesn’t matter’.” Continuing with my previous question, if they sought your advice on the best book(s) for them to read as a stock market beginner then which book(s) would you recommend? Why? Anshul: Warren Buffett’s annual letter to shareholders. Technically, it’s not a book but it’s available in book format also. Buffett’s letters aren’t just about investing. They have tremendously useful lessons on business and on life. It’s a super text, i.e., its content is timeless. In my first reading, I focused on what Buffett was saying. In the second reading, I learned how Buffett communicates his philosophy, i.e., by using simple communication style, by using humor, and by using analogies. In the third reading, I noticed what Buffett was not saying. For example, he never makes predictions about the stock market. The second book I’ll recommend is "The Dhandho Investor" by Mohnish Pabrai. It’s a great book for beginners. It explains various value investing principles in an easy to understand language and lots of real examples and case studies.     Ravi: Moving on, let us say there is a situation where you could retain only three books from your entire book collection, which books would those be and why? Anshul: The first would be "Sapiens" by Yuval Noah Harari. I consider it to be the best book that I have ever read outside the field of investing. Harari is a gifted writer and an outstanding historian. I wish my history teacher taught like him. Before reading Harari’s books, I never thought that history could be so interesting and so useful. In his narrative, Harari weaves in powerful insights. Second, Peter Kaufman’s "Poor Charlie’s Almanack" (PCA). As investors, we don’t just invest our money. We invest our time too. And unlike money, time is severely limited and irrecoverable. Which means learning to invest one’s time wisely is much more important skill to learn than investing money. And the principles of wise investing are applicable everywhere - in business, in stock market, at work, and in relationships. My third pick would be "Antifragile" by Nassim Taleb. Antifragility as such an important idea that I feel it should be compulsorily taught in the schools. Antifragility is not a novel idea. Mother nature is inherently antifragile. If we can arrange our lives to bring in the elements of antifragility, it would not only bring financial wealth but it can make us physically, emotionally, and mentally super strong. Now that I have already told you my three picks, I want to add another spin to your question. My current library is a reflection of the kind of thoughts and ideas that occupy my mind most of the times. Had I not picked up Warren Buffett’s book back in 2010, perhaps my library would have looked very different. Finding Buffett’s book was a serendipitous event in my life. I sometimes imagine, had I picked up a book on arts or music and had that subject interested me as much as Buffett’s book did, I might be doing totally different things and thinking different thoughts today; and that wouldn’t be a tragedy. It’s just an alternate reality that didn’t happen. So coming to your question again, if I am forced to retain only three books from my entire book collection, subconsciously I would probably want those three books as the seeds which can eventually become the full blown library very similar to the one I have right now. But that way, I am giving up on the opportunity to experience a totally different alternate reality, isn’t it? What if I don’t retain any book from my current library and start with a clean slate? That will allow the serendipity to send a totally new book my way and possibly a different but equally exciting future. Wouldn’t that be fascinating?   Ravi: Anshul, it was wonderful picking your brains. I thoroughly enjoyed every bit of this conversation and I am sure readers also would love it. Last question from my end, do you have any special message for the readers of stockandladder.com? Anshul: Greek philosopher Socrates once said, “An unexamined life is not worth living.” I think there’s a lot of wisdom in those words. Thinking deeply about whatever we do, endlessly questioning the things that seem to be important to us, and an unbiased examination of every aspect of our lives (which is devilishly hard) would probably bring satisfaction and joy for most people.   Ravi: That was an insightful, informative and intellectually stimulating conversation, Anshul.  Thanks for sharing your thoughts, experiences and wisdom with Stock and Ladder readers. Wishing you the very best for your life, career and investing journey.   Investing is a marathon where we try to get better every single day and hope that all the daily improvements we make will compound into something big. To that end, dear reader, I sincerely hope that you enjoyed this conversation as much as I did. I also wish that you found at least a little something in this conversation to ponder about or add value to your investing journey.   Keep Learning and Happy Investing!!!   Originally Published in Stock and Ladder   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How are Chinese Stocks Responding to the Trade War and A Slowdown in the Asian Market?

Colin Lloyd

China

Despite US tariffs, China’s September trade balance with the US reached a record high; A number of China’s Asian neighbours have seen a deceleration in growth; The Shanghai Composite has fallen more than 50% since 2015, the PE ratio is 7.2; Government bond yields have eased and the currency is lower against a rising US Dollar.   During 2018 Chinese financial markets have been on the move. 10yr bond yields rose from all-time lows throughout 2017 but have since declined:  Source: Trading Economics, PRC Ministry of Finance    Despite this easing of monetary conditions the negative impact US tariffs, continues to weigh on the Chinese stock market: Source: Trading Economics, OTC, CFD   Despite being a leader in frontier technologies such as e-commerce (China has 733mn internet users compared with 391mn in India, 413mn in the EU and a mere 246mn in the US) the recent decline in tech giants Alibaba (BABA) and Tencent (TCEHY) have added to financial market woes. However, as the chart above shows, Chinese stocks have been in a bear-market since 2015. Some of its Asian neighbours have followed a similar trajectory as their economies have slowed in response to a strengthening US Dollar and US trade policy.   The notionally pegged Chinese currency has also weakened against the US Dollar, testing it lowest levels in almost a decade: Source: Trading Economics   Meanwhile, President Xi has now announced plans to rebalance China’s economy towards consumption, turning it into an importing superpower. Surely something has to give.   The IMF expects Chinese GDP to grow at 6.6% in 2018. They continue to point to signs of economic progress:   The country now accounts for one-third of global growth. Over 800 million people have been lifted out of poverty and the country has achieved upper middle-income status. China’s per capita GDP continues to converge to that of the United States, albeit at a more moderate pace in the last few years.   The authors go on to predict that the country may become the world’s largest economy by 2030. However, there are headwinds:   Despite the sharp rebound in nominal GDP and industrial profits, total nonfinancial sector debt still rose significantly faster than nominal GDP growth in 2017. While the corporate debt to GDP ratio has stabilized, government and especially household debt is rising, driven by continued strong off-budget investment spending and a rapid increase in mortgage and consumer loans.   It is debt that concerns Carnegie Endowment’s Michael Pettis – Beijing’s Three Options: Unemployment, Debt, or Wealth Transfers – as the title suggests he envisages three paths to adjustment.   Raise investment. Beijing can engineer an increase in public-sector investment. In theory, private-sector investment can also be expanded, but in practice Chinese private-sector actors have been reluctant to increase investment, and it is hard to imagine that they would do so now in response to a forced contraction in China’s current account surplus.   Reduce savings by letting unemployment rise. Given that the contraction in China’s current account surplus is likely to be driven by a drop in exports, Beijing can allow unemployment to rise, which would automatically reduce the country’s savings rate.   Reduce savings by allowing debt to rise. Beijing can increase consumption by engineering a surge in consumer debt. A rising consumption share, of course, would mean a declining savings share.   Reduce savings by boosting Chinese household consumption. Beijing can boost the consumption share by increasing the share of GDP retained by ordinary Chinese households, those most likely to consume a large share of their increased income. Obviously, this would mean reducing the share of some low-consuming group—the rich, private businesses, state-owned enterprises (SOEs), or central or local governments.   Although fiscal stimulus appears to be rebounding it is a short-term solution. There have been many example of non-productive public investment: as a longer-term policy, this route is untenable:   If Beijing does not rein in credit growth in time, it will be forced to do so once debt levels reach the point at which debt can no longer rise fast enough to maintain the country’s targeted economic growth rate. This adjustment can happen quickly, in the form of a debt crisis. Or (what I think is far more likely, at least for now) it can happen slowly, in the form of what is subsequently called a lost decade (or decades) of slow growth, similar to what Japan experienced after 1990.   Increased unemployment is a dangerous route to take, debt levels are already stretched, which leaves wealth transfers to the private sector.   A forced contraction in China’s current account surplus must be counteracted by either an increase in unemployment, an increase in the debt, or wealth transfers to Chines consumers (rather than savers).   Looking ahead Chinese growth is likely to slow. Here is Focus Economics – China Economic Outlook for October:   China Economic Outlook Available data suggests that economic growth decelerated in the third quarter, mainly due to lackluster infrastructure investment and negative spillovers from financial deleveraging. Surprisingly, export growth remained robust in Q3 despite the ongoing trade war between China and the United States. The September PMI survey, however, revealed that external demand is softening, which suggests export figures are likely to worsen in the next few months. In response, the government has reverted to old tactics, boosting lending and increasing fiscal stimulus. Although these initiatives are effective in supporting the economy in the short-term, they threaten the effort made in previous years to reshape the country’s economic model and allow the country to avoid the “middle income trap”.   China Economic Growth Looking ahead, economic growth is expected to decelerate. This reflects China’s more mature economic cycle and the impact of previous economic reforms, as well as the tit-for-tat trade war with the United States and the cooling housing market. However, a looser fiscal stance and a more accommodative monetary policy should cushion the slowdown. FocusEconomics panelists see the economy growing 6.3% in 2019, which is unchanged from last month’s forecast. In 2020 the economy is seen expanding 6.1%.   Countering this view Peterson Economics – Who Thinks China’s Growth Is Slowing? suggests that China may be holding up much better than imagined:   A widespread consensus has developed around the view that China’s economic growth is slowing and that the leadership in Beijing will have no choice but to capitulate in the tariff war with President Donald Trump to avoid a further slowdown. Leading US news organizations (here and here) have sounded this theme as a kind of late summer siren song to lull people into thinking that Trump’s confrontational approach is bound to succeed at some point. The reality is that, as has been the case for the last few years, the case for China’s imminent economic difficulties is overblown.   The most widely cited piece of evidence for the new conventional wisdom, for example, is that fixed asset investment is slowing dramatically. Unfortunately, this assessment is based on a monthly data series released by China’s National Bureau of Statistics (NBS), which is currently revising the method used to calculate fixed asset investment. The method that was used so far involved considerable double counting, which the authorities are paring back. The slowing growth of this metric, thus, tells us nothing, and assessments based on existing data are no longer meaningful.    There are three sources of growth in any economy: consumption, investment, and net exports. The problem is that data on China’s fixed asset investment, which include the value of sales of land and other assets, have increasingly overstated the expansion of the economy’s productive capacity.  Nonetheless, financial analysts and others have relied on this series because it is the only high-frequency data available on investment.  China’s data on gross domestic capital formation, which accurately measures the expansion of productive capacity, are available only on an annual basis and with a lag of five months.   According to NBS data, fixed asset investment grew by only 5.5 percent in the first seven months of 2018, the lowest in decades. In the first half of the year (January to June), fixed asset investment grew by 6 percent. But the price index for fixed asset investment rose by 5.7 percent, implying that real investment barely grew.  This, however, is inconsistent with the more reliable NBS data, which show the expansion of capital formation, properly measured, accounted for about one-third of the 6.8 percent of China’s GDP growth.   When the NBS releases final data for 2018 (probably in about nine months), we are likely to learn that the growth of capital formation, properly measured, exceeded the growth of fixed asset investment, just as it did in 2017.   The full article is in three parts; part 2 takes a closer look at domestic consumption and part 3 charts the steady rise in imports.   Conclusions and Investment Opportunities   According to analysis from Star Capital (28-9-2018) the PE ratio for Chinese Stocks was just 7.2 times – the second cheapest of the 40 stock markets they monitor – although its CAPE ratio was a more exalted 15.7. Since June 2015 the Shanghai Composite Index have fallen by 53%, peak to trough, whilst since January it has retraced 32% to its low last month. The downtrend has yet to reverse, but, as the second chart above shows, we are testing a support line taken from the lows of 2005 and 2014.     The PBoC Q2 2018 Monetary Policy Report revealed a moderation in the rate of growth of loans to households to 18.8%, other areas of lending continue to expand rapidly. M2 growth has been steady at around 8%. I believe they will allow interest rates to remain unchanged at 4.35%, or reduce them should the need arise. Last month PBoC foreign exchange reserves fell slightly (-$34bn) but they remain above $3tr: enough to moderate the RMBs decline. China’s real broad effective exchange rate (trade-weighted) is still in a broad, multi-year uptrend due to its soft peg to the US$. Here is the chart since 2006: Source: Federal Reserve Bank of St Louis    I expect China to reach a trade deal with the US within the next year. The recent slowdown in growth rate of debt formation by households will reverse: and the Shanghai Composite Index will form a base. The RMB may weaken further as the US continues to raise interest rates. Provided the US stock market maintains its nerve, an opportunity to buy Chinese stocks may emerge in the next few months. It may not yet be time to buy but there is little benefit in remaining short.   Originally Published in In the Long Run     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How to Make Sense of the Indian Economy: Why are Central Bankers Obsessed with Inflation?

