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Gold – Is it All that Glisters?

Colin Lloyd

Macro

Uncertainty about US trade policy has truncated the rally in stock   Gold remains supported by central bank buying and fears of a US Dollar collapse Gold miners look best placed to reap the benefits regardless of direction A collapse in the Dollar is needed for gold to rally substantially   In Q4 2018, as stocks declined, gold rallied 8.1% and gold mining stocks 13.7%. It was a prescient reminder of the value of gold as a portfolio diversifier. There have, however, been some other developments both for gold and gold mining stocks which are worthy of closer investigation.   Central Banks   Central bank net purchases of gold reached 651.5 tons in 2018, up 74% from 2017, when 375 tons were bought. The Russian central bank, perhaps fearing US sanctions, sold almost all of its US Treasury bonds to buy 274.3 tons of gold last year. For probably similar reasons, the Turkish central bank bought 51.5 tons, down from the 88 tons purchased the previous year. Other big central bank buyers included Kazakhstan, India, Iraq, Poland and Hungary.   In the first quarter of 2019 central banks purchased a further 145.5 tons, up 68% on Q1 2018. The trend is not new, central bank purchases have been rising since 2009:    Source: BIS, IMF, GEMS, Reuters   Putting global reserve holdings in perspective, here is the central bank world ranking as at March 2019:    Source: IMF, Statistica   Despite the substantial buying from central banks the price of gold has been broadly range bound for the past five years.   Source: Trading Economics   The absence of a sustained rally suggests that many investors have forsaken the barbarous relic, however, concern that the gold price will collapse have to be tempered by the cost of mining an ounce of gold. Mining costs have increased substantially since the early 2000’s due to increasingly expensive exploration costs and a general decline in ore quality. In the chart below Money Metals Exchange shows Barrick (GOLD) and Newmont (NEM) average cost of production since 2000:    Source: SRSrocco Report, Kitco   In a July 2018 post for Seeking Alpha – Money Metals Exchange –  Never Before Seen Charts: Gold Mining Industry’s Costs Are Higher Than Market Realizes show that the amount of ore needed to produce an ounce of gold at Barrick’s (GOLD) Nevada Goldstrike and Cortez Mines has increased four-fold since 1998:    Source: SRSrocco Report, Barrick   The market capitalisation of the sector has halved since 2012, leading to understandable consolidation and deleveraging. Gold, however, is an unusual commodity in that its stock is far larger than its annual production. About 3000 tons of gold is mined annually, this is dwarfed by the 190,000 tons that have been mined throughout history according to World Gold Council estimates. Since it has little industrial use, almost all the gold ever mined remains in existence: central bank reserves are a key determinant of its price. Interesting research on the subject of what drives gold prices can be found in this article from the London Bullion Market Association – Do Extraction Costs Drive Gold Prices? They conclude that, due to the large stock relative to production, the price of gold is the principal influence on the mining industry.   The US Dollar and Inflation Expectations   The rally in the gold price in 2011-2012 was linked to the Eurozone crisis, the moderation since then has coincided with a recovery in the US Dollar Index. Other factors which traditionally drive gold higher include inflation expectations, these fears have continually failed to materialise whilst the inexorable increase in debt has led some to speculate about a debt deflation spiral; an environment in which gold would not be expected to excel:    Source: Trading Economics   A different approach to gold valuation is the ratio of the gold price to the total-return index for ten-year US government bonds. This ratio has been moving steadily higher, suggesting a shift to an era of structural inflation, according to Gavekal Research. Other evidence of inflation remains muted, however.   Is Gold Perfectly Priced or Do the Central Banks Know Something We Do Not?   A look back at the decade after the end of gold reserve standard is a good starting point. The Bretton Woods agreement collapsed in 1971. In the years that followed currency fluctuations were substantial and the US Dollar lurched steadily lower:    Source: Trading Economics   The US Dollar was so little revered that in 1978 the US Treasury had to issue foreign currency denominated Carter Bonds in Swiss Francs and German Marks, such was the level of distrust in the mighty greenback.   Confidence was finally restored when Paul Volker took the helm of the Federal Reserve. Volker did what his predecessor but three, William McChesney Martin, had only talked about – taking away the punch bowl just as the party got started – he hiked interest rates and managed to subdue inflation: the fiat US Dollar was back in favour.   Today the US Dollar is undoubtedly the first reserve currency. In the era of digital money and crypto currencies the barbarous relic has stiff competition. Added to which it is traditionally an unexpected inflation hedge and traditionally affords scant protection in a deflationary environment. Given the global overhang of the US Dollar denominated debt, many believe this is the next challenge to the international order.   Considering the conflagration of factors alluded to above, I believe gold is destined to remain a much watched side-line. Gold mining stocks may fare better, as S&P Global Market Intelligence – Outlook 2019: $3.9bn Increase In Earnings For Majors – explains:    …rising production in 2019, higher metals prices and lower costs could increase free cash flow by $1.3 billion, or 19%, year over year. Companies will use this increased cash flow to lower net debt, which is expected to fall 19% year over year in 2019, placing the majors at their lowest level of leverage in five years. The majors have been focusing on returns to shareholders. Higher earnings have led to dividend payouts increasing 103% to $2.0 billion in 2017 from $1.0 billion in 2016 and remaining at about $2.0 billion in 2018.   As for price of gold itself? The attractive fundamentals underpinning mining stocks is likely to cap the upside, whilst continued central bank buying will insure the downside is muzzled too. When I have little fundamental conviction I am inclined to follow the trend. A break to the upside maybe closer, but the long period of price consolidation favours a break to the downside in the event of a global crisis.   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.)

The Indian Economy and The Dance of Yield Curve

Ankit Gupta

Macro

Off late, there has been a whole lot of discussion around the Yield Curve, especially with the recent inversion of the US Treasury Yield Curve - a phenomena commonly deemed to be a “Recession Predictor” of sorts. It is rather fascinating to analyse how a small change in the Yield Curve is representative of the upcoming possibilities in a country’s economy. The article attempts to analyse the Indian Bond Yield Curve, since 1998, highlighting its key aspects and how the Indian economy has reacted to any change in the curve and vice-versa.    First things first. How to interpret the chart.   We have the weekly Bond yields of available India Government Bond maturities since Jan 1998 till 17th March 2019. Instances where the yield points are not connected in the chart suggest the unavailability of a yield point of an intermediate maturity. Over time, the Indian government issued bonds of varying maturities, and hence one can see the curve dancing to its full potential in the later years.     Pretty neat, isn’t it!   The gif illustrates how India's Yield Curve has changed over the course of time, but what does it really represent? Before we get into that, here is a recap of some of the common traits of a Bond Yield Curve.   a. Normal Yield Curveb. Inverted Yield Curvec. Flattened Yield Curved. Steep Yield Curve.   We shall now move on to examine how the Yield Curve has changed over the course of time.   1998 - 2002   Due to the lack of enough data points, it is rather difficult to interpret anything substantial during this phase. Noteworthy however, is the fact that both the short term and long interest rates were above 10% during this period.    2002 - 2004   There is an overall downward shift in both the short term and long term bond yields throughout this period. What caused the downward shift and what does it imply?   The short term rates fell from 6% to 5% - quite a significant drop. A Central Bank usually announces a rate cut to boost the economy, and/or to avoid recession. As borrowing money becomes cheaper, consumer spending tends to go up, thus further increasing the money circulation in the economy.    In recent times, we have seen countries such as Japan/EU set the interest rates below 0% - a rather severe measure, nonetheless helps revive the economy. A similar effect was felt in the Indian economy as well. India GDP growth rate shot from 3.8% to a staggering 8%.    2005 - Until Mid 2008    One wonders...if low interest rates are good for the economy, shouldn’t they be just kept low? Not really.   When rates are low, borrowing becomes cheap, which means debt market shoots up, increasing the overall debt in the economy. This is what happened until 2004. 2005 onwards, until the dawn of the financial crisis, rates kept increasing, indicative of a highly distressed economy.   During this period, short term rates shot up more than the long term rates indicating efforts by Central Banks to prevent inflation, which of course, was the Financial Crisis of 2008. Long term rates are not driven by the Central Bank policies. They provide an overall view of the economy on a longer term horizon. During these times, the spending decreases, and savings increase, implying trouble in the short term.    So, now we know that something bad with economy is about to happen. Too late now, though!   Financial Crisis and Recovery (2008 - 2011)   This chart is quite interesting. I have split it in 3 sections, all of which are equally important. It highlights the period leading to the crisis, the actions/measures taken during crisis, and the slow recovery thereon.   The period until August 2008...Well, by now, the crisis had almost hit the United States, and it had its repercussions felt globally. Short term rates (6months/1 year), all shot up vis-a-vis the long term rates. A classic case of Yield Curve flattening. There is a recession in sighting!   Then it struck! A sharp decline in the Bond yields. Money became cheap again - a drastic measure taken by Central Banks across to handle the crisis. A good measure indeed! Short term rates fell from as high as 9% to just below 5% within a couple of months. That is extreme! Short term rates kept falling, highlighting the Steepening of the Yield Curve. This was done to encourage consumers to borrow more and kick start the economy. Across the globe, Central Banks took significant measures to inject more money into the economy - US reduced interest rates, EU initiated the Quantitative Easing program et al.    Over the course of the next 3 years, the Indian economy tried to recover. Slowly and gradually, rates increased indicating an overall revival. Yield Curve returned to its normal shape, not flat, not steep and definitely not inverted!   Curios Case of Inversion This Time (2012 - 2014)     The recovery happened, or so it seemed. After returning to its normal shape, India Bond Yield Curve went on to become flatter. Short term rates again shot up to coincide with long term rates.    From the Financial crisis, it became quite evident that a crisis is not just limited to the economy in which it is started. This time around, with rising commodity prices, and looming Euro debt crisis, the RBI had to increase short term interest rates over and over again, hence leading to the Flattening of the curve again.   The Curve remained similar until mid 2013, when suddenly an inversion happened - 6 months bond yield shot up to 11%, while the 10 year Bond yielded only 9%. An extremely rare scenario! It was a desperate and deliberate attempt by the RBI to defend the weak Indian Rupee, thereby making it hard for speculators to sell currency. As Reuters summarised,   The RBI’s strategy of using short-term money markets to defend the rupee seemed ideal. By anchoring long-term yields, the Central Bank could ensure that its policies to defend the currency were contained at the short end of the Yield Curve and so did not affect other borrowers and investors in the economy.   Indeed, a very drastic measure taken by the RBI.   Returning Back to Normalcy (2014 - 2016)     It took some time for the Yield Curve to change its course. It remained inverted until 2015, but there was a gradual decline in the interest rates across maturities. Across the globe, emerging markets economies continued to struggle. With rise in commodity prices, and oil reaching new highs, emerging market economies tumbled up until 2015. Emerging market currencies weakened against the USD. Yield Curves remained flat or inverted (in India’s case).    But beginning 2016, the Indian economy began to recover its lost sheen. Both long term and short term yields fell, with short term falling more than the long term. The Yield Curve had started to return to its normal phase, some of which could be attributed to oil prices, as it took a significant hit in the global markets. Highly depended on oil and a major importer, the Indian economy fluctuated with the rise and fall of oil prices.   Now a Days! (2017 - Now)   So, what’s happening these days? What can we read from the current Yield Curve? From 2017 until mid 2018, rates were increasing constantly - a sign of rising debts, heavy corporate books, banking books.   As we now know of the Black Friday and the Flash Crash of September, it became evident that there was a bubble in the Indian economy, waiting to burst. In September 2018, a financial crisis in Indian Housing Sector emerged, and it extended itself to other parts of economy as well. With much at stake, and the 2019 General elections in the offing, the Central bank had to constantly lower rates to make room for cheaper borrowings. Short term rates have gone down significantly compared to long term rates, highlighting the Steepness in the Yield Curve again. This allows for cheap short term financing, further raking up the overall debt in the economy.   What Next?     With the upcoming General Elections, it is highly unlikely that the interest rates will change much. As highlighted above, long term yields are generally an indicator of the economy in the longer run. In this regard, the Yield Curve is likely to become Normal again with long term rates falling faster than short term rates on back of a slowing GDP growth.   Originally Published here.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Understanding Debt: Difference between 'Good' and 'Bad' Debt