Nikhil Arora

Macro

The battle between a country’s government and its Central Bank is neither new nor unique.   Though the ongoing spat between the Reserve Bank of India (India’s Central Bank or RBI) and the government can boast of multiple drivers, the most recent and by appearances a perennial bone of contention is the former’s adoption of Flexible Inflation Targeting (or FIT) as its monetary policy framework.   What is FIT?   Through an agreement signed between the RBI and Government of India as at February 20th, 2015, RBI decided to adopt a ‘modern monetary policy framework’ with the objective to ‘primarily maintain price stability, while keeping in mind the objective of growth.’   Thus, price stability became an overarching objective of monetary policy, moving other factors to the background.   The said price stability is to be achieved by keeping track of, forecasting, and controlling inflation, meaning that if the percentage change in monthly Consumer Price Index or CPI (headline) year-on-year was outside or expected to be outside a specific range of numbers (the “Target”) for a certain duration, it gives RBI a justification to decrease or increase short-term interest rates.   No other consideration is to have an equivalent weight. Inflation must be granted precedence.   The agreed upon Target range at present stands at four (4) percent with a band of +/- 2 percent for three consecutive quarters.     So, What is the Problem?   The proponents of FIT argue that it gives a clear goal for policy setting, and over time helps in establishing the credibility of the Central Bank while managing and anchoring price and policy expectations of the public. A quantifiable target reduces the chances of monetary policy being steered for political purposes.   Both high inflation and low inflation hurts. While the former eats through real rates of return i.e. the borrowed interest rate minus inflation; the latter is an indicator of either over supply or low demand. Hence it makes a lot of sense to keep it under leash.   However, the outcome of using monetary policy to control inflation often depends on how the said price instability has originated in the first place.   When inflation is demand driven i.e. the demand gets too hot for sustainable supply, the FIT approach works well as hawkish monetary policy then becomes a lever to control consumption spend.   However, when inflation is supply driven i.e. the supply is artificially low (either due to low productivity, lack of investment, hoarding, supply shocks caused by inadequate monsoons, oil price hikes etc.) but the demand is ‘business as usual’, FIT would be less effective as it would rather lower investment appetite, thereby risking supply to pushed down further down.   Warwick J. McKibbin, a Senior Fellow at Brookings, a think tank says,   Falling productivity would cause both a rise in input costs and a fall in output. An inflation targeting Central Bank would tighten monetary policy as input costs rose but in doing so would reduce real GDP in the economy. Thus, monetary policy would lead to a worse outcome for the real economy than caused by the shock alone.   Most governments, especially in emerging markets where supply shocks are common, are hence apprehensive of FIT. Plus, there is a natural tendency to blame lack of growth on tighter monetary policy, taking attention away from larger structural issues where fiscal intervention is needed.   Businesses also tend to oppose FIT, linking higher rates to a lower investment appetite which may be a disingenuous claim.   Raghuram Rajan, ex-RBI Governor who pushed for FIT, in his book I do What I do elaborates,   I have yet to meet an industrialist who does not want lower rates, whatever the level of rates. But will a lower policy interest rate today give him more incentive to invest?   Answering his rhetoric himself, he claims “even if [RBI cuts] policy rates, we don’t believe banks, who are paying higher deposit rates, will cut their lending rates. The reason is that the depositor, given her high inflationary expectations, will not settle for less than the rates banks are paying her. Inflation is placing a floor on deposit rates, and thus on lending rates.”   Conclusion   What you may wonder, is the solution? A popular alternate suggested by many has been to track the growth in Nominal GDP (NGDP targeting), instead of inflation. NGDP growth is basically the sum of inflation and real GDP growth.   The idea here is that in supply shock driven inflation, though the inflation component of NGDP would go up, the real GDP component would go down. Whilst a FIT regime would drive up rates to control inflation but be at the risk of pushing real GDP down further, a NGDP target would be a more holistic measure in that situation, warranting a less dramatic response.   Optically it literally combines the objective of price stability and growth. It would however widen the mandate and accountability of the Central Bank, as per a view shared by The Economist, while it was pushing for a NGDP target framework for the US Federal Reserve (Fed):   A Central bank with an explicit NGDP level target would have faced (appropriately) intense pressure to do much more much sooner than one with the Fed's present, vague focus on an inflation target as a means to broader macroeconomic stability.   This will be a recurring column published every Friday under the title: “How to Make Sense of the Indian Economy”.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Opportunities and Threats Post-Brexit: Short-term Pain, Long-term Gain?

Colin Lloyd

UK

A Brexit deal is still no closer, but trade will not cease even if the March deadline passes; In the short-term, UK and EU economic growth will suffer; Medium-term new arrangements will hold back capital investment; Long-term, there are a host of opportunities, in time they will eclipse the threats.   N.B. In a departure from the my usual format, this Macro Letter is the transcript of a speech I gave earlier this week at the UK law firm, Collyer Bristow; Thomas Carlisle may have dubbed Economics ‘the dismal science,’ but I remain an optimist.   Setting aside the vexed question of whether Brexit will be hard, soft or stalled, the impact on financial services (and, indeed, the majority of UK trade in goods and services) will be dramatic. Financial markets (and businesses in general) loathe uncertainty. Ever since the referendum result, investment decisions have been postponed or cancelled. When investment is being made, it is generally tentative and defensive. Exporters and importers alike are striving to develop alternative strategies to maintain and protect their franchises.   As a long-term economic commentator, I try to look beyond the immediate impact of events, since near-term expectations are usually reflected in the valuation of an asset or currency. Brexit, however, is a particular challenge, not only due to near-term uncertainty but because policy decisions taken now and in the wake of the March 2019 deadline could set the UK economy on an unusually wide array of possible trajectories.   Near-term   To begin an analysis of the impact post-Brexit on financial services, there are several near-term threats; here is a selection:   House Prices Earlier this month Mark Carney, the Governor of the Bank of England, warned Cabinet Ministers that a ‘no-deal’ on Brexit could see house prices decline by as much as one third and a rapid rise in defaults. The subsequent impact on financial institutions balance sheets and the inevitable curtailment of bank lending could be severe. Jacob Rees-Mogg even dubbed him, ‘The High Priest of Project Fear.’   Passporting Assuming no deal is agreed, the access which financial services providers in the UK have had to the EU27 will not be available after March 2019. Many existing contracts and licensing agreements will need to be rewritten.   Regulatory Equivalence Divergence between the regulatory regime in the UK and Europe remains a distinct risk. The types of legal issues surrounding, for example, ISDA Master agreements (Deutsche Bank AG v Comune di Savona) will inevitably become more widespread.   Systemic Risks to the Euro The ECB is vocal in its mission to maintain control over the clearing and settlement of Euro denominated transactions. Many financial services activities which currently take place in the UK may need to be transferred to another EU country.   In the near-term, these types of factors will reduce trade and economic growth, both in the UK and, to a lesser degree, in Europe. In May 2017 I wrote an essay entitled ‘Hard Brexit Maths – Walking Away’ in which I estimated the negative impact a no-deal Brexit would have on the EU. The UK’s NIESR estimated the bill for a Hard Brexit to the UK at EUR66bn/annum. I guesstimated the cost of Hard Brexit to the EU at EUR 62bn/annum. Both forecasts will probably prove inaccurate.   The reduced free movement of workers from the EU is another significant factor. It will lead to a rise in a toxic combination of skill shortages (due to new immigration controls) and unemployment, as companies are forced to conserve capital to weather the inevitable economic slowdown.   There are, however, several near-term opportunities, here is a small selection:   Sterling Weakness The currency has already weakened. Whilst this may be inflationary it makes UK exports more competitive. Whether the UK can take advantage of currency weakness remains to be seen, history is not on our side in this respect.   A US Boom Aided by a lavish tax cut, the US economy is growing faster than at any-time since the financial crisis, underpinning its currency. Its trade deficit is growing despite tariff barriers.   US Trade Policy The Trump administration appears to have focused its ire on trade surplus countries, of which Germany is the largest European example. The UK is not under the White House microscope to the same degree. Seizing the opportunity presented by these financial and geopolitical shifts is easier to speak of than to grasp. Nonetheless, just this month Absa Bank of South Africa (recently spun-off from Barclays) announced plans to open a London office to capitalise on post-Brexit opportunities connected with the fast-growing economies of Africa.   Medium-term   The medium-term risks will mostly be borne out of inertia. Until the shape of Brexit is clear, decisions will continue to be postponed. Once Brexit occurs there will be inevitable technical problems, stemming from systems issues and new procedures. Growth will slow further, business operating costs will need to be cut, employment in financial services (and elsewhere) will decline at exactly the moment when greater investment should be undertaken.   But, new trade deals will be negotiated, not just with Europe and the US, but also with the countries of the British Commonwealth, notably (but not just) India. Many of these countries are among the fastest growing economies in the world, often imbued with benign demographics. Here is a rapidly expanding working age population in need of capital investment and financial services.   Ruth Lea, Chief Economist at Arbuthnot Latham has commentated on this subject at length during the last two years. In April she wrote:    Commonwealth countries, taken together, have buoyant economic prospects and their share of global output continues to increase (especially in PPP terms). The EU28 share, in contrast continues to decline. UK exports to the top eight Commonwealth countries rose by over 31% between 2006 and 2016, but total exports rose by 40%. And the share of UK exports going to the top eight Commonwealth countries fell from 7.5% in 2006 to 7.0% in 2016… There is little doubt that Commonwealth countries have the potential to be significant growth markets for the UK’s exports, given their favourable growth prospects and demographics. This is all the more likely given the probability of trade deals with individual Commonwealth countries after Brexit. Long-term   David Riccardo defined the law of comparative advantage just over two hundred years ago. Perhaps one of the best examples of the continuance of the phenomenon is Switzerland, which has seen its currency appreciate against the US$ by approximately 3% per year, every year since fiat currencies were freed from their shackles after the collapse of the Bretton Woods agreement in 1971. Here is a chart of the US$/CHF exchange rate over the period:  Source: fxtop.com   The Swiss turned to pharmaceuticals and other value-added businesses. The success of this strategy, despite a constantly appreciating currency, has spawned an entire industrial region – the Rhone-Alp economic area, which incorporates German, French, Italian and Austrian companies bordering Switzerland. This region is among the most economically productive in the EU.   The UK has an opportunity, post-Brexit, to focus on economic growth. As a trading nation, we should concentrate our efforts on re-forging links with the fast-growing countries of the Commonwealth, where the advantages of a common language and legal system favour the UK over other developed nations.   An example of this opportunity is in education. We have a world class reputation for education and training. Combine this redoubtable capability with the abundance of new technologies, which permit the delivery of content globally via the internet, and we can provide the full gamut of instruction, ranging from primary to tertiary and professional via a combination of video content, on-line examination and tailored digital collateral.   A recent MOOC (Mass Open On-line Course) in which I enrolled, attracted students from across the world. The course was dedicated to finance and among the students with whom I interacted was a Masi tribesman from Kenya who hoped to develop micro-finance solutions for the local farming community. The world is our veritable oyster.   Conclusion – The Bigger Picture   The economies of the developed world are growing more slowly than those of developing nations. Providing goods and services to the fastest growing economies makes economic sense. Many of the largest companies listed on the UK stock market have been oriented to take advantage of this dynamic for decades. Brexit is proving to be cathartic, we should embrace change; the sooner the better.   The Austrian economist, Joseph Schumpter, described the cycle of economic development as including a period of ‘creative destruction’. Brexit could be an extreme version of this process. The patterns of trade which have developed since the end of WW2 have been concerned with promoting cohesion between European nations, but, as Hyman Minsky famously noted, ‘stability creates the seeds of instability.’ I believe the political polarisation seen in Europe and elsewhere is a reaction against the success of the global financial and economic system and the institutions and alliances created to insure its success. We are entering an era of change and Brexit is but one personification of a growing trend. Technology has shrunk the world, empowered the individual and (in the process) undermined the influence of nation states and international institutions. Individual freedom is ascendant but with freedom comes responsibility.   One of the greatest challenges facing the UK and other developed nations, in the long run, is the provision of pensions and health insurance to an increasingly ageing population. Many of the financial products required by these ageing consumers are ones in which the UK is a world leader. The developing world is rapidly growing richer too. Their citizens will require these self-same products and services. Brexit is an opportunity to look forward rather than back. If we embrace change we will thrive, if not change will occur regardless. Post-Brexit there will be considerable pain but, if we manage to learn from history, there can also be long-term gain.   Originally Published in In the Long Run     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

A Look Into The Nifty 50: Jolted by Macro Headwinds, Do Markets Tell A Different Tale?

Sharath Toopran

Macro

From an Indian perspective, the year thus far has been jolted by several macro themes which I believe are notable headwinds for the economy.   First, a hawkish environment in the western world characterised by monetary tightening is a marked reversal to an elongated period of quantitative easing and declining interest rates. Consequently, a textbook “flight to quality” thesis is at play, in effect driving capital outflow from India and other emerging markets inducing a real contagion risk.   Second, an uptick in crude oil prices through the year (crude oil is up 7%+ year-to-date) has pressured fiscal deficits and could pull the handbrakes on the growth profile of an economy that relies on overseas supply of crude oil for nearly 80% of its demand.   The combined effect of the aforementioned two factors have induced the Third - a swift depreciation in the INR which is down nearly 14%+ year-to-date against the USD.   Fourth, escalating US-Sino trade tensions have certainly taken some shine off the global growth outlook.   A deep-dive on these macro themes and others can be found in this excellent opinion piece by Nikhil Arora: Current State of the Indian Economy: Is it Time to Go Bearish?   However, the domestic stock market headlines numbers illustrate a somewhat different narrative. Nifty 50 and BSE Sensex have seen fairly robust growth year-to-date. Nifty 50 is up around 9% and the BSE Sensex is up around 12%. If one were to look at Nifty 50 through just the macro-lens, one could just as easily have expected the opposite movements in the markets. An equally palatable outcome one might argue.   In that context, one wonders if the strength in domestic headline numbers is indeed a proxy for underlying economic health?   A Look Into The Nifty 50 – “Weights” Matter   Nifty 50 is considered the flagship index on the National Stock Exchange, tracking the behaviour of the largest and most liquid blue chip stocks. Given its diverse constituents, healthy liquidity and general clout, it is often treated as a proxy for overall economic health.   However, due to its float-adjusted market capitalization based indexing method, the bigger and larger constituents can meaningfully sway the entire market. While, this is true for all market capitalization based indexing methods, a detailed look at the index constituents makes for an interesting read through. This is all the more interesting given that there are a plethora of macro catalysts simultaneously at play in the current environment.   From a simplistic perspective, higher the weight of the stock in the Nifty 50 index, more is its directional pull on the index.   An example that demonstrates this fairly well is Reliance Industries Limited (RIL). RIL has close to 10% weight on the Nifty 50 due to its lofty market capitalization. RIL stock is up around 35% year-to-date, a remarkable surge which would make even a high risk-high return type growth investor fairly content with the year-to-date return. However, what one might miss easily is the massive say that RIL and its 35% surge has had in moving the Nifty 50 headline numbers, which are the ones that are usually reported by the mainstream press anyway.   Another example is a yet another heavy ’weight’ - HDFC Bank, also constituting nearly 10% to the Nifty 50 weight and somewhat similar to RIL has also seen its stock climb year-to-date. HDFC is up a robust 10% year-to-date and consequently has significantly contributed to Nifty 50’s upward movement. Source: nseindia.com Weights are as of Aug 31st market close  Reliance Industries Ltd, HDFC Bank, Housing Development Finance Corporation, Infosys Ltd and ITC Ltd together accounting for nearly 40% of overall weight of the Nifty 50 and are all up meaningfully. In fact, all top ten stocks by weight on Nifty 50 are all up year-to-date.   On traversing down the Nifty 50 constituents, one can quickly decipher that bigger weight stocks have generally seen upward movements year-to-date and in turn helped galvanize the broader Nifty 50. An example from closer to the other end of the spectrum is Hindustan Petroleum Corporation Ltd which is down 40% year-to-date making it the worst performer in the Nifty 50 but has less than 1% weight on the Nifty 50 index. In fact, the top 10 constituents by weight on the Nifty 50 are all in the green year-to-date and collectively have enough pull to dictate Nifty headline numbers.   However, drilling down into the Nifty 50, one can see less than half i.e. 24 (at the time of writing) are in the green while the other 26 are in the red. But the 24 stocks in the red i.e. trending down year-to-date, on account of weight asymmetries have significantly lower impact on the broader index. In that context, while the headline numbers intuitively paints an optically pleasing picture, a deeper-dive into the index portrays a less optimistic picture. One wonders if Nifty 50 with just 50 stocks and such diverse market capitalization ranges is even a fair representation of the overall market.    (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Impact of Demonetisation through Numbers from RBI

Mithun Madhusudan

Financial Institutions

It was a fine evening in November 2016 and I was walking back home from work. I received an SMS cryptically asking me to tune into the PM’s broadcast that night. I plugged in my earphones and heard what everyone in India would find out in the next 30 mins - Rs 500 and Rs 1000 notes were now worthless. Thus began a saga that lasted a few months - old notes were to be deposited, new notes printed and distributed, and the economy was to get a reboot. While people shout at each other on the 9 pm news about alleged Urban Naxals and pass judgments while the Courts are yet to pronounce theirs, objective discussions on costs and benefits of demonetisation have stayed off the airwaves.   RBI's Annual Report has finally given us some numbers to look at and analyze how the costs and benefits of demonetisation compare.   Why Demonetisation?   A few reasons were (in the order they were shared with the public)   Black Money: The idea being that money hoarded illegally would be flushed out of the system - since the government was going to keep a track on deposits into the banking system and use that information to find people who now had money in the banking system disproportionate to their known sources of income. Counterfeit Currency: A) Old notes were worthless, so any cash hoarded by terrorists/criminals would now be worthless B) Counterfeiters would also now have to rework their infrastructure to copy the new notes, and in a best case scenario, not be able to counterfeit at all. Digital Payments: The retrospective notion that forcing people to adopt digital methods of payments would reduce the amount of cash in the economy, increase the traceability, and improve financial inclusion.   All in all,   It was supposed to be a short-term shock to the economy which would provide long-term benefits.   Demonetisation is so 2016. Why Are We Talking About It Again?   Because the Reserve Bank of India finally released its Annual Report last week detailing how much of the cash in the system actually came back. So finally, we have some objective numbers with which to evaluate the impact of demonetisation.   What Does the RBI Report Say?   1. Did the amount of black money in the system reduce? 99.3% of the 15 lakh crore which was in circulation in November 2016 is now in the RBIs vaults. So two things could have happened. There wasn’t a lot of black money as cash in the economy to begin with. Initial estimates ranged from 5%-10% of currency in circulation being black, much higher than the 0.7% which was not returned to the RBI. This could make sense - there aren’t a lot of people who would be holding illegal money in cash, it would more likely be in real estate and gold. The other option is that the black money is now white in some form - some of it is deposited in the RBI, some in the form of assets, some still in cash, and is now for all practical purposes, legit. How did this happen? I mean we’ve all heard stories about a neighbourhood uncle with political connections who converted all his old notes into new via a ‘connection’. How much of this is true is still anybody’s guess. (unless the government starts prosecuting people who have too much cash in their accounts and can’t explain how - we are yet to hear about this happening. In fact FM Arun Jaitley has made this point in a Facebook post, saying 1.8m depositors have been identified for this enquiry - as seen below.).     2. Counterfeit currency: Overall detection of fake notes in 2017-18 was 31% lower than the previous year. Detection of Rs 500 and Rs 1000 notes has decreased by around 50%. But the new Rs 500 notes are still being counterfeited. Also, the Rs 2000 note is now the pick for counterfeiters. The RBI report says that  only 638 pieces of fake Rs 2,000 notes were detected in 2016-17, but in 2017-18, 17,929 pieces (worth Rs 360 million) were detected.   3. Digital payments: Overall digital payments have increased massively since November 2016. In 2017-18, digital payment volume rose by 29%. But does this also mean households now prefer digital over cash? Not really. Household preference for cash: In November 2016, around Rs 18 lakh crore was the amount of currency in circulation, out of which around 86% was demonetised. Today, around Rs 18 lakh crore of currency is still in circulation! So even though digital payment volume has increased, people still have a preference for cash.   What Was the Impact?   We all faced the micro impact, but a sharp drop in GDP (~1%) was a predominant economic impact - much of India’s industrial sector runs in the unorganized sector where lack of cash constrained production and productivity. In addition, the RBI spent around Rs 13,000 crore to print the new notes and transport it across the country (whereas only around Rs 10,000 crore of the banned currency did not return into the system). So based on these costs, it does seem that demonetisation did not achieve its objectives.   However, there are some long term impacts which are yet to be quantified - notably the effect of demonetisation on formalization of the economy i.e. more traceability of cash. better accounting, and higher tax collections. We have yet to see how that pans out.   You can subscribe to my weekly letter series titled "Policy & Governance for Dummies" by clicking here. View the letter archive by clicking here.       (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Do Emerging Markets Stand A Chance To Recover Against the Bull Market in US?

Colin Lloyd

Macro

Emerging market stocks have stabilised, helped by the strength of US equities; Rising emerging market bond yields are beginning to attract investor attention; US tariffs and domestic tax cuts support US economic growth; US Dollar strength is dampening US inflation, doing the work of the Federal Reserve.   To begin delving into the recent out-performance of the US stock market relative to its international peers, we need to reflect on the global fiscal and monetary response to the last crisis. After the great financial recession of 2008/2009, the main driver of stock market performance was the combined reduction of interest rates by the world’s largest central banks. When rate cuts failed to stimulate sufficient economic growth – and conscious of the failure of monetary largesse to stimulate the Japanese economy – the Federal Reserve embarked on successive rounds of ‘experimental’ quantitative easing. The US government also played its part, introducing the Troubled Asset Relief Program – TARP. Despite these substantial interventions, the velocity of circulation of money supply plummeted: and, although it had met elements of its dual-mandate (stable prices and full employment), the Fed remained concerned that whilst unemployment declined, average earnings stubbornly refused to rise.   Eventually the US economy began to grow and, after almost a decade, the Federal Reserve, cautiously attempted to reverse the temporary, emergency measures it had been forced to adopt. It was helped by the election of a new president who, during his election campaign, had pledged to cut taxes and impose tariffs on imported goods which he believed were being dumped on the US market.   Europe and Japan, meanwhile, struggled to gain economic traction, the overhang of debt more than offsetting the even lower level of interest rates in these markets. Emerging markets, which had recovered from the crisis of 1998 but adopted fiscal rectitude in the process, now resorted to debt in order to maintain growth. They had room to manoeuvre, having deleveraged for more than a decade, but the spectre of a trade war with the US has made them vulnerable to any strengthening of the reserve currency. They need to raise interest rates, by more than is required to control domestic inflation, in order to defend against capital flight.   In light of these developments, the recent divergence between developed and emerging markets – and especially the outperformance of US stocks – is understandable. US rates are rising, elsewhere in developed markets they are generally not; added to which, US tariffs are biting, especially in mercantilist economies which have relied, for so many years, on exporting to the ‘buyer of last resort’ – namely the US. Nonetheless, the chart below shows that divergence has occurred quite frequently over the past 15 years, this phenomenon is likely to be temporary: Source: MSCI, Yardeni Research Another factor is at work, which benefits US stocks, the outperformance of the technology sector. As finance costs have fallen, to levels never witnessed in recorded history, it has become easier for zombie companies to survive, crowding out more favourable investment opportunities, but it has also allowed, technology companies, with no expectation of near-term positive earnings, to continue raising capital and servicing their debts for far longer than during the tech-bubble of the 1990’s; added to which, the most successful technology companies, which evolved in the aftermath of the bursting of the tech bubble, have come to dominate their niches, often, globally. Cheap capital has helped prolong their market dominance.   Finally, capital flows have played a significant part. As emerging market stocks came under pressure, international asset managers were quick to redeem. These assets, repatriated most often to the US, need to be reallocated: US stocks have been an obvious destination, supported by a business-friendly administration, tax cuts and tariff barriers to international competition. These factors may be short-term but so is the stock holding period of the average investment manager.   Among the most important questions to consider looking ahead over the next five years are these:    Will US tariffs start to have a negative impact on US inflation, economic growth and employment? Will the US Dollar continue to rise? And, if so, will commodity prices suffer, forcing the Federal Reserve to reverse its tightening as import price inflation collapses? Will the collapse in the value of the Turkish Lira and the Argentine Peso prompt further competitive devaluation of other emerging market currencies?   In answer to the first question, I believe it will take a considerable amount of time for employment and economic growth to be affected, provided that consumer and business confidence remains strong. Inflation will rise unless the US Dollar rises faster.   Which brings us to the second question. With higher interest rates and broad-based economic growth, primed by a tax cut and tariffs barriers, I expect the US Dollar to be well supported. Unemployment maybe at a record low, but the quality of employment remains poor. The Gig economy offers workers flexibility, but at the cost of earning potential. Inflation in raw materials will continued to be tempered by a lack of purchasing power among the vastly expanded ranks of the temporarily and cheaply employed.   Switching to the question of contagion. I believe the ramifications of the recent collapse in the value of the Turkish Lira will spread, but only to vulnerable countries; trade deficit countries will be the beneficiaries as import prices fall (see the table at the end of this article for a recent snapshot of the impact since mid-July).   At a recent symposium hosted by Aberdeen Standard Asset Management – Emerging Markets: increasing or decreasing risks? they polled delegates about the prospects for emerging markets, these were their findings:    83% believe risks in EMs are increasing; 17% believe they are decreasing 46% consider rising U.S. interest rates/rising US dollar to be the greatest risk for EMs over the next 12 months; 25% say a slowdown in China is the biggest threat 50% believe Asia offers the best EM opportunities over the next 12 months; 20% consider Latin America to have the greatest potential 64% believe EM bonds offer the best risk-adjusted returns over the next three years; 36% voted for EM equities.   The increase in EM bond yields may be encouraging investors back into fixed income, but as I wrote recently in How To Identify Valuable Bond Markets With High Yields there are a limited number of markets where the 10yr yield offers more than 2% above the base rate and the real-yield is greater than 1.5%. That Turkey has now joined there ranks, with a base rate of 17.75%, inflation at 15.85% and a 10yr government bond yield of 21.03%, should not be regarded as a recommendation to invest. Here is a table looking at the way yields have evolved over the past two months, for a selection of emerging markets, sorted by largest increase in real-yield (for the purposes of this table I’ve ignored the shape of the yield curve): Source: Investing.com Turkish bonds may begin to look good value from a real-yield perspective, but their new government’s approach to the imposition of US tariffs has not been constructive for financial markets: now, sanctions have ensued. With more than half of all Turkish borrowing denominated in foreign currencies, the fortunes of the Lira are unlikely to rebound, bond yields may well rise further too, but Argentina, with inflation at 31% and 10yr (actually it’s a 9yr benchmark bond) yielding 18% there may be cause for hope.   Emerging market currencies have been mixed since July. The Turkish Lira is down another 28%, the Argentinian Peso by 12%, Brazilian Real shed 6.3% and the South African Rand is 5.7% weaker, however the Indonesian Rupiah has declined by just 1.6%. The table below is updated from How Trade Wars May Impact The Emerging Markets: Is Turkey the Canary in The Coal-Mine. It shows the performance of currencies and stocks in the period January to mid-July and from mid-July to the 28th August, the countries are arranged by size of economy, largest to smallest: Source: Investing.com It is not unusual to see an emerging stock market rise in response to a collapse in its domestic currency, especially where the country runs a trade surplus with developed countries, but, as the US closes its doors to imports and growth in Europe and Japan stalls, fear could spread. Capital flight may hasten a ‘sudden stop’ sending some of the most vulnerable emerging markets into a sharp and painful recession.   Conclusions and Investment Opportunities   My prediction of six weeks ago was that Turkey would be the market to watch. Contagion has been evident in the wake of the decline of the Lira and the rise in bond yields, but it has not been widespread. Those countries with twin deficits remain vulnerable. In terms of stock markets Indonesia looks remarkably expensive by many measures, India is not far behind. Russia – and to a lesser extent Turkey – continues to appear cheap.   ‘The markets can remain irrational longer than I can remain solvent,’ as Keynes once said.   Emerging market bonds may recover if the Federal Reserve tightening cycle is truncated. This will only occur if the pace of US economic growth slows in 2019 and 2020. Another possibility is that the Trump administration manage to achieve their goal, of fairer trading arrangements with China, Europe and beyond, then the impact of tariffs on emerging market economies may be relatively short-lived. The price action in global stock markets have been divergent recently, but the worst of the contagion may be past. Mexico and the US have made progress on replacing NAFTA. Other countries may acquiesce to the new Trumpian compact.   The bull market in US stocks is now the longest ever recorded, it would be incautious to recommend stocks except for the very long-run at this stage in the cycle. In the near-term emerging market volatility should diminish and over-sold markets are likely to rebound. Medium-term, those countries hardest hit by the recent crisis will languish until the inflationary effects of currency depreciations have fed through. In the Long Run, a number of emerging markets, Turkey included, offer value: they have demographics on their side.   Originally Published in In the Long Run     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Transfin. Podcast | LongShorts

We like to talk Business and Finance. Figured we should do it for a living. Join us as we chat on three of this week's key stories.