Nikhil Arora

Credit

Today let's talk about one of finance's most feared and mis-understood concepts.   Debt.   Debt forms the back-bone of any economy. It is inescapable. No matter how rich you are or become, in some or other strand of your mortal existence, you would be compelled to deal with it.   Either when you use a credit card, go abroad for higher studies, buy a house, or decide to scale up your company.   Debt is modern society’s engine of growth.   Let back-track for a moment.   How does Debt work? What does it look like? Why does it transpire in the first place? If unchecked, how can it go so wrong?   The concept is straightforward.   Say you want to buy a car selling at Rs 10L. But you don’t wish to pay the entire amount in lumpsum. After all, Rs 10L is a sizeable amount. When you mention your concern to the car salesman, he promptly gives you an alternate. Instead of asking for Rs 10L upfront, he says why don’t you just pay Rs 1L (i.e. only 10% of the car’s selling price) and agree for a payment plan amounting to Rs 18,000 per month…and the car is all yours!   Not bad huh?!   Think about what just happened. For Rs 1L only, and a small monthly pay-out, your favourite Rs 10L car is yours to take home!   Let us assume you agree to this option. Well, congratulations!   For two things:   Firstly: For your new vehicle.   And Second: You just took some Debt (here known as a “car loan”).   What!   Yes. The alternate presented by the car salesman included a mysterious third party i.e. a bank or a financing company, which in effect paid a major share of the lumpsum amount (i.e. Rs 9L) to the car showroom on your behalf. With the remainder Rs 1L coming from you (remember?), the car showroom makes its money on day one, as it would have liked.   The Rs 18,000 per month that you would now shell out, say for the next seven years, would go to the same third party (from whom you effectively “borrowed”) to repay the Rs 9L plus...surprise - surprise...Interest!   The car showroom makes its money upfront. The third party makes its money over next seven years by charging Interest. You get to buy your car, right now.   So, remember, when you “borrow” money…you take Debt.   Why is Debt so Attractive?   Well for starters, it allows you to spend more than your present capability. It allows you to invest and grow. It allows you to consume more. It lets you take home a car by only paying a small part of its total value upfront.   Why is it so Risky?   The fact that you have borrowed money, implies that you need to pay it back. And in most cases, you need to pay back with Interest. And if you don’t pay your dues, you’ll be in trouble.   What Kind of Trouble?   Let us get back to our car example. It has now been almost five months since you bought the car. You’ve made five payments of Rs 18,000 each, all on time. But in the sixth month…say your company starts downsizing…and unfortunately you end up losing your job. You don’t have an income and now the Rs 18,000 per month hurts.   A month passes by…you are unable to find a new job…and end up missing a due payment.   Someone from the bank calls and gives you a stern warning. You’re hopeful that you’ll get back on your feet soon, so end up dishing another Rs 18,000 from your savings, but the bank levies a small penalty this time for the delayed payment.   Another month passes by…you still don’t have a job…and you start panicking. You call the bank and tell them you’re unable to pay them anymore. Your bank account is almost empty. You don’t have any savings. The bank sends a guy who takes away (or “reposes”) your beloved car.   Another month passes by, and amidst all these distractions, you somehow manage to snag a new job. The pay cheques are back, and you are once again at ease. You thank your Stars…thinking the worst is over!   But is it? You now wish to apply for a credit card. The credit card company rejects you. Your health insurance policy is up for renewal, and your premium spikes up. You try to take another car loan, and the Interest on the monthly payment this time is much higher than Rs 18,000 like last time!   What Happened?   Simple. For the banking system – you are now deemed as a risky borrower. Your erstwhile “default” on the car loan turned your good debt into bad. Anytime you need to borrow in the future, the system would remind you of your risky behaviour, either through rejection, or through a higher Interest rate.   This distinction between good debt and bad debt is important. Good debt can easily turn into bad without proper planning or due to unforeseen circumstances.   Debt can do wonders and grant you 'leverage' but chasing too much leverage comes with its own set of risks, costs of which can be far-reaching and far too real.   Debt is a tool that works best when used carefully.   Scratch that, Debt is a tool that ONLY works when used carefully.    (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