How Brilliant Careers Are Made - And Unmade

Rotman Management

Consumer Behaviour

Everyone has blind spots and weaknesses. By identifying and addressing your own challenges, you can accelerate your career, writes Carter Cast.   Have you ever wondered why some careers flourish, while others stall? ‘Career derailment’ occurs when an individual previously deemed to have strong potential is fired, demoted or plateaus below expected levels of success. According to statistics, somewhere between 30 and 67% of leaders involuntarily derail at some point in their career.   Not surprisingly, career derailment carries high costs: The direct and indirect cost to organizations can be more than 20 times the derailed employees’ salaries. Given the stakes involved for individuals and organizations alike, I recently set out to pinpoint the major causes of career derailment. In this article I will share key findings from the research, lay out the behaviours that can stall a career and offer remedies to help people avoid derailment.   Career Derailment 101   First and foremost, career derailment does not indicate a lack of managerial talent. Instead, it often afflicts talented managers who are either unaware of a debilitating weakness or interpersonal blind spot — or are arrogant enough to believe that the rules don’t apply to them.   As part of my research, I conducted extensive interviews with three leadership consulting firms: the Centre for Creative Leadership, the Korn Ferry Institute and the Hay Group. All three indicated that organizations prefer to focus on the positive and don’t even like to discuss peoples’ negative qualities. The problem is, these personal weaknesses often override an individual’s strengths. Following are five major career derailers that every leader should be aware of.     Derailer 1: Interpersonal Issues Researchers agree that this is the most prevalent and damaging derailer. Stuart Kaplan, the former global Chief Operating Officer of Korn Ferry’s leadership and talent consulting practice (now Director of Organizational Development at Google) put it this way:    As you progress [in your career], your relationships with others are more important than your knowledge of and relationship with data. This need kicks in as you move into middle and upper management. It’s a mindset change. You have to let go of having the answer and embrace the relational world. It becomes less about competencies and more about trust.   To examine this derailer more closely, I broke it down into two categories: relational issues and dark-side personality dimensions. On the relational front, Korn Ferry analyzed a tremendous amount of data from its 360-degree feedback instrument and found a total of 19 negative behavioural characteristics that reliably correlate to job performance flame-out. Ten of them are related specifically to relational issues. The five most common are, in descending order: defensiveness; lack of composure under stress; insensitivity to others’ feelings; excess ambition; and arrogance.   Defensiveness leads the way in terms of career damage because it often suppresses one’s ability to learn and develop.   Looking at the second category, dark-side personality dimensions involve dysfunctional dispositions that are associated with failure as a manager. Psychologists Joyce and Robert Hogan have conducted extensive research on derailment resulting from personal factors and created an inventory assessment tool that managers can take to test for these dimensions. David Dotlich and Peter Cairo put the Hogans’ model into practice with their own tool, the CDR International Derailment Report, which they have administered to thousands of managers and executives. In doing so they have confirmed the accuracy of the Hogans’ dimensions. In Why CEOs Fail, they write:   Many leaders sabotage themselves, albeit unconsciously. We’ve found all leaders are vulnerable to 11 derailers— deeply ingrained personality traits that affect their leadership style and actions. Odds are that you possess at least one of these traits.   Dotlich and Cairo’s 11 derailers are as follows:   Arrogance: You’re right and everybody else is wrong. Melodrama: You always grab the centre of attention. Volatility: Your mood swings drive business swings. Excessive caution: The next decision you make may be your first. Habitual distrust: You focus on the negatives. Aloofness: You disengage and disconnect. Mischievousness: Rules are made to be broken. Eccentricity: It’s fun to be different just for the sake of it. Passive resistance: Your silence is misinterpreted as agreement. Perfectionism: Get the little things right even if the big things go wrong. Eagerness to please: Winning the popularity contest matters most.   According to Dotlich and Cairo, most managers possess at least two or three of these derailers. This statistic might seem alarming, but it needn’t be. The unknown enemy is the most fearsome. By understanding our own derailment propensities, we can address them and mitigate their potential to cause trouble.      Derailer 2: Difficulty Building and Leading Teams People who suffer from this derailer tend to do at least one — and sometimes all — of the following:   They over-manage Those who over-manage don’t empower their team members and are over-controlling and meddling. As a result, team members find their efforts thwarted and can lose their sense of autonomy and their desire to take the initiative. Those who over-manage are also poor delegators. Because they were often effective individual contributors, they tend to revert to that behaviour and try to do the work themselves.    They fail to build and lead the team These leaders don’t communicate business priorities or provide the necessary strategic context for assignments, so their team members fail to understand how their work fits within the overall strategy of the team, the department or the organization. They also find it difficult to resolve interpersonal, resource-allocation or workflow/process-related problems within the team in a timely manner, reducing its effectiveness, and they do a poor job of developing the functional and managerial skills of their direct reports.   They don’t manage the team’s context  Managing team members one-on-one isn’t the same as managing a team. Managing a team means also managing the team’s context, which entails:  1) Scanning the competitive environment and making adjustments to strategy based on an on-going assessment 2) Lobbying for and securing resources for the team 3) Ensuring strategic and project alignment with other internal functions 4) Ensuring that team objectives, goals and key performance indicators (KPIs) are clear — and are met   Derailer 3: Difficulty Adapting to Change Almost two-thirds of managers who have derailed were described as being ‘unable to change or adapt’. As people rise through organizations and business situations become more complex, adaptability becomes increasingly important. With additional responsibility, more constituencies and political nuances must be managed. As my colleague, Kellogg Professor Kevin Murnane puts it:   As you progress, you need to move from the technical to the interpersonal and from certainty to ambiguity.   This derailer can be triggered by three things:   Changing circumstances The most common reason for derailment here is that a person gets promoted into a new position and doesn’t have the requisite skills or hasn’t taken the time to understand the job requirements — and continues to act and behave in the same manner as before being promoted. A common issue after promotion is the difficulty of making the mental transition from being a ‘technical manager’ to a ‘general manager’ and moving from ‘me’ to ‘we’. Some people also have great difficulty understanding and accepting fundamental shifts in the macro environment and making the necessary adjustments.     Over-dependence on an advocate Another common reason for derailment within this category is over-dependence on a previous boss or advocate. People frequently struggle when they lose their old boss and gain a new one who has a different agenda and management style.   Personality traits  These include not seeking input or being unable to take direction from others; being fearful of change (especially of appearing inept); having narrow interests; lacking curiosity; and preferring the status quo, even when faced with new challenges that necessitate a change in approach.   Derailer 4: Lack of Strategic Orientation This derailer can be broken into three components:   Over-dependence on one skill This means relying on the same skill or small set of skills to get any job done and not recognizing the importance of a broadened skill set, and it often comes with a bias for one’s functional area of expertise. The old adage, ‘If all you have is a hammer, everything looks like a nail’ comes to mind. For example, a Chief Financial Officer trying to pin a return on investment to all projects, even those that are exploratory or conceptual; or an enterprise sales manager saying, ‘Selling is selling; I don’t need to understand how our new client software portal works’. In the book Potential — For What?, the Hay Group lists such narrowness as a critical derailer: “A narrow and short-sighted emphasis on immediate results and/or technical expertise — this is the opposite of lateral thinking and taking a broader view.” All things change, and one of the requirements for higher-level management and career fulfilment is broadness and diversity.   Being non-strategic This often takes three forms: 1) Being a whirlwind of execution and not pulling back to examine and understand the strategic context surrounding the work. Given the propensity for this, when I worked at Walmart.com I frequently urged my team to remember to ‘zoom in’ or ‘pull back’; 2) Being too technically oriented, overly concerned with project details, getting mired in the tactics of the business and losing touch with its over-arching objective; and 3) Lacking a holistic understanding of how the pieces of the business fit together — not grasping the value chain, the process or activities by which a company adds consumer/customer value.   Having a key skill deficiency This issue concerns not having a key skill necessary to be successful in a position. Some of the causal factors for this are: counting backwards to retirement and not taking on new challenges or learning new skills; younger managers suffering from general inexperience; lacking technical or functional skills; being new to the job or function and also not being interested in self-development.   Derailer 5: Poor Follow-Through This last derailer is an insidious one. When managers cannot be counted on to deliver on commitments, they lose their personal credibility and co-workers slowly but surely back away and avoid working with them. Following are five reasons for poor follow-through:    Poor planning and organizational skills People suffering from this derailer are often disorganized and are not detail oriented, which can lead to unmet commitments.       Trouble prioritizing work Effective managers are able to differentiate high-impact work from busy work and prioritize their time accordingly. They use various heuristics to prioritize, plan and execute their work. An affliction from which ineffective managers suffer is what I call ‘working in response mode,’ wherein they allow interruption after interruption to impede their progress on important projects by responding, like Pavlov’s dogs, every time a text or email message comes in over the transom.   Being a pleaser People who have trouble delivering on promises are often pleasers who never say ‘no’ to a request for fear of disappointing their co-workers. As a result, they over-commit and under-deliver.   Not understanding due process  In my experience, managers who execute poorly often lack an understanding of the due process required inside their business unit or company. They tend to have a naive or inadequate understanding of the action steps, the work flow, the functional and cross-functional dependencies, and the necessary stakeholder approvals required to complete an initiative inside their company. As a result, they assume they can accomplish activities or projects in an unrealistic time frame.   Suffering from grandiosity  People who suffer from grandiosity often are creative, curious, highly conceptual people who are spirited and full of big ideas. When this trait goes into overdrive, however, their strengths can become weaknesses. They become enamoured of their game-changing, high-concept ideas and are distracted from following through on the mundane tasks or projects for which they are accountable.     Derailment Remedies   All positive change — whether becoming a better leader, learning to be more adaptable, thinking less narrowly or improving follow-through skills — begins with self-awareness. This trait is mission critical. A lack of self-awareness is the single best indicator of an individual’s impending derailment. For those who want to improve their self-awareness and proactively tend to their blind spots, I recommend the following.   Seek 360-degree feedback from co-workers.  A handful of organizations do a fine job of administering, interpreting and coaching managers and executives through some type of multi-source assessment. I urge everyone — regardless of level — to go through this type of assessment process.   Gain a deeper understanding of your blind spots and self-defeating behaviours. Although none of us likes the prospect of hearing about, examining and addressing our areas of personal vulnerability, there is no better way to improve our performance. The Hogan Personality Inventory and the Hogan Development Survey offer a rich set of tools to understand bright-side and darkside personality traits.   Gain a deeper understanding of your ‘strengths in overdrive’.  Do you know the circumstances in which you overuse your strengths? Let’s say one of your strengths is ‘determination’: You are widely known as a person who works hard and doesn’t stop until the job has been successfully completed. Think of what happens when that strength goes into overdrive — when you offer too much of it. Perhaps your determination turns into pushiness. Then think about the challenge behaviour — the balancing behaviour you’re leaving out. So with ‘pushiness’ you might be missing ‘patience’ or ‘deliberation’.   Given your determination, do you have a bias against people who demonstrate great patience and are deliberate? Perhaps you tend to associate these traits with being ‘lazy’ or ‘slow-moving’. The key here is to examine the flip side of your biggest strengths. By doing so, you can uncover behavioural areas that may be holding you back.   Seek coaching and counsel, especially during times of transition.  When I interviewed Smruti Rajagopalan, an organizational design and talent management Consultant at the Hay Group, she stressed the importance of self-awareness and self-management during times of change. Behaviour is a function of a person in a situation, she explained, and blind spots often act as derailers because they cause individuals to misjudge situations and their approach to emerging challenges.   This is particularly true during times of change: A new job or assignment, new boss or other wildcard thrown into the mix can heighten derailment risks. Difficulty adapting to changing circumstances — especially a job change involving a new assignment or a promotion — can often derail promising careers. People perform well when there is a match between their capabilities and the requirements of their job. When that match gets out of balance, they struggle.   While working with both middle and senior level managers attending the Kellogg School’s continuing education program, I have asked hundreds of program participants, ‘When you were promoted or transferred into a new assignment, how many of you had a clear understanding of the skills required and the success factors of your new job?’ Only 10 to 20 per cent of people raise their hands. Then I’ve called on people who did raise their hands, asking them how they went about understanding the job requirements and success factors of their new job and trying to create a smooth transition into their new role.   They have all reported taking one or all of the following actions: First, taking the time to be crystal clear on what their new boss wanted, asking essentially, ‘What will I have accomplished in two or three years to make you say I did a great job in this role?’ From that conversation, they made a list of the three to five key deliverables and then worked with their boss to establish key performance indicators for each. Their goal was to be crystal clear on what success looked like.   Second, if the new boss wasn’t able to provide clear direction, they developed their own goals and objectives, with clear success metrics and then ran them by him/her to ensure alignment. Third, they sought advice from other employees who had gone through the same or similar transitions, asking about challenges in the transition and what to watch out for. What did they learn? What caught them off-guard? Which other departments, functional groups and resources were critical to their success?   What three pieces of advice would they offer? Then, in the early stages of a job transition, they checked in with the boss on a regular basis — weekly or bi-weekly — to make sure they were aligned on what was important to accomplish and make sure they received ongoing feedback.   Be empathetic and compassionate — and stay humble.  One of the best ways to avoid derailment is to be ‘other oriented’ by practising empathy and compassion. When you find yourself in a charged situation with a peer, ask yourself, ‘Why might this person be resisting my proposal?’ ‘What are her objectives, and how might I help her achieve them while still adhering to my own goals?’ Above all, practise humility. Staying humble is important because the leading cause of interpersonal issues is arrogance.   Embrace the shift from managing self to managing others.  Making the shift from being a ‘doer’ to managing through others is an enormous transition that is not always easy. When we’re good at something, we like to keep doing it. We see the tangible progress and receive the rewards, so we’re naturally reluctant to change our approach. In Becoming a Manager, Linda Hill discusses the importance of the mindset shift that occurs in this transition from being a specialist to an orchestrator. She writes that this shift literally involves a transformation of identity. To be successful, managers must not only learn their job requirements but also cultivate self-reflection in order to motivate others.   In Closing   Your career is not a foot race. It is long. No one — you included — will remember if you reached vice president by age 35 or age 39. So, take the time to get really good at something; that’s your bargaining chip, your career leverage. And by all means, take a lateral move if it’s in a critical path area that’s important to understand.   Always remember: You will only go as far as your blind spots allow. Do whatever you can to increase your self-awareness and reduce the career-limiting effects of blind spots. The fact is, each and every one of us has derailment propensities. To understand them is to empower ourselves to manage past them. The best news of all: By identifying and addressing your own issues and challenges, you can accelerate your career.    Carter Cast is the Clinical Professor of Innovation and Entrepreneurship at the Kellogg School of Management, a venture partner at Pritzker Group Venture Capital and author of The Right (and Wrong) Stuff: How Brilliant Careers are Made — and Unmade (PublicAffairs, 2018). He is the former CEO of Walmart.com and has held senior management positions at PepsiCo and Electronic Arts.   This article originally appeared in Rotman Management, published by the University of Toronto’s Rotman School of Management. For more, or to subscribe: www.rotmanmagazine.ca   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)  