US China Trade War: The Prospects for Freer Trade and the Impact on Asset Prices

Colin Lloyd

Trade

Will the Sino-US trade war breed contagion?   Will the dispute trigger a global recession? Has the era of freer trade ended? Will asset prices suffer?   As Sino-US trade talks ended, not only, without a deal, but with another sharp increase in tariffs, it is worth looking at what has happened and why.   During 2018, the US reversed 38 years of tariff reduction with a radical abruptness, imposing tariffs on 50% of Chinese imports, China retaliated in kind, imposing tariffs on 70% of US imports. The Peterson Institute – The 2018 US-China Trade Conflict after 40 Years of Special Protection – published before the recent tariff increases, reviews the situation in detail. The author, Chad Brown, begins by looking at the tariff reductions since the late 1980’s. For the US, these tariffs had fallen from 5% to 3%, whilst for China they declined from 40% to 8% by 2017. Over the same period China’s share of US imports rose from near to zero in 1978 to 20% by 2014. By contrast, Chinese imports from the US rose steadily, reaching 10% in 2001 – which coincided with their ascension to the World Trade Organisation (WTO) – however, since then, imports from the US have declined, dipping to 8.5% by 2017. In bilateral terms Chinese imports from the US are about a quarter of her exports to the land of the free.   At first sight, it might seem as if the trade tensions between China and the US are new, but relations have been deteriorating since the bursting of the US Tech bubble in 2001, if not before. Looking at the chart below, which measures antidumping and countervailing tariffs, it appears as if the Chinese did not begin to retaliate until 2006:    Source: Peterson Institute   Analysing anti-dumping and countervailing tariffs in isolation, however, gives a misleading impression of the US response to China. Peterson research attempts to assess the entire scope of the Sino-US trade dispute, by incorporating all forms of US special protection against China over the entire period. The next chart shows the true scale of US tariff reduction on Chinese imports; seen in this light, the extent of the recent policy shift is even more dramatic:     Source: Peterson Institute   Using this combined metric, US special protection peaked at 39% in 1986, after which these barriers declined rapidly reaching a nadir at 4.3% in 2005. On the eve of the trade war in 2017 barriers had risen to 8.1%. Prior to the May 10th tariff increase, that figure had jumped to 50%. An updated version of the Peterson chart of shown below:    Source: Peterson Institute   The additional tariffs imposed this month will raise the average US tariff on Chinese goods to 18.3%. If Trump follows through with his threat to impose a 25% tariff on most of the rest of US imports from China, the average US tariff toward China would increase to 27.8%.   Source: Peterson Institute   What is the likely impact of these actions on trade and prices? For the US, import prices will increase, but given that US inflation has tended to be below the Fed target, this is manageable; corporates and consumers will pay the cost of tariffs, the tax receipts will help to finance the cost of recent US tax cuts. In China, whilst the impact is still negative, as this recent article from CFR – China Never Stopped Managing its Trade makes clear, the majority of imports are made by state owned enterprises or by companies which have a government permit to import such goods, added to which Chinese inflation has also been reasonably subdued, despite impressive continued economic expansion:    When the state controls the firms that are doing the importing, a few phone calls can have a big impact. That’s why China can shut down trade in canola with Canada without formally introducing any tariffs.   That’s why China can scale back its purchases of Australian coal without filing a “dumping” or “national security” tariffs case.   And that’s why—when the trade war with the United States started—U.S. exports in a number of goods simply went to zero (normally, a 25 percent tariff would reduce imports by more like 50 percent or something…]   For US companies the four largest exports to China are aircraft, automobiles, soybeans and oil and gas. Of these, only automobiles are sold directly to the private sector. Here are three charts which explain why, for the US (at least in the near-term) there may be less to lose in this global game of chicken:   Source: US Census Bureau, Haver Analytics   Source: US Census Bureau, Haver Analytics   The decline in US imports has been driven by a combination of substitution for imports from other sources and a rising domestic capability to manufacture intermediate goods. Faced with a dwindling market for their exports, the US might be forgiven for wishing to retire from the fray whilst it still has the advantage of being the ‘consumer of last resort’.   To date, US government receipts from tariff increases have amounted to an estimated $2bn. A study by the World Bank and the International Finance Corporation, however, estimates the true cost the US economy has been nearer to $6.4bn or 0.03% of GDP. The chart below shows the already substantial divergence between prices for tariff versus non-tariff goods:    Source: Financial Sense, US Department of Labor, Commerce department, Goldman Sachs   The impact on China is more difficult to measure since Chinese statistics are difficult interpret, however, only 18% of Chinese exports are to the US – that equates to $446bn out of a total of $2.48trln in 2018, added to which, exports represent only 20% of Chinese GDP – all US imports amount to 3.6% of Chinese GDP.   The scale of the dispute (bilateral rather than multilateral) should not detract from its international significance. One institution which seen its credibility undermined by the imposition of US tariffs is the World Trade Organisation (WTO) – Chatham House – The Path Forward on WTO Reform provides an excellent primer to this knotty issue. Another concern, for economists, is that history is repeating itself. They fear Trump’s policies are a redux of the infamous Smoot-Hawley tariffs, imposed during the great depression. Peterson – Does Trump Want a Trade War? from March 2018 and Trump’s 2019 Protection Could Push China Back to Smoot-Hawley Tariff Levels published this month are instructive on this topic. These tariffs were implemented on 17th June 1930 and applied to hundreds of products. To put today’s dispute in perspective, the 1930’s tariff increase was only from 38% to 45% – a mere 18% increase – this month tariffs have increased from 10% to 25%: a 150% increase. Those who note that 25% is still well below 1930’s levels should not be complaisant, China remains a WTO member, were it not, US average tariffs would now be 38%. Back in 2016 President Trump talked of raising tariffs on Chinese imports to 45%, a number cunningly lifted from the Smoot-Hawley playbook.   One of the counter-intuitive effects of the 1930’s tariff increase was price deflation, in part due to many tariffs being imposed on a per unit cost basis. Today, per unit tariffs apply to only around 8% of goods, added to which, due to monetary engineering, by central banks, and the issuance of fiat currency by governments, the threat of real deflation is less likely.   Another risk is that the Sino-US spat engulfs other countries. The EU (especially Germany) has already suffered the ire of the US President. Recent trade deals between the EU and both Canada and Japan, have been heralded as a triumph for free trade, however, they are an echo of the trading blocs which formed during the 1930’s. To judge by Trump’s recent tweets, for the moment, China has been singled out, on 13th May the President said:    “Also, the Tariffs can be completely avoided if you buy from a non-Tariffed Country, or you buy the product inside the USA (the best idea). That’s Zero Tariffs. Many Tariffed companies will be leaving China for Vietnam and other such countries in Asia. That’s why China wants to make a deal so badly!”   Even if the trade dispute remains a Sino-US affair, there are other unseen costs to consider, on productivity and investment, Bruegal – Implications of the escalating China-US trade dispute takes up the discussion (emphasis mine):    The direct aggregate effect of the tariffs on the welfare of the US and Chinese, while negative, is likely to be very small… because they represent a transfer from consumers, importers and partner exporters to the government… sooner or later, the American consumer will bear much of the cost of the tariff though higher prices, but also that tariff revenue will return to American residents in some form. The negative aggregate welfare effect of tariffs thus arises because, at the margin, they displace more efficient producers by less efficient ones… because, at the margin, tariffs artificially reduce the consumption or use of imports in favour of domestic goods or goods imported from third parties…   The distributional effect of tariffs is likely to be very uneven and severely negative on some people and sectors… while the Treasury will see increased revenue, and some producers who compete with imports will gain, small companies that depend on imported parts from China are likely to be very badly affected by tariffs…   Larger importers will also be adversely affected… US farmers who depend on Chinese markets have already been badly hurt by Chinese retaliation…   The biggest adverse effects of tariffs on aggregate economic activity is through investment. Lower investment is the natural result of the tariffs’ big distributional effects… and the uncertainty they engender. This effect on ‘animal spirits’ is difficult to model and impossible to quantify with precision… The extraordinary sensitivity of stock markets to trade news and their volatility is just one manifestation of this effect. The widening growth gap between the global manufacturing and services sectors evident in recent quarters is another, as is the slowdown in investment in many countries.   Bruegal go on to discuss the risk to the international trading system and the damage to the credibility of the WTO. Finally they suggest that the trade dispute is a kind of proxy-war between the two super-powers: this is much more than just a trade dispute.   Putting the Sino-US dispute in an historical context, a number of commentators have drawn comparisons between China today and Japan in the 1980’s. I believe the situation is quite different, as will be the outcome. Again, I defer to Bruegal – Will China’s trade war with the US end like that of Japan in the 1980s?  The author’s argue that Japan chose to challenge the US when it was close to its economic peak and its productivity was stagnating. China, by contrast, has a younger population, rapidly improving productivity and, most importantly, remains a significant way below its economic peak:    …Because China is at an earlier stage of economic development, it is expected to challenge the US hegemony for an extended period of time. Therefore, the US-China trade war could last longer than the one with Japan. With China’s growth prospects still relatively solid –  it will soon overtake the US economy in size and it does not depend on the US militarily – China will likely challenge US pressure in the ongoing negotiations for a settlement to the trade war. This also means that any deal will only be temporary, as the US will not be able to contain China as easily as it contained Japan.   If you are looking for a more global explanation of the current dispute between the US and China, then this article from CFR – The Global Trading System: What Went Wrong and How to Fix It is instructive:    As economist Richard Baldwin lays out in his book The Great Convergence, the Industrial Revolution of the 19th century had launched Europe, the US, Japan and Canada on a trajectory that would see their wealth surge ahead of the rest of the world. In 1820, for example, incomes in the US were about three times those of China; by 1914 Americans would be 10 times as wealthy as Chinese. Manufacturing clustered in the technologically advanced countries, while advances in containerized shipping and the lowering of tariffs through trade negotiations made it possible for these countries to specialize and trade in the classic Ricardian fashion.   The information technology revolution of the 1990s turned that story upside down. With the advent of cheap, virtually instant global communications via the Internet, it became possible – and then imperative for competitive success – for multinational companies to take their best technologies and relocate production in lower-wage countries. Manufacturing output rose in middle-income countries like China, India, Thailand, Poland and others, while falling sharply in the US, Japan, France, the UK and even Germany…   The global great convergence, however, coincided with a great divergence within the wealthy countries (and many developing countries as well). The new technologies and the disappearance of trade barriers upended the balance between labor and capital in the advanced industrialized countries, and contributed to soaring economic inequality…   In the US in 1979, an American with a college degree or higher earned about 50% more than one who had only a high school education or less. By 2018, American workers with a four-year college degree earned almost twice as much as those with just a high-school education, and were unemployed half as often, while those with a professional degree earned nearly three times as much.   The author goes on to liken today’s tension between the US and China with the situation which existed between the UK and US at the beginning of the 20th century:    The world today again faces the same governance gap – a US that no longer has the economic muscle nor the political will to organize the global system, and a rising China that is reluctant to play a greater role.   CFR ask what the prospects maybe for renewed globalization? They identify three key elements which need to be addressed in order for de-globalisation to be reversed: a trade war truce(once both sides wake up to the extent of the empasse they have engineered), a filling the Leadership Vacuum (caused by both sides turning their backs on the WTO – they need to reengage and lead the world towards a solution) and, especially for the US, meeting the challenges at home (Trump cannot rely on a trade war in the long-run to solve the problem of inequality within the US).   Conclusions and Investment Opportunities   What is the likely impact on financial markets? To answer this question one needs to know whether the current trade war will escalate or dissipate: and if it escalates, will it be short and sharp or protracted and pernicious?   Alisdair Macleod of Gold Money – Post-tariff considerations identifies the following factors:    The effect of the new tariff increases on trade volumes   The effect on US consumer prices   The effect on US production costs of tariffs on imported Chinese components   The consequences of retaliatory action on US exports to China   The recessionary impact of all the above on GDP   The consequences for the US budget deficit, allowing for likely tariff income to the US Treasury   Leading, in MacLeod’s opinion, to:    Reassessment of business plans in the light of market information   A tendency for bank credit to contract as banks anticipate heightened lending risk   Liquidation of financial assets held by banks as collateral   Foreign liquidation of USD assets and deposits   The government’s borrowing requirement increasing unexpectedly   Bond yields rising to discount increasing price inflation   Banks facing increasing difficulties and the re-emergence of systemic risk   The author suggests that, all other things equal, tariffs should lead to price increases, but, with the US consumer already heavily burdened with debt, consumption demand will suffer.   I am less bearish than MacLeod because, if the Sino-US trade war threatens to puncture the decade long equity bull-market, we will see a combination of qualitative and quantitative easing from the largest central banks and aggressive fiscal stimulus from the governments of G20 and beyond. I wrote about this scenario (though without reference to the trade war) earlier this month in Macro Letter – No 114 – 10-05-2019 – Debasing the Baseless – Modern Monetary Theory. My, perhaps overly simple, prediction for assets in the longer-term is: bonds up, stocks up and real estate up.   In an alternative scenario, we might encounter asset price deflation and consumer price inflation occurring simultaneously. Worse still, this destructive combination of forces might coinciding with a global recession. The severity of any recession – and the inevitable correction to financial markets that such an economic downturn would precipitate – will depend entirely on the time it takes for US and Chinese trade negotiators to realise the danger and reach a compromise. I believe they will do so relatively quickly.   Attempting to predict what President Trump might do next is fraught with danger, but, due to the inherent weakness of the democratic process, I expect the US administration to concede. The US President has an election to win in November 2020; the President of China has been elected for life.   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.)