The Truth About Lies in Negotiations

INSEAD Knowledge

Consumer Behaviour

By Horacio Falcão, Senior Affiliate Professor of Decision Sciences at INSEAD and Alena Komaromi, Financial Services Professional (INSEAD MBA ’12D)   It’s a complex game of “catch me if you can”.    Brenda calls the airline customer service after finding out that she’s unable to check in on her upcoming flight.   Rep: Ma’am, because of the low tariff on your ticket, you are on standby. Brenda (in a calm voice): I have paid almost 300 euros for this one-hour flight. This is not a low price. Could you please double check? As a frequent flyer with your company, I should have priority. Rep: May I put you on hold while I check? [Doesn’t wait for Brenda’s response, puts her on hold for five minutes.] Rep: Ma’am, are you still there? I can give you seat 16F. Brenda: Is this a window seat? Rep: No, ma’am. This is our last seat. Brenda: Ok, thank you for your help.   Right after the call, Brenda has a nagging feeling that something is amiss. She pulls up the airline’s website and finds several available seats on her flight, including a few window options. She quickly changes her seat selection and wonders: “Was it a glitch in the system or did that rep lie to me?”   Can You Spot a Lie?   How good are we at detecting lies? The paper “Can Ordinary People Detect Deception After All?” by Leanne ten Brinke (UC Berkeley), Kathleen Vohs (University of Minnesota) and Dana Carney (UC Berkeley) noted that we are bad at it, at least on a conscious level. In fact, we tend to have a truth bias: We are likely to believe others are truthful more often than they actually are because there is a high social cost of spotting a liar, especially if our assessment turns out to be wrong.   The researchers had a hunch that humans should be evolutionarily primed for lie detection as a means for self-preservation. They posited that our ability to detect lies mostly exists at the subconscious level and only surfaces at a specific “tipping point”, i.e. when the cost of being deceived outweighs the potential social cost of signalling distrust. They suggested that our conscious lie-detection accuracy should improve in highly threatening situations or when the social cost of showing distrust is low. In practical terms, we should strive to listen more closely to our gut during high-stakes negotiations as deep down we probably know who is lying.   Another paper by Todd Rogers (Harvard University), ten Brinke and Carney (cited above) analysed whether political campaign callers were able to tell who would follow through on their promise to go to the polling booths. After all, more than half of people who claim they will vote flake out. A number of nonverbal cues allowed the callers to more accurately guess whether the respondent was telling a lie. These cues included respondents sounding uncertain or insecure or taking more time to say whether they would vote. Using a lot of speech fillers such as “um” and “ah” also predicted lying, but callers failed to recognise that. On the other hand, they associated sounding tense or nervous (e.g. when respondents spoke fast or in a high-pitched voice) with lying, but it wasn’t the case.   The Use of Deception in Negotiation   What about lies in negotiations? “Sweet Little Lies: Social Context and the Use of Deception in Negotiation” by Mara Olekalns (University of Melbourne), Carol Kulik (University of South Australia) and Lin Chew (University of Melbourne) looked at the role of gender, negotiation strategy and trust levels in lying to claim more value in negotiations.   The researchers paired up 60 male and 60 female participants into same- or mixed-sex negotiating dyads. Participants then role-played an employment contract negotiation covering nine issues. Employers and employees were told separately that they would not receive points for a particular issue (job assignment and contract length, respectively). This gave negotiators an opportunity to lie and make fake concessions on that issue to score more points elsewhere.   The researchers examined two types of deception: sins of omission (withholding information) and sins of commission (misrepresenting information, aka bald-faced lying). After meeting their partners, but before the negotiation began, participants answered a questionnaire to gauge how much they trusted their partner on the following dimensions:   Identity (e.g. “This person’s interests are the same as mine”) Benevolence (e.g. “This person is concerned with my welfare”) Integrity (e.g. “This person will try to be fair”) Deterrence (e.g. “I can trust this person to follow through; else I can get even”)   Lastly, each pair of negotiators was instructed to use a competitive (stereotypically male) strategy or an accommodating (stereotypically female) strategy. The assumption was that stereotypes would especially impact same-sex pairs: A man using an accommodating strategy while negotiating with another man would signal vulnerability, eliciting deception. Conversely, in female-only pairs, the use of a competitive strategy would trigger deception through raising suspicion. In the case of mixed-gender dyads, researchers predicted that gendered expectations wouldn’t be so salient and that both men and women would judge each other based on their “competitive negotiator” persona.   It turned out to be somewhat more complicated than that. Male-only dyads did not seem to adjust their use of deception depending on trust or strategy, but rather based on a pragmatic greed-driven approach. Men negotiating with men were more likely to commit sins of omission or commission if the odds of getting more value outweighed the risks.   Conversely, female dyads adjusted their use of deception in response to their level of trust and the negotiating strategy they had been assigned. Outright lying increased when negotiators felt they shared interests (identity-based trust) and were advised to be accommodating, whereas there were more sins of omission when they believed the counterparty wasn’t concerned with their welfare (low benevolence-based trust) and they were told to be competitive. In sum, it appears that women are more opportunistic in their use of deception. These findings suggest that women may lie out of fear as well as greed, depending on the circumstances.   Male-female dyads were the only case where predictions held true: There was more lying when trust was low and negotiators used an accommodating negotiation strategy.   Practical Implications From a Win-Win Standpoint   In the real world, associating sins of omission with deception is rather a philosophical question or a cultural distinction. While some cultures do not view an omission as a lie, others are stricter and consider this unethical behaviour.   When it comes to withholding information strategically, there are two ways to go: win-lose (power-focused) or win-win (value-focused). In win-lose scenarios, such withholding aims strictly to take advantage of your counterparty, probably by not sharing information that would help them either create more value or claim their fair share. Using the win-win approach, you may also need to withhold information at times, mostly limited to that which concerns power. Such withholding does not aim to take advantage of others, but rather to prevent them from blocking your attempts at creating more value or claiming your fair share. Indeed, complete transparency about your bottom line, your willingness to pay, your lack of alternatives or inability to walk away can only help your counterparty extract more value from you. Sharing such power-related information does not make a lot of sense in a negotiation.   While we invite you to reject actively misrepresenting information, it is important to recognise that complete transparency can tempt your counterparty to exploit your “naïveté” by using blatant lies, among other power moves. The research above helps identify situations that raise the risk of your counterparty resorting to deception.   In male-only negotiations, showing concern for reputational integrity may indicate high rewards for truth-telling and high risks for deception. As such, it may persuade your counterparty to communicate more truthfully. In female-only negotiations, the same advice would apply as women may also lie out of fear in particular instances. In addition, to mitigate the risk of greed-based lying in female dyads, it would be useful to promote an environment of openness and information sharing, while not overplaying identity-trust cues. Finally, mixed-gender negotiations already involve the least amount of deception in a competitive and trustworthy environment.   In sum, it seems that the best move is to encourage truth-telling by creating a safe and open negotiation process. Meanwhile, we all need to listen to our gut and challenge our truth bias. We should also double check critical information by asking questions and requiring data, particularly in scenarios that raise the risk of deception. After all, we are not good at detecting lies, so we might as well check when the stakes are high.   Horacio Falcão is also the programme director of Negotiation Dynamics, part of the school’s suite of Executive Education programmes. He is the author of Value Negotiation: How to Finally Get the Win-Win Right.   Alena Komaromi (INSEAD MBA ’12D) is a financial services professional.   Follow INSEAD Knowledge on Twitter and Facebook.   This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Smog and Air Pollution Shroud Delhi Ahead of A Not-so Happy Diwali

Mithun Madhusudan

Environment

We’re into November now and winter is here (God is 2018 over already?!), bringing with it the yearly narrative about air pollution in Delhi. In this context, here are some questions we should be asking ourselves - What causes air pollution and how do we measure it? What are the contributors of air pollution in Delhi? Why does it get worse in winter? Who is responsible for managing and fixing it? What can you do? Let’s dive in.     What Causes Air Pollution?   In general, combustion is the major contributor of air pollution - burning anything from fuel to wood lets off gases and particulate matter into the atmosphere. There are natural factors as well, but we will restrict this discussion to man made factors - which is where most of the regulation should happen.   How Do We Measure Air Quality?   Air quality is measured in Delhi via the Air Quality Index. It tracks the following pollutants. PM10, PM2.5, Nitrogen Dioxide (NO2), Ozone (O3), Carbon Monoxide (CO), Sulphur Dioxide (SO2), Ammonia (NH3), Lead (Pb). Here’s a real time reading of Delhi’s air right now.   Of the above components, of particular interest are PM2.5 and PM10 - defined as particulate matter smaller than 2.5 micrometer and 10 micrometer respectively. For contrast, the average diameter of hair is about 100 micrometer. These are considered to be especially harmful for humans because they are easily absorbed by the lungs on account of their small size, and are considered to be major contributors to pollution related health issues. This is why the concentration of PM2.5 and PM10 are considered representative of poor air quality and are used in any news you will read.   Now, here are some scary numbers.   PM2.5 recommended - 100 microgram per cubic meter Actual value at 12pm in Delhi, Tuesday 6th November 2018 - 411 microgram per cubic meter.   A solid 4 times over the limit. Delhi is routinely cited as being amongst the most polluted cities on the planet. It’s not just Delhi, 70 cities in India did not breathe ‘good quality air’ from Oct 22-Oct 29th 2018. The System of Air Quality and Forecasting (SAFAR) run by the Meteorological department, has more concise readings and predictions. If you’re in Delhi, brace for ‘Very Poor Quality’ air in the next few days.   So that establishes we have a problem. But where does this problem originate?   What Are the Sources of Air Pollution?   Breaking down the sources of combustion/burning is the easiest way to think about contributors to air pollution. According to multiple sources, the largest contributor of air pollution in Delhi is vehicular emissions, some studies showing it contributes as much as 63% of the pollutants. Other factors include combustion from brick kilns in neighbouring states, industrial pollution, construction activities (all of these contribute to dust particles) and come winter the particular mix of crop burning, cold air, and Delhi’s location. Specifically for PM2.5 particles - road dust, vehicular emissions, domestic cooking, and industries are the main culprits. As per a Economic Times article “While road dust is a major contributor to high PM 2.5 levels in the city, it must be factored in that while this is true in summers, in winters road dust plays very little role in overall air quality. In this season it is clearly vehicles that are contributing the most — rising up to 35-36% contribution at times.     As per estimates, on average, across the urban airshed of the Greater Delhi, to the annual average PM2.5 concentrations Vehicle exhaust is responsible for up to 30% Biomass burning (including seasonal open fires, cooking, and heating) is responsible for up to 20% Industries are responsible for up to 20% Soil and road dust is responsible for up to 15% Diesel generators are responsible for up to 15% Open waste burning is responsible for up to 15% Power plants are responsible for up to 5% Outside the urban airshed is responsible for up to 20% (sum is not 100% – this is an upper estimate for all the sources)   What this means is that although Delhi’s air never normally measures up to ‘good quality’, during winter a combination of factors push the quality into the dangerous category.   What’s Different About Winter?   First, in the neighbouring states of Punjab and Haryana, the paddy crop is harvested and the fields are prepared for the next sowing. When the paddy is harvested (mostly manually), the straws (called crop residue) are left on the field (they are too short to cut easily). These need to be cleared off before the next crop can be planted - the cheapest and fastest way to do this is crop burning. This leads to large clouds of smoke which drift towards Delhi and cause a spike during the winter season. Low wind speeds because of winter in North India exacerbate this problem by not dissipating the smoke coming from neighbouring states. During November 2017 upto 25% of the pollutants in Delhi were estimated to be from crop residue burning. And of course there is Diwali.     What is the Impact of Firecrackers on Diwali?   The current narrative around the impact of firecrackers centers around 2 arguments.   First, that it is not the major contributor (% wise) to the total air pollution in Delhi. This is largely true (see above sources of air pollution).   Second, that focusing on other sources of pollution is far more warranted than trying to constrain something that affects the sentiments of such a large majority of the population.   There are not a lot of widely cited studies which measure and correlate the impact of Diwali on air pollution. This study says there is a small but statistically significant increase in pollutants around Diwali. In addition, spikes in the worsening air quality are normally seen around Diwali. Check the chart for November 2016 - the worst incidence of Air quality in Delhi. Also look at the prediction for Air quality on the SAFAR here - it shows a drastic deterioration into ‘Severe’ the highest level for PM2.5 concentration over the next few days. Crackers also release traces of harmful metals into the atmosphere, exacerbating the already high PM2.5 concentrations.   The Supreme Court has now taken matters into its hands and laid down regulations around the bursting of crackers - primarily restricting the time of bursting from 8pm - 10pm. But we all know that’s a stretch - no state is going to be able to enforce such a regulation strictly, and the citizens don’t care enough, we simply don’t have the manpower. And can you blame the cops for not wanting to chance their health in the excessively polluted air?     Who is Responsible for Fixing This?   The 3 key stakeholders are the Center, the Delhi government, and the citizens. Since crop burning is a major issue, the Central government needs to play the mediators role in bringing the state governments on the same page. This doesn’t look like its happening. Only Delhi Minister Answers Centre's Call, 4 States Skip Pollution Meet.   From a more localized perspective, the Delhi government is responsible for regulating vehicle use, construction activities, open burning of garbage etc. However, these are short term solutions. Medium term solutions include mechanized harvesting (so no crop residue is left to be burnt), incentivizing farmers not to burn the crop residue (it has various other uses like conversion to biofuel and manure if it is harvested and not burnt) shifting to cleaner fuels (the Bharat VI standards are to be implemented soon), phasing out old vehicles. But none of this is not going to happen this year. So now what?   What Can We As Citizens Do?   Warning - personal opinions ahead.   So here we are - poor air quality, predicted to get worse, and conditions which make the air literally unbreathable in the next few days. We as citizens have some choices which are in our hands. What are we prepared to give up to do our part in making sure we can breathe some (moderately) clean air over the next month? Crackers and reduced vehicular use seem to be the easiest to attack. These satisfy 3 criteria - these are within your immediate control, these have the highest benefit to cost ratio, and these will make a difference.  For me, the choice is pretty clear.   Happy Deepawali to all of you - and those of you in Delhi - stay safe!   Until next time.   You can subscribe to my weekly letter series titled "Policy & Governance for Dummies" by clicking here.   View the letter archive by clicking here.       For a deeper understanding of the issue and plausible solutions, click here.    (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

The Art of Doing Nothing in Investing: The Secret Sauce Behind a Smart Investment

RichifyMeClub

Investment

People have a tendency to believe that the state of being active is directly correlated to value creation.   Brooklyn, 1893: Anne Scheiber, born in 1893, was an auditor at IRS and pocketed not more than $4,000 a year. Being a Jewish as well as a woman, she was never promoted in her career. After having retired in 1944 with a lump sum amount of $5,000 and an annual pension of $3,100 per year, she had nothing but all the time to study and analyze the financial statements of the companies.   Using her lump sum as well as pension amount, she started investing in companies that she believed would continue to blossom and fill her bags with annual dividends. A few of the companies that she had chosen to accumulate were Coca-Cola, Pepsico, and Exxon.     During this process, despite the several wars and sanctions, drawdowns and booms, bubbles and busts, she did nothing except holding her stocks for the next 50 years. In 1994, when she passed away after her stint of 101 long years, she donated her fortune of $22 Million that she had amassed by investing in those companies.   Image: Anne’s Portfolio in 1995 | Source: Merril Lynch   With a meager pension amount and savings, clearly, the art of doing nothing made her enjoy the compounding benefits. After all, she chose not to interrupt her compounding engine for 50 long years. That’s it. There was no rocket science.   Manhattan, 1877: Years before Anne Scheiber was born, the year 1877 witnessed the birth of a gentleman – Jesse Livermore. He was famous for his monumental wins and defeats by virtue of his excessive tradings in the stock market. After having built his fortune of $100 Million in the 1929 market crash, he continued playing his bets and lost everything in 1934. Certainly, the urge of doing something punished him badly and made him lose his money several times throughout his trading career.   Eventually, in 1940, he took his own life by committing suicide. End of the story.   Well, the sole purpose of showcasing the above stories is to tell you that the act of doing nothing honored Anne Scheiber considerably throughout her life.   In a majority of disciplines, the results we achieve are mutually dependent on the amount of activity we do. To be a better writer, one needs to write often while switching the imagination from one discipline to another, thinking about what might make sense to the reader, decide on a theme and set up a premise. That’s how one gets better with every write-up.   To be a better batsman, a cricketer needs to venture out, practice 10-14 hours a day, explore various techniques to hit the ball, getting better with every shot. And that’s the reason that Virat Kohli is one of the finest cricketers in the Indian Cricket Team. Evidently, these examples justify that more is the activity, the better you become.   People have a tendency to believe that the state of being active is directly correlated to value creation. But, I believe that investing is one such discipline where the ones with the least amount of efforts end up generating the most extraordinary results.   Let me tell you something really interesting.   Instead of buying his first stock in 1942, had Warren Buffett invested those $114.75 in an index fund of S&P 500 and reinvested the dividends, he would have turned it into $400,000. With a simple strategy of doing nothing, had he gone on a vacation and never checked his account thereafter, the tailwinds of American Economy would have made him accumulate four hundred thousand dollars without any effort. That’s the art of doing nothing. Over time, it turns the odds of success in your favor.    “If you wrap your head and your attitude and your mentality around a do-nothing approach, I think that alone is probably the most important thing that individuals and professional investors can think of.”   - Morgan Housel   The hardest part of controlling our temperament to act is to let go of negative emotions that endorse activity. And being a human makes it really hard to ignore them. In a volatile or a panic-stricken environment, our emotional reactions come into the picture, derail our ability to analyze, alter our decision-making framework and increase our urge to act.   In the US, when Fidelity Investments (Peter Lynch used to be its star fund manager) conducted its own research to find out what kind of investors accomplished the highest returns, it turned out that the ones who had completely forgotten about their investments achieved the extraordinary results. Similar stories are available in Indian context too. There are people who applied for IPOs during the 1970-80 era, did nothing henceforth and left behind the portfolios worth crores.   Just have a look at the below tweet thread by Vikram Chachra which truly justifies the subject line of this blog post.     In conclusion, don’t let your emotions play with your investment results. The outcomes can be highly devastating.   After all, The Art of Doing Nothing is one of the best strategies to build a long-term wealth.   Originally Published in RichifyMeClub   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

A Guide to Exercise: Why HIIT is the Ultimate Resistance Training Routine

Dr Arun K Chopra

Ship Shape

Last week we discussed the basic principles of resistance training, including the pros and cons of practising weightlifting with free weights, resistance machines and body weight exercises. We can practice any one or a combination of these modalities using certain exercise protocols.   Though volume based training, which focuses on the number of repetitions (reps) of a particular exercise (set); and number of sets has traditionally been in vogue; intensity based plans, where intensity of workout instead of its volume has now become a rage.    High Intensity Interval Training (HIIT) is one such intensity based plan which we'll discuss through this article.   Resistance training works on the basic premise that the workout causes a bearable stress upon the exercised muscle groups, resulting in muscle fatigue, utilisation of muscle glycogen, and micro-trauma to the muscle fibers.   When followed by good diet and rest, the body repairs the tissues making them stronger and better able to lift a potentially heavier weight next time.   The debate has always been around whether it is better: To lift moderately heavy weights to bring muscle fatigue in one set?; To lift heavy weights but stop short of total muscle fatigue?; or To perform multiple sets and reps of an exercise in achieving this goal?   HIIT vs. Low Intensity High Volume   To examine these issues, Prof Martin Gibala and his colleagues at McMaster University conducted a series of studies beginning in 2006.   They compared the efficacy:  Low Volume Sprint Interval Training (or "HIIT" group) vs. Low Intensity High Volume (i.e. conventional High-volume Endurance Training or "ET" group)   in improving effort tolerance and inducing positive changes in skeletal muscles.   The HIIT group performed 30-second bursts of intense cycling on a stationary bike (at 250% of their maximum rate of oxygen consumption or "VO2 max") which was repeated 3-5 times with 4 minutes rest between the bursts, while the ET group cycled at 65% of VO2 max steadily for 90-120 minutes.   Both groups performed the same workout on 3 non-consecutive days per week for 2 weeks. So the HIIT group exercised for a total of 12-18 minutes of actual training in 2 weeks (total duration 90-120 minutes including rest periods), whereas the ET group spent 9-12 hours training per week. Both groups completed an 18.6-mile cycling test both before and after the two-week training.   Surprisingly, both groups had equal improvements in exercise performance and adaptations in skeletal muscle biopsies, despite a much smaller exercise time in the HIIT group.   Given the excess time spent in running long distances slowly and the risk of musculoskeletal injury noted in a previous article, HIIT appears to be a much more effective and safer method of training.     As the heart and lungs don’t differentiate between lower or upper body exercise, nor between the stress caused by intense cycling, sprinting or lifting heavy weights, the adaptations occurring in the skeletal muscles and the benefits accrued to the cardiovascular system (heart, blood vessels and lungs) are similar.   The Physiology of HIIT   To understand how this happens, we have to briefly discuss human physiology.   When a muscle needs energy, glucose gets broken down in the presence of oxygen by a process called the Krebs cycle - producing a large amount of energy (measured as 36 ATPs, with ATP being a unit of energy). This process is called Aerobic metabolism.   The Krebs cycle can produce greater energy, but works relatively slowly.   However, Glycolysis, which is an Anaerobic (i.e. without oxygen) process of converting glucose into energy, generates only only 2 ATPs.   Interestingly, when intense effort is put in, its Glycolysis, rather than Krebs cycle, which accelerates to produce molecules called pyruvate, along with energy.    Due to limits on processing capacity of a cell, the pyruvate accumulates in the muscle, and gets converted to lactic acid, which causes the burn noted in muscles after a short period (30-60 seconds or so) of intense effort.   At this stage, the exercise is usually stopped and the lactic acid is converted back to pyruvate, which can then gradually undergo Aerobic metabolism. This is what is called the EPOC (Excess Post-exercise Oxygen Consumption) or the oxygen debt, alluded to in a previous article.   Thus recovery from a high intensity exercise stimulates the aerobic metabolism, as much or even greater than a steady-state aerobic exercise.   But there is more! If one can manage to continue exercise despite the lactic acid burn (as happens with regular training), the lactate in the muscles enters the circulation, reaches the liver, where it gets converted to pyruvate and then glucose, by a process called gluconeogenesis.   This glucose is again available for the muscles, for immediate use (if exercise is continued) or for deposition as muscle glycogen, if exercise has been stopped. This process, called the “Cori Cycle”, is responsible for the so-called “second wind” that an athlete gets if one manages to push forward despite a lactic acid burn.     Further, as one continues a strenuous activity, or during crisis situations, the body releases the emergency hormones - adrenaline and glucagon, which in turn activate a process of fat burn (by stimulating an enzyme called hormone sensitive lipase). This should put to rest the misconception that only steady-state aerobic exercise can burn fat, and not HIIT.   HIIT - A Savior For Diabetics?   Other benefits from intense exercise include the complete breakdown of muscle glycogen in the exercised muscles, which improves insulin sensitivity (as glucose has to re-enter to get converted to glycogen) and thus blood glucose levels as well.   HIIT is thus one of the most effective techniques for decreasing insulin resistance that is so common in overweight individuals and is the root cause of most cases of diabetes. Muscle strength and bulk also increase more with intense effort, due to the greater micro-trauma caused to muscle, and the greater release of anabolic hormones like testosterone and growth hormone.   Why Low Intensity Exercise May Not Be Enough?   On the other hand, low intensity, steady state exercise or moderate weight lifting (not to complete failure) for multiple sets are useful but not optimal. They do not deplete the muscles completely of glycogen and while helpful in lowering blood glucose, are not as effective in reversing insulin resistance as HIIT.   If low intensity exercise (which is tiring, nevertheless) is followed by a high calorie meal or diet, the liver and muscles rapidly get saturated with glycogen, and the excess glucose can have no metabolic fate, except be converted to fat.   This fatty acid generation leads to a rise in the potentially harmful VLDL and LDL cholesterol fractions. The inflammation generated by the high circulating levels of glucose and insulin in liver and blood vessels is patched up by LDL cholesterol, which may ultimately predispose to heart attacks.   A possible disadvantage of prolonged periods of slow jogging (i.e., Low Intensity High Volume) which are long enough to completely deplete muscle glycogen stores, is the potential breakdown of muscle needed for energy generation, a phenomenon that doesn’t occur with HIIT due its shorter duration and the release of emergency hormones like adrenaline that cause fat breakdown instead.   You might also have wondered why overweight and obese people often fail to lose weight despite caloric restriction and aerobic exercise. In insulin resistant individuals, the baseline high insulin levels prevent fat breakdown despite a calorie deficit. Thus, they face fatigue and food cravings after exercise (for carbohydrates, in particular) and fail to lose as much weight as they want to.   Further, studies show that the metabolic adaptations to aerobic exercise have peripheral effects i.e. only in the particular muscles being exercised, i.e., the training effect of regular jogging does not increase the effort tolerance for cycling equally.   Anaerobic routines such as HIIT, in contrast have a much central effect, resulting in overall tolerance and strength.     Conclusion   Aerobic exercise is useful in many ways for promoting health and fitness, but the benefits are predominantly owing to a training effect of the muscle groups in use.   On the other hand, anaerobic exercise like HIIT provides muscle strengthening and hypertrophy along with all the advantages of aerobic training and more: greater EPOC, greater fat loss and better restoration of insulin sensitivity, all despite spending much lesser time exercising, though with greater effort.   Next week, we shall discuss how HIIT can be incorporated into our workouts.   This is a recurring column published every Sunday under the title: A Guide to Exercise.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How to Make Sense of the Indian Economy: FAQ on Interest Rates