The "New" Indian Economy: Posing A Conundrum for the State, Markets and the Democracy

CUTS International

Macro

There is something about our societies that is changing so rapidly, with conversations on the role of state, market and democracies begining to gain traction of late. To begin with, India was not meant to be a market democracy, if the constitutional spirit is anything to go by. 29 years after our independence i.e. in 1976 we felt the need to formally include ‘socialism’ as an explicit reminder in the Preamble to our Constitution. However, it was only 14 years later i.e. in 1991 that we felt the need to change our practice away from that goal and bring about market liberalisation. 28 years since, the world has thrown at us two grand failures – Failure of Socialism and Failure of Capitalism.   A part of the reason of these failures can be attributed to how the state responded to both these principles of running and managing the economy, not just in India but across the globe. And to make things more complex, the Chinese growth model serves as a rude shock to the idea of democracy around the world (speaking strictly in the economic sense).   In short, what we have gathered is that the relationship between markets and democracies have to be crafted carefully rather than assuming that the latter will automatically facilitate the former. This thought, once considered truism, is now under severe scrutiny. Therefore, the role of the state assumes not only unprecedented significance but also calls for a radical overhaul in its capacity to analyse and act.   This is particularly important in light of the following facts:   First, the fundamentals of ‘industrialism’ - premised upon the relationship between factors of production i.e. land, labour, technology and capital - are being challenged world over. In the new economy facilitated by unprecedented technological intervention, this relationship is increasingly being redefined and the search to disrupt drivers of economic inequality is pre-occupying policy discourse globally. In other words, the new economy is rendering some of these factors increasingly redundant in the quest for higher productivity.     It is therefore not surprising that questions about the fundamental structures of economies are gaining traction. India too is no exception. With a burgeoning labour force coupled with challenges of jobless growth, equity and sustainability, these questions are all too important for India as well.   Second, many of the imperatives for growth and development of India like better health, quality education, affordable and reliable electricity, productive and remunerative agriculture, digital and physical connectivity, sustainable urbanisation, Ease of Doing Business and non-vulnerable employment cannot be addressed without the proactive role of subnational entities.   Further, with many a disruptions catalysed by rapid technological change, traditional business models which catered to provisioning of basic necessities are also going through a rapid change. For instance, large scale utilities have started to focus on decentralised models while ‘individual focus’ is gaining supremacy as technology is increasingly facilitating fulfilment of unique demands in almost all spheres of life.     In other words, what we are seeing is a trend towards hyper decentralisation and fragmentation.   Third - the new data economy is bound to challenge the most basic of all things i.e. Freedom. All democracies, regulations and markets around the world are modelled around this concept.   Synonymous with freedom is individual choice. However, with massive amounts of data being collected and processed by big tech corporations which have become larger than nation states in many ways, the fear is that the individual choice could well be shaped and determined by big tech corporations rather than people. With the idea of ‘people’ being challenged, the idea of democracy too stands challenged.   The combination of these three, is perhaps the biggest challenge being faced by us today. Ironically the state is still cast in the old mould and hence slow to react to these challenges.   An evidence of this fact is that we have not yet accorded the due importance to many of these issues. Conversations on inequality, however, have just started to gain traction.   For instance, new ideas like Universal Basic Income or Universal Basic Capital are being discussed as new redistribution mechanisms but at best they seem to be avoiding some fundamental questions.   The proponents of these propositions are caught in the merits, demerits and design aspects of these solutions without realising that re-distribution strategies have miserably failed in the past. More importantly, focus on these aspects blurs a more important background i.e. why are we talking about them in the first place.   Therefore, fundamental fault lines in the economy need to be understood. They need to be understood to understand that misallocation in any factor market conditions can lead to misallocations across the chain. In a globalised and hyper connected world, such misallocations would be difficult to rein in within any particular geography. For instance, if ‘capital’ is allowed to make unlimited amount of capital, the end result would be the death of capital itself as other capacities and capabilities would remain stalled. In such a scenario, the means to create new capital would eventually diminish.   Therefore, temptations to continue with business as usual must be resisted. In other words, there is no point in aping the growth models practiced by the developed economies. One must understand that it is exactly those growth models that have gotten us into this logjam.   To put it differently, every time a system fails, stimulus of ‘cheap’ (low interest rates) capital is infused. With money coming in cheap, misallocation is easy and the result is excess of capital and excess of labour. The other side of this problem is stranded capacities and high NPAs, which have been plaguing the Indian banks.   To illustrate, one needs to look back at the investment binge between 2003 and 2012. Nothing short of a bubble, this binge was fuelled by excess global liquidity and easy bank credit. This resulted in the Indian businesses adding massive capacities based on over-optimistic domestic estimates and Chinese demand. But with the global and domestic downturn hitting demand, the excesses of that period meant high NPAs for financial institutions and massive debt distress for big industrial houses.   The question is how does one move forward? In a recent paper titled The High Price of Efficiency, published in the Harvard Business Review, Roger Martin of University of Toronto, offers some interesting arguments.   The gist of those arguments is that instead of market efficiency the focus should be on market resilience. This is because rewards from the efficiency get more and more unequal as the efficiency improves. This leads to ever growing market power to the most efficient competitors. The end result is the Pareto distribution of wealth i.e. a highly skewed and unequal distribution of surpluses generated in the economic activity.      In other words, super-efficient dominant model elevates the risk of catastrophic failure which is the most dangerous in new economies where competitive advantage is often tied to network effects, which gives incumbents a powerful boost.   The solutions therefore, as argued by Martin, must entail polices that limit scale, introduce some friction in the path to efficiency, promote patient capital, and those that create better jobs and teaching for resilience.   These prescriptions have eminent merit and are not de-linked from each other. In fact, they are possible only in combination with each other.   For instance, if competition policies can rein in market domination of a kind that crowds out any competition whatsoever, then a lot many enterprises can be created which can ensure a distributed spread of capital. For the growth of these enterprises, some kind of legitimate trade barriers would be acceptable. Such incentives can be given in lieu of promoting long term capital as its value would be greater than short term capital. In other words, it can lead to creation of companies with long term strategies. Such companies are then most likely to invest in human capital for long term productivity. In other words, they will care for workers who are also consumers of their products and have the capacity to buy them. In a nutshell, they will realise that cheap labour is actually more expensive, and last but not the least teaching for such ethics, which Martin describes as ‘Resilience’, should start at management schools which are currently over obsessed with ‘efficiency’ as the ultimate goal.   It is interesting to note that Martin is not alone in this thought. His basic argument resonates with the view put forth by Joseph Schumpeter, regarded as one of the greatest economists of the 20th century who opined that dynamic capitalism was executed to fail because the very efficiency of capitalistic enterprise would lead to monopolistic structures and the disappearance of the entrepreneur.   Therefore, as a solution he emphasised the importance of ‘innovation’ but one that is a process of industrial mutation, that incessantly revolutionises the economic structure from within, incessantly destroying the old one and incessantly creating a new one. He called it the ‘creative destruction’.   In India and globally, the State, the Market and the Democracy should come together for this ‘creative destruction’ to save each other from themselves!!!   About the Authors   Pradeep S. Mehta and Abhishek Kumar work for CUTS International, a global public policy think and action tank.   (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Rent Control in India: An Obsolescent Stratagem

Akhilesh Singh

Urban

When you think of rent, you think of landlords and tenants. Many of us instantly draw a picture in our heads, innuendos of landlords treating their tenants unfairly or the other way around.   To address one spectrum of this problem, that is, the landlord charging the tenant more than the rent price, rent controls were built.   What is Rent Control?   As the name suggests, it is a form of price control which puts a cap on the amount that an owner can charge the tenant as rent in the real estate sector, the cap being a variable and changing with time.   Rent controls are popular because a huge population benefits from them since people seeking to rent out a place are likely to outnumber the number of people giving out a property for rent.     Rent Control in India   Rent control is brought into enactment in any state primarily to shield the tenants from landlords, who may otherwise charge the tenants exorbitant rents, and to eliminate any loopholes which may arise in an agreement between a landlord and the tenant.   Rent controls are popular among renters all over the world, as they seem to offer lower prices with few adverse consequences. In the long run, however, substantial rent controls can cause entire cities to crumble, lacking the necessary dynamism as they fail to take into account factors such as inflation and urbanization in the economy.   The Rent Control Act was passed by the Indian Government in 1948, with each state having its own bye-laws, made in accordance with the state's position at the time the Act had come into force. However, over the years, these laws have now become obsolete.   Mumbai: The Poster Child   Mumbai is often considered the poster child for this phenomenon. There is a shortage of rental housing, with very little new stock being created and the existing rental inventory crumbling and falling apart. Over­­­­­­­ 0.48 million houses lie vacant in Mumbai. This is despite a affordable housing shortage of 1 million units in the city.   A substantial part of Mumbai comes under rent control regulations that date back to the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947. The Act froze rents at 1940 rates or at rates decided by the court.   Let's say Jagmohan moved to Mumbai around the time of partition (one of the reasons why the government imposed rent controls at that time was to facilitate immigrants like Jagmohan). He rented a house from a landlord at INR200 a month at that time.   The rent of the properties let out thereon didn't keep up with inflation and urbanization. Over 70 years since, Jagmohan or his children who now live in that house still pay a few hundred rupees per month to stay in the apartment which now would easily cost over a lakh per month in the market! In South Mumbai’s numerous rent controlled flats, tenants often pay as little as INR300-INR500 as rent at a time when the market rate is as high as INR20,000-INR60,000.   These rent controls also protect the tenets from any forced eviction by the landlord.   Over time and after multiple amendments being passed, the Maharashtra Rent Control Act, 1999 replaced the 1947 legislation, however with little change to the rental prices or eviction rules.   A major problem with such prolonged continuation of first generation rent control is that it leads to the degradation of housing stock.   With landlords practically getting nothing off the nominal rents, they often give up on the maintenance and upkeep of the house, leaving the properties in unkempt and dilapidated condition. Tenants who might have rented the place some 50-70 years back refuse to vacate the property. With an excruciatingly slow judicial system at play, many law suits filed remain stuck in the courts for decades.   When rents are so much lower than the prevailing market rates, builders and developers have no incentives to generate more rental housing. For over two decades, almost all new housing being built in Mumbai is for ownership purposes, most of it for the upper-middle classes and above. Shortage of housing stock built solely for rental purposes eventually distorts market rates and pushes up the prices of uncontrolled rental properties.     The Way Forward   Most economists agree that a ceiling on rents over time reduces the quantity and quality of the housing available. However, will it help the cause if rent controls are completely done away with? Not really! If the tenants presently occupying rent-controlled properties are pushed to start paying the market rates, in some cases, they might even have to pay more than 200 times the rent amount they currently pay. Moreover, with a lack of affordable housing in the city, completely abandoning rent controls may not be a viable solution for the mid and lower income groups.   Lessons from Overseas   The city of New York took its first steps to decontrol rents in the 1960s, lifting controls over 7,000 apartments. A Rent Stabilisation Law was passed in 1969 that allowed landlords to charge a certain base rent, which would cover maintenance costs and taxes. In older rent controlled properties, rents were increased gradually till they reached the base rent.   Further reforms introduced in 1993 decontrolled vacant and high-income apartments, and eligibility for rent stabilisation was based on a household’s income level. An apartment can be deregulated from the rent stabilisation system if it is vacated at a rent of $2,500 a month, or if the tenant’s income reaches $200,000. At present, over 31% of New York’s rental apartments are rent stabilized.     Some cities like Zurich and Manila moved to second generation rent controls in the 1980s. Second generation rent control means that a landlord can raise rents by a certain percentage every year and take increments to cover costs of repairs and maintenance.   A plausible solution to Mumbai’s rental housing problem is to allow landlords to levy rent adequate to cover operating costs, maintenance and ensure a nominal return. Tenants must simultaneously be protected from any form of harassment from the landlord.   Therefore, instead of completely abandoning rent control, the maximum city must gradually move towards some form of second generation control, and overtime perhaps aim for rent stabilization.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

What Causes Diabetes: Is Sugar in Diet the Real Culprit?