Nikhil Arora

Scribes

I have touched upon a few basic concepts around Interest Rates in my previous articles, including what they represent, how they work, who sets them, and their role in commonly available savings & lending products (car loans, home loans, education loans, gold loans).   In this piece I will elaborate on some rather ‘layered’ issues around Interest Rates in a Q&A format. Kicking off with a few questions from my end to get the ball rolling.   Feel free to add your queries in the Comments section below which I will try to respond through future articles.   1. Do Interest Rates Change? My Finance Professor used to say that the best answer to a complicated question is:   It depends!   Depends on what?   Well, what time frame are you looking at? Secondly, what type of Interest Rate are you talking about?   As explained earlier, ‘Interest Rates’ as a standalone term, let’s just say, is rather non-specific. It can refer to a wide variety of things, be it i) Retail-level Interest Rates which people encounter when transacting with their local bank either as savers or borrowers, ii) Short-term Interest Rates set by the country’s Central Bank e.g. repo rate adjustments by RBI in India, or iii) Benchmark Long-term Interest Rates derived from the issuance and trading of government bonds.   Best way to answer this question would be to go point by point:   i) Retail-level Interest Rates In a short to medium term period, Retail-level rates are the most stable as they’re derived rates instead of benchmark rates, as in category ii) and iii).   Your bank effectively collects money from depositors (paying them some interest i.e. the savings rate) and lends money to borrowers (charging them some interest i.e. the loan rate).   Naturally, frequent changes in your savings rate or regular modifications in your car loan EMI are not desirable. Think of the challenges it will pose to your financial planning! Hence banks don’t do that. Once they’ve advanced a loan, they will ensure your EMIs stay the same (unless you take a Floating Interest Rate loan as discussed earlier) through the duration of the loan.   However, Interest Rate on a ‘new loan’ (which gets locked once the loan is advanced) would vary as per the latest translation of the Central Bank’s view.   Savings rates are also periodically revised (once a quarter or sometimes more frequently) depending on a bank’s commercial considerations within the broader economic agenda set by the Central Bank.   ii) Short-term Interest Rates as set by the Central Bank Central Bankers meet frequently (e.g. the RBI meets once in 2 months) over what they call a Monetary Policy Review.   The objective of this review is to flex short-term Interest Rates (e.g. repo rates). Repo rate in layman terms is the Interest Rate charged by the RBI when a commercial bank borrows funds from it. This borrowing is a frequent activity, and a lot more frequent during a liquidity crunch.   Hence the RBI can promptly vary the supply of money in the Economy by changing repo rates (e.g. to control inflation). We will cover this concept in more detail when talk about Monetary Policy at a later stage, but the important thing to know is that once every 2 months, the RBI’s repo rate is up for revision, either an increase, a decrease, or a hold (i.e. no change).   This rate is important as it sets the tone for short-term Interest Rates in the country and is hence often used as a benchmark for commercial banks to setup the Retail-level Interest Rates discussed earlier, either as Interest Rates on a ‘new loan’ or as part of their Savings rate review.   iii) Benchmark Long-term Interest Rates derived from the Issuance and Trading of Government Bonds They vary all the time, by the day, by the hour, by the second.   This is because they are supply and demand driven. And economic forces move the market’s demand for government bonds.   Higher is the demand for a new government bond issuance, lower would be the offered Interest Rate. Lower is the demand, higher would be the offered Interest Rate to attract investors. This demand combined with the perception of risk keeps changing.   If the world is hit by a global financial crisis, benchmark rates of most countries would go up. When President Trump slaps import tariffs on China, rates in China would increase. If the government’s fiscal deficit is widening, rates would increase…as that implies the government is spending way higher than it can fund.   2. Why are Retail-level Interest Rates comparatively stable, but Benchmark Long-term Interest Rates much more volatile? Think of electricity you get in your house. How is this flowing to your room? There is perhaps a coal or gas power plant outside your city where bulk electricity is being generated. That high voltage current then travels across transmission lines to your city. Once it reaches the city, the voltage is stepped down and the current moves along distribution lines towards your neighborhood and home.   Now the biggest input cost for the power plant would be coal. Coal’s price is supply-demand driven and is hence volatile. Do you get a higher electricity bill every time coal prices go up?   I guess not.   The utility company ensures the rate at which they’re charging you doesn’t sway as per the changing tides of the coal market.   When it comes to Interest Rates, think of Retail-level Interest Rates analogous to your monthly electricity bill, and the Benchmark Long-term Interest Rates as the volatile price of coal. The former is stable, the latter volatile.   3. Why are the Interest Rates charged by the Bank on Loans higher than the Interest Rates the Bank pays back on Savings accounts? Well, this is pretty much the business model of banks. As explained earlier and in ultra-simplistic terms, banks collect deposits from deposit holders (i.e. the savers or let’s just say the regular folk).   These deposits are then given out as loans to borrowers. How does the bank make money?   It pays some interest to the deposit holders and charges a higher interest from borrowers. The interest on loans is naturally higher than the interest on deposits for the bank to make any profit.   4. Why are Interest Rates higher in India vs. the Developed world? Interest Rate is a measure of risk and credit worthiness. The risk of investing is perceived to be higher in a developing country such as India vs. the developed world. It’s a question of many factors, such as regional stability, state of government finances, robustness of currency, availability of legal recourse in case of default or bankruptcy etc.   Developed economies, being more diversified and mature, are comparatively better hedged against these contingencies.   Source: Various Central Bank Websites   Secondly, Interest Rates trail inflation. Inflation can be understood as the rate at which value of money depreciates (more on Time Value of Money later).   e.g. If I could buy 200ml of toned milk last year for INR15, but I now need to shell out INR16 to buy the same 200ml of toned milk, the value of money in a way has depreciated. The Interest Rate I can earn by depositing money in the bank has to be at least higher than the rate of inflation.   Developing countries in general have a higher inflation rate (owing to higher demand plus other structural drivers) and hence require a higher Interest Rate. Clear?   Thirdly, its about access to capital. More is the availability of capital to lend or invest, lower should be the cost of borrowing (the magic of supply and demand). Developed countries are bigger financial centers, have massive capital inflows and hence have lower rates of interest. Developing countries are relatively scarce in capital, hence a higher rate of interest prevails.   For a deeper understanding of Interest Rates and how they work, you could refer to my previous articles below: Understanding Interest Rates Interest Rates and the Indian Bank   This will be a recurring column published every Friday under the title: “How to Make Sense of the Indian Economy”.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Transfin. Podcast E9: Wrath, Haze, Bespoke

Professor S

LongShorts

Transfin. Podcast E8: Pipes, Sandstorm, Ubernomics

Professor S

LongShorts

Transfin. Podcast E7: Media Kingpin, Data Lines, Black Gold

Professor S

LongShorts

Inside Epic Games' Fortnite: The Most Popular Video Game in The World

Professor S

LongShorts

Fortnite, is the most popular video game in the world, boasting of c. 80mn players per month.    Fortnite is an online video-game which was released in 2017 and developed by Epic Games. With a lofty 80mn players per month, it stands as the most popular video game in the world. While multiple game modes at play, at its core, it is a shooter-survival game for Windows, macOS, PlayStation 4, Xbox One along with Nintendo Switch, iOS and Android.   Largely leveraging on the rise of Fortnite, its maker, Epic raised $1.25bn in new funding from multiple investors valuing it at an estimated $15bn.  The investors that took part in the new funding round included KKR & Co, Iconiq Capital, Lightspeed Ventures among others. Epic already has Disney, Tencent, and Endeavour as minority shareholders. While the official valuation is not clearly known, it is estimated that the aforementioned investment round valued Epic Games at a towering $15bn. The $1.25bn raise is the largest ever private raise for a video-game company beating the previous $550mn raised by Sea Limited in 2017. Video-game company, Netmarble raised c. $2.3bn  in 2017, albeit via an IPO.   Epic makes money through purchase of in-game items. These items include new challenges, newer weapons and other cosmetic items such as skins and emotes. These virtual items can be purchased by an in-game currency ‘v-bucks’ which itself can be bought by real money. As such these virtual purchases are largely cosmetic and do not impact the core game-play experience. This revenue model is not unique to Epic Games or Fortnite, but a widely deployed monetization strategy among several video-games. It is estimated that Epic made over $1bn in revenues from these micro-transactions. While the game initially was launched at $40, it gained more traction only once the free-version was launched thus now largely relying on sale of in-game virtual items.   Epic’s open-source game developer tools have been used by other game developers. In addition to publishing titles like Fortnite, Epic Games has open-source game developer tools which have been used on several other games. Furthermore, Epic’s Unreal Engine design suites have been used for plethora of games over the years under a licensing agreement as well.   Use of player data and analytics is central to Epic’s focus on lifting the overall gaming experience for all kinds of gamers. Continuous use of real-time data is used to heighten the overall gaming experience for the gamers. The AWS-running analytics platform helps in game patches in addition to constantly improving and introducing newer features and in-game tools largely based on user engagement data. This data is central to support game designers in their creative choices while designing the game.   Clash of Clans maker was sold for $8.6bn and Candy Crush Saga maker was sold for $5.8bn. While not comparable games, it is worthwhile to highlight that Supercell Oy, the maker of “Clash of Clans,” was sold to Tencent for $8.6 billion. Furthermore, Activision Blizzard bought “Candy Crush Saga” maker King Entertainment for $5.8 billion underlining the lofty valuations that mobile games can fetch. For perspective, publicly traded video-game giants Take-Two Interactive and Activision Blizzard carry market capitalizations of c. $15bn and c. $51bn respectively.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

India's Fiscal Deficit Close To Target, Yuan Hits Decade Low et al

Professor S

End Of Day Wrap Up

Good evening reader,   In the spirit of peace and harmony, let us begin today by presenting two somewhat contrasting narratives on the Indian telecom landscape emanating from the ongoing 'India Mobile Congress'. While Airtel's Sunil Mittal sees headwinds, Reliance Chairman Mukesh Ambani beams optimism.   Mr. Mittal underlines financial stress points such as heightened telecom levies as high as 37%, towering spectrum and license fees, and a lofty 18% GST as key challenges stifling growth. Mr. Ambani in contrast highlights the enormous runway up for grabs as India marches towards a 4G/5G world, of course to be deservedly vanquished by the one offering the "most affordable price". A clear case of defense vs. offense? Or perhaps a mere reflection of their moods, one an aging accomplished veteran, the other a youthful contender ready to displace him (not to be taken literally).   We have seen this 'new-entrant' movie before in the US with T-Mobile, and in Canada with Wind Mobile. Both having subsequently seen consolidation. There are similar tales in other international telecom markets as well. But is Jio different? Well, for one thing it is bankrolled by the biggest business conglomerate in India, and ready to bleed chips till the game is won.   As India's telecom sector shakes off its first wave of consolidation, it is set for an exciting new chapter of growth which one hopes will remain competitive over the longer run. The customer will win. At least in the short term.   On that note, time to present today's Top 6 Business Stories through our End Of Day Wrap Up:   INDIA   ArcelorMittal wins bid for debt-laden Essar Steel after offer of upfront payment of INR42,000cr. The Committee of Creditors (CoC) selected ArcelorMittal’s bid to buy out Essar Steel, even after company promoters tried to make last minute settlements with lenders, offering to clear all dues and asking for withdrawal of the Insolvency Bankruptcy Code (IBC) case. ArcelorMittal altered its offer from INR35,000cr as upfront payment to INR42,000cr which outdid Vedanta’s bid, as Numetal stayed ineligible. The company also proposed to infuse INR8,000cr as capital into Essar Steel to enhance production and profitability.   IL&FS Board to monetize road, power assets amidst lack of funds. The Government-appointed Board of Infrastructure Leasing & Financial Services (IL&FS) is set to submit a revival plan to National Company Law Tribunal (NCLT), for sale of its road and power assets, the proposal for which will also be run through the company’s shareholders. Stakes of IL&FS Financial Services and IL&FS Energy Development may also be up for sale.   India’s fiscal deficit breaches 95.3% of its full year target in six months. India’s fiscal deficit has reached 95.3% of its INR6.24tr target for this year within the first six months, worse than 91.3% at the same time last year. The govt. will have to rein in its expenditure to INR295bn in the remaining six months to stay within the estimated numbers, as per ICRA. Direct tax collection grew by 16.9% this year, whereas indirect tax collection fell 2.8%.   NBFC liquidity under duress, Centre plans early capital infusion to support financial markets. Department of Financial Services (DFS) with top officials of Finance Ministry are in the course of preparing a plan to ease the strain on financial markets, on back of NBFC liquidity crunch. This plan could entail capital infusion in Public Sector Banks (PSBs), in light of RBI's refusal to ease Prompt Corrective Action (PCA) norms putting operational and lending restrictions on banks.   US/INTERNATIONAL   Amazon reports profit of $2.88bn, sales and share price slumps. US-based Amazon posted a profit of $2.88bn, 11 times of what it earned last year. The share price dropped on back of lower-than-estimated revenue growth. Sales were reported at $56.58bn, lower than estimates. The company’s cloud service, Amazon Web Services (AWS) however generated revenues of $6.68bn, accounting for 12% of Amazon’s total topline.   Chinese Yuan edging towards a decade low against the Dollar owing to US-China trade war. The Chinese Yuan hit 6.9725/USD, its lowest value since 2008, amid trade tensions between the two countries. Head of China's foreign exchange regulator assures fundamentals are healthy. The currency devalued against USD each day of this week and saw c. 7% selloff this year.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

RIL's Jio to Take Over Broadband, Airtel Q2 Profits Drop 65% et al

Professor S

End Of Day Wrap Up

Good evening reader,   We love Thursdays. Their placement in the workweek is near perfect.   Yes, we've just made a blanket assertion! With confidence.   Here's why.   Signs of manic activity would have by now (hopefully) mellowed. Not saying we get done with work or anything, but at least the probability of a surprise goes down. One is happily tilted towards the weekend, but still not really plugged out.   Its a good day to introspect and take stock of the week's events. Probably that's why we do our Podcast today.   Oh yes, did we tell you we do a Podcast? It’s where we chat on 3 topical stories from the world of Business and Finance - curating and adding our insights on fairly layered topics (check the channel by clicking here). We try to keep it conversational...relaxed you know. Like the way people in general talk, but a wee bit more cynical ;)   Today's edition (Episode 8) talks about the ongoing crisis in Saudi Arabia, the changing economics of Uber, and how Reliance Jio is taking over broadband. Sprinkled in between would be anything and everything from the world of Business that caught our eye.   With this enthusiastic introduction, we're sure you can't wait (just removed out cynical hats for a moment). Hope you like it.   There's also the usual round-up of Today's 6 Top Business Stories through our End Of Day Wrap Up:   INDIA   RBI dismisses liquidity window for NBFCs on belief of no systemic risk. The Reserve Bank of India (RBI) has rejected a proposal for a special refinancing window for Non Banking Financial Companies (NBFCs) as it believes that there is ‘not a strong enough case right now’. The two-day RBI Board meeting was intended to discuss the liquidity jam that NBFCs are facing and the government’s request to ease capital funding of Public Sector Banks (PSBs) to expand business.   Air passengers to double by 2037, India expected to be third largest aviation market. According to International Air Transport Association (IATA), air traffic may double by 2037 to 8.2bn passengers a year, with Asia-Pacific region driving the growth. IATA stated this surge in aviation could support c. 100mn jobs globally. China is expected to be the largest market, followed by US and India.   Wipro Q2 profits drop 10% QoQ, below estimates. Company realised a loss of INR514cr due to a client settlement during the quarter. Revenue rose by 2.4%, driven by a benchmark deal with Alight LLC. A sequential growth of 1-3% forecast by the firm for Q3. Management cited challenges faced by Wipro's US Healthcare business over uncertainties around Obamacare.   Airtel Q2 profits plunge 65% y-o-y to c. INR119cr, still beat estimates. Bharti Airtel reported a net profit of INR118.80 in FY19Q2, a 65% year-on-year fall. The telco’s total revenue slipped to INR20,422cr against INR21,777cr in September 2017. However, as of September 30, the company reported an increase of 14.2% in customers.   US/INTERNATIONAL   Tesla share price rises as company announces profit on Model 3 production. Tesla announced a $311.5mn profit (its 3rd ever profitable quarter), beating market estimates and heading towards its Model 3 production targets. The company is rushing its manufacturing plans in China, intending to bring parts of Model 3 production to serve the Chinese market.   Fed report states US businesses are positive on growth but concerned about tight labour market and tariffs. Businesses, mainly manufacturers, in the US are optimistic about the economy’s growth but are weighed down by concerns over trade tariffs that could push up costs, according to a report by US Federal Reserve. Some firms are raising prices to accommodate retaliatory tariffs on US goods, whereas others are shifting business strategies and importing materials from countries other than China. Companies reported offering more perks to retain/attract workers, but wage growth remained “mostly modest”.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Jio GigaFiber 'Wired-in' with Key Broadband Investments

Professor S

LongShorts

Reliance Industries Ltd (RIL) acquired majority stakes in two of India's largest cable TV and broadband companies - Hathway Cable & Datacom, and DEN Networks for a combined sum of INR5,230 crore. With RIL's Jio metaphorically "wired in" to gain traction on its own broadband service named Jio GigaFiber, these investments make the right noise.   Last week, Reliance Industries Ltd (RIL) made two strategic investments in India's two largest cable TV and broadband companies or MSOs - Den Networks, and Hathway Cable & Datacom. RIL invested INR2,290 crore for 66% stake in Den and INR2,940 crore for 51.3% stake in Hathway, resulting in a combined INR5,230 crore of investment spend.  These MSO investments are largely directed to steer RIL towards ramping up Jio's push into high-speed broadband network, by leveraging Den and Hathway's fairly robust Local Cable Operator (LCO) network. Access to LCO network is pivotal for Jio to accelerate its "last mile connectivity" build-out. Consequently, these investments can be viewed as key facilitating anchors for Jio to achieve its target of reaching 50mn homes across 1,100 cities. Recall that Jio introduced plans around its broadband service Jio GigaFiber recently, and it is widely expected to deploy a similar pricing strategy to the aggressive tactics employed for Jio's swashbuckling 4G rise. Jio's 4G was seen as an 'aggressive new entrant' and by the looks of it, Jio's GigaFiber appears to be borrowing a page from the same playbook. In that context, an accelerated go-to-market strategy allowing quicker realization of scale benefits to offset margin pressure is perhaps central to Jio's near term strategic outlook.     Den and Hathway's existing relationships with LCO's is a key underlying strategic rationale for RIL's investments. There are about 27,000 LCO's that are aligned with Den and Hathway and as such these offer important touch points for Jio GigaFiber's broadband penetration.  These LCO's provide RIL with direct access to about 24mn homes, across 750 cities where Den and Hathway already offer broadband services. By bringing Den, Hathway, and the related LCO's within the larger RIL ecosystem, Jio can speed up the upgrade of its existing infrastructure to Jio GigaFiber, while harnessing tremendous capex and revenue synergies between Cable and Broadband and perhaps venture into triple-play (Wireless, Broadband and Cable) offerings. LCO's remain a largely unorganized and fragmented sector but play a key role in last-mile connectivity due to their direct relationships with Internet service providers. In that context, these relationships are key for RIL. As a side note, LCO's themselves have been under market pressure owing to competition from DTH operators like Airtel and Tata Sky and as such RIL's investment in MSO's should strengthen their positioning as well.   At an estimated 18mn broadband subscribers, Fixed Line Broadband (FLBB) in India is still in in its nascence, offering meaningful growth runway.  As per TRAI, Fixed Line Broadband (FLBB), in India has about 18m broadband subscribers, with the following market shares - BSNL: 58.8%, MTNL: 4.1%, Airtel: 10.3%, ACT: 6.2%, Hathway: 3.7%, and Others: 16.9%. Furthermore, India's FLBB as a % of Total Households (THH) in mid-high-single digit on a % basis, is one of the lowest in APAC. While a gloomy statistic, it paints an optically positive picture when viewed in terms of growth runway.   Notwithstanding meaningful presence in Cable, Hathway and Den have fairly modest footprint in Broadband, indicating meaningful upside especially with RIL on board.  As per most recent company presentations, Hathway has 0.77mn broadband subscribers while Den has 106,000 broadband subscribers - both fairly modest numbers. Despite that, Hathway is India’s largest cable broadband services provider, with 5.5mn homes-passed and 0.77mn subscribers with a 52% market share of the total MSO cable broadband market in India. On the Cable Front, with 7.2mn subscribers each, Hathway and Den have a more meaningful presence with majority of these cable subscribers being managed through LCO's. Hathway's presence in 350 cities and Den's presence in 200 cities bodes well for the several touch points that Jio can manage to leverage. Furthermore, their geographic presence is somewhat non-overlapping with Hathway (more prominent in Central and Western India) and Den (more prominent in the Northern belt) allowing a wider geographic gamut for Jio to explore.     Capital infusion from RIL should help Den and Hathway improve their balance sheets, while providing funding resources for growth and maintenance capex. RIL's capital infusion should help both Hathway and Den in de-leveraging their balance sheets while also supporting incremental capex towards upgrading existing infrastructure and also laying out new cable lines. While, Hathway and Den are both seeing fairly meaningful EBITDA growth led largely by the Cable business, with RIL on board, one could possibly envision acceleration in EBITDA growth and margin expansion via economies of scale. As both the companies try to penetrate deeper into existing markets and possibly venture into newer ones, access to RIL's deep coffers in addition to back-end technology and infrastructure are perhaps meaningful positives. With cable broadband still in its early innings, it would be worthwhile to see how independent MSO's and RIL's Jio GigaFiber evolve over time.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Flattening US Treasuries Yield Curve: Is It The Economy's Canary in the Coal Mine?

Professor S

LongShorts

The US treasuries yield curve is 'flattening'. Is it the economy's canary in the coal mine? Bond yields in general reflect the amount of return an investor realizes on a bond investment and US treasury yields are usually directionally linked to interest rates. Given the 'yield curve's' significance as a key sentiment indicator for the economic outlook, it warrants a closer look as such.    Yield curve is a graphical representation of bond yields of varying maturity dates. Typically, longer the maturity, higher the yield. The yield-curve represents the graphical shape of bond yields plotted against the maturity of these bonds. Typically, longer the maturity of a bonds, higher is the yield that it carries and is described as the 'normal yield-curve' (discussed below). The US treasuries yield curve (often simply referred to as the 'yield curve') is a closely tracked visual representation offering meaningful read-throughs. US treasury bonds are considered the safest investment in global financial markets and their yields are extensively used for wide-ranging economic inferences. Yields are often thought of as a proxy for bond investors appetite for risk. Higher the expected risk, higher the yield and so on.    It is usually characterized by the following shapes i) Normal yield-curve ii) Flattening yield-curve and iii) Inverted yield-curve. Depending on the shape of the curve, there are some inferences that can be drawn on the economy, albeit not easy to individually isolate the key drivers.  i) Normal yield-curve: Short-term bonds carry lower yields while long-term bonds carry higher yields (and the difference between these yields is the yield spread). This is fairly intuitive, hence 'normal', since the longer a bond investors capital is locked in, the higher the yield that an investor warrants. Therefore, normal curve takes the shape of a upward sloping curve with yields rising as maturity period increases. ii) Flattening of the curve: The 'flattening' of the yield curve is not technically a shape but simply means that the yield spread is decreasing. The term 'flattening' is again a graphical representation where in the steepness of the curve is somewhat flattening. It essentially means that the difference between the long-term and short-term treasury yields is narrowing. iii) Inverted Yield Curve: This happens when the short-term yield moves higher than long-term yield. While this appears counter-intuitive, what it signifies is that bond investors now see the current interest rate environment as more attractive to lock in prevailing rates under the expectation that future rates might actually be lower than what it is now. In effect, investors ask for a higher rate of return on short term lending relative to long term which is seen as red-flag for a possible period of economic slowdown.    The current US treasury yield-curve is flattening i.e. current yield spread is narrowing. The yield-spread stands at c. 23bp and there are concerns of a yield-curve inversion. A flattening/inverting yield curve is often perceived to be indicative of an upcoming recession, with investors increasingly being hesistant to lend in the short term. This flattening yield-curve typically signifies cautiousness surrounding the US economic outlook. It stands at a tight 23bp at the time of writing. In case this spread further narrows to zero or worse goes negative, we will have the inverted yield curve. In the last 50 years, almost always has an 'inverted yield curve' given way to recession. In that context, the yield curve is being closely watched and has prompted a response from Fed Chairman, Jerome Powell who albeit played down concerns and said "there’s no reason to think that the probability of a recession in the next year or two is at all elevated." The short-term yields are a direct result of interest rate hikes by the federal reserve whereas the longer-term yields are indicative of growth and inflation expectations.     There are other factors at play ranging from inflation expectations to general demand for US treasury bonds that impact their yields; Higher demand for US treasury bonds pressure their yields. Other factors are at play ranging from inflation expectations to a general demand for US treasury bonds. As touched on earlier, longer-term yields typically track growth and inflation expectations. This is again intuitive since bond coupons can see their value eroded via inflation. In that context, lower long-term yield also underlines lower expectations of inflation. However, if the demand for long-term bonds increases via asset managers or even foreign funds/governments buying US long-term debt, this could artificially pressure long-term bond yields. As outlined earlier, there are several moving pieces to the economy (click here to understand more on the nuances of inflation, interest rates,  monetary policy etc) and the shape of the yield-curve is just one economic tool, albeit one that is closely watched by the financial markets and other industry participants. With US mid-term elections in November, rest be assured, the term yield curve will be thrown around extensively in conjunction with any commentary around the economic outlook of the US.     (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

REITs: A New Way to Invest in Real Estate in India

Professor S

LongShorts

Global investment giant Blackstone and Bangalore-based real estate developer Embassy launched India’s first real estate investment trust (REIT) i.e. Embassy Office Parks REIT (or ‘Embassy REIT’ hereon). While this may appear too precise to care, REITs offer a unique 'financial markets' avenue to gain exposure to real estate rather than requiring investors to buy physical assets. The 'financial markets' avenue makes them very interesting, especially in a post Demonetization/RERA era where buying property in the conventional way is something investors have had to hold back on.   REIT is a company (and an investment vehicle) that owns, operates, finances and manages 'income-generating real estate assets'. It is essentially a real estate company that offers common shares (called ‘units’) much like other listed companies, allowing investors to take an effective ownership in the business. That being said, REITs have two unique characteristics which make this investment vehicle somewhat different. First, REITs own and manage income-generating properties. Second, REITs are mandated to distribute most of the cash flow it generates back to unit-holders.   The combined effect of these two characteristics mean investors gain exposure to real estate assets which generate income which in turn is distributed back to them. This is in addition to the upside potential of price appreciation. These advantages are heightened in the Indian context because of lack of meaningful alternatives.   SEBI requires REITs to distribute 90% of income earned back to investors making REITs a liquid and income-generating investment vehicle. As per SEBI, 90% of Net Distributable Cash Flow (NDCF) is mandated to be returned to investors (or ‘unit-holders’) on a semi-annual basis. Also, in the case of an asset sale, 90% of sale proceeds are to be returned to investors.    Consequently, REITs offer regular income while also being fairly liquid on account of it being publicly traded in the financial market. The minimum investment requirement is INR2 lakh, which as such underlines a significantly lower entry barrier for an investor to gain exposure to the aforementioned sector.   Embassy REIT property portfolio consists of 33 million sq. ft making it the largest office portfolio in Asia. As per the red-herring prospectus filing, Embassy REIT will raise over INR5,000 cr with an option to increase the fundraising by 20-25%. The REIT itself is expected to be listed sometime early next year.   Embassy REIT property portfolio consists of 33 million sq. ft across Mumbai, Pune, Bengaluru, and Noida in effect making it the largest office portfolio in Asia. The portfolio includes Blackstone’s own assets as well as those in partnership with Embassy Group and includes 11 assets: seven office parks and four commercial buildings. Of the 33 million sq. ft, 24 million sq. ft is completed and 95% leased.   While Embassy REIT marks the first REIT in India, REITs as an asset class have fairly robust presence in advanced markets including US, Canada, UK, and Asian markets such as Singapore and Hong Kong among others. Real-estate is generally perceived to be a significant investment class in India however REITs have never made the cut. Somewhat lower yields and a real-estate market largely tainted with illiquidity and lofty levels of opaqueness have been key impeding factors. However, in more advanced markets, REITs are considered key investment vehicles on account of their earlier outlined benefits and also in injecting portfolio diversification. That being said, Embassy REIT now offers the first opportunity for Indian investors in this asset class and its multifarious advantages could possibly help it in gaining some sort of momentum. Embassy REIT marks the birth of a new asset class in India and such should be worth keeping a close eye on.   Other international funds have been betting on Indian commercial real estate as well – timing is hardly surprising. While Embassy REIT is a clear bullish bet on Indian commercial real estate, it is not the only international player making such a bet. Singapore's sovereign wealth fund GIC invested Rs 9,000 crore in December 2017 in DLF – India’s largest realty firm. Notable global funds such as Canada Pension Plan Investment Board (CPPIB), Brookfield Asset Management, Ascendas and Qatar Investment Authority have all been making bets on the Indian commercial real estate segment, albeit without REIT offerings.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)