Dr Arun K Chopra

Ship Shape

Diabetes is one of the most pervasive lifestyle diseases as we discussed last week, with an estimated prevalence of 425 million, as per the IDF Diabetes Atlas 2017. Another 350 million people are pre-diabetic, or at risk of developing diabetes in the future. It accounts for over 4 million deaths per annum worldwide, making it one of the deadliest scourges of mankind.   The Big Question However Is…   What causes Diabetes? Is it a consequence of eating too much sugar, or does sugar just happen to increase the risk of diabetes in patients who are genetically at high risk (positive family history, that is)?   There are two common types of diabetes.   Type 1 (about 5% of cases): Is caused by an absolute deficiency of insulin production in the body and thus is diagnosed during childhood.   Type 2 diabetes (over 90% of cases): Is caused by Insulin Resistance.   What is Insulin Resistance?: A condition when a greater amount of insulin is required to maintain normal blood sugar levels. Needless to say, with passage of time (about 3-15 years), many of these patients also develop a deficiency of insulin secretion due to sustained over-production.   Source: Power-Pak C.E.   For several decades, the prevalent view among physicians was that diabetes occurred only to those at high risk, and that restriction of sugar was advisable only to those with overt diabetes.   However recently, the ill effects of sugars and sugar sweetened beverages (SSBs) have become better established. Guidelines have come up which restrict acceptable sugar consumption to 6-9 tsp per day. But, they still don’t clarify the important question asked i.e., is diabetes a consequence of eating too much sugar, or does sugar just happen to increase the risk of diabetes in patients who are genetically at high risk.     Throughout the 20th century, numerous textbooks and journal articles have been dedicated to this critical concept. However, there was no evidence of a direct link between sugar consumption and diabetes. This was because the consumption of excess sugar is not accompanied by simultaneous rise in blood sugar for a long time. It was realized much later that this was due to the capacity of pancreas to flexibly vary the quantity of insulin released in blood, depending on the body's intake of sugar in the first place.   Different people have a different sensitivity to insulin secreted as well as the effects of sugar in diet...making any interpretation of these linkages even more elusive.   During this time, the underlying cause for diabetes was thought to be obesity. Due to the incomplete "Calories In, Calories Out" model of obesity discussed earlier here and here, fat in the diet (being the most calorie rich nutrient) was thought to be responsible for obesity, diabetes and ultimately, heart disease and strokes. This was the thought which drove the restriction of fats, as advised by dietary guidelines till 1970s.   The Answer…   A breakthrough in this field came from Gerald Reaven, a leading American endocrinologist. Dr Reaven had been studying Insulin Resistance since 1968. In his classic Banting Lecture of 1988, he gave the conceptual framework to understand the precursor for major lifestyle diseases. Referred to as the “Metabolic Syndrome” (also called Syndrome X or Reaven’s Syndrome), this comprised a set of conditions that included:   Upper body or abdominal obesity High blood pressure High serum triglycerides Low HDL-cholesterol levels  High blood sugars   The presence of any 3 of these 5 criteria confirmed the diagnosis. The underlying abnormality was established to be Insulin Resistance.   An inability to change one’s lifestyle significantly was postulated to be a possible cause for worsening of these conditions ultimately leading to full-blown diabetes, hypertension, heart disease and strokes.   This discovery also appears to tie up the underlying abnormalities between obesity, diabetes and heart disease, namely, insulin resistance, which appears to be common to all of them.   Further, we now know that the body responds to different dietary nutrients differently. Carbohydrates are associated with early taste satisfaction but result in a craving for frequent meals/snacking, while proteins and fats grant greater satiety, keeping one full for a longer duration.   Thereby, excess refined carbohydrates in the diet, especially sugars is the driver for chronic overeating and obesity leading to insulin resistance (due to the repeated cycles of excess insulin secretion following frequent carb-based meals) and its sequelae - diabetes, hypertension, lipid abnormalities, heart disease and strokes.   A large meta-analysis in 2015 finally reported that high consumption of SSBs, artificially sweetened beverages and fruit juices are all associated with new-onset diabetes, independent of the body weight (though individuals already overweight/obese were at higher risk). However, the data for sugar (i.e., SSBs) was more convincing than the other two groups.   In summary, sugar and refined carbohydrates in the diet are associated with excess release of insulin in the body leading to insulin resistance, which is a precursor to the development of the lifestyle diseases, such as, obesity, high blood pressures, abnormal lipid levels, diabetes, heart disease and strokes. While there is no direct one to one correlation between sugar intake and diabetes, the presence of excess sugar in our diet has undoubtedly increased the risk of developing insulin resistance, that appears to be the common metabolic abnormality underlying these conditions.   What should be done about this? More on this, next week.   This is a recurring column published every Sunday. Click here to view my other articles on health, nutrition and exercise.    (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

K-Pop: How the Korean Government Helped Turn Korean Pop from a Backwater Affair to a Global Force

Gauri Chopra

Culture

Music as an art-form is deeply intertwined with a country’s local culture, drawing from it and giving back to it in equal parts. Thanks to the advent of globalization in mid-to-late 20th Century, music quickly became a worldwide phenomenon, with people from different countries gaining seamless access to each other’s sounds. Given its status as the world’s lingua franca, it came as no surprise when English demonstrated a natural advantage over the rest in the global music market.   However, one can’t help but notice a recent change in this trend, signified by the growing popularity of local music throughout the world – specifically, K-pop.   A Brief History   K-pop, short for Korean pop, refers to a genre of music originating from South Korea – characterized by synthesized sounds, colorful costumes, and dance routines.   The origins of contemporary K-pop can be traced back to the early 90s, when the musical landscape of Korea changed significantly for the first time, stepping away from popular American and Japanese-style ballads called ppongjjak to “more modern” styles of music.   It was a group by the name of “Seo Taiji and Boys”, who in 1992, revolutionized Korean music by becoming the first to successfully bring western elements (such as rap, and the use of MIDI technology) while incorporating dance routines in their performances, a model that is to-date followed by most modern K-pop groups.   Strong Backing   One of the major reasons for K-pop’s rise is the role played by the South Korean government. The seed for this was sown in 1994, when the Presidential Advisory Board on Science and Technology prepared a report for the President, suggesting the government to promote media production as a national strategic industry. The report illustrated that the total revenue earned by the Hollywood Blockbuster Jurassic Park was roughly equivalent to foreign sales of 1.5 million Hyundai cars. Given that Hyundai was the pride of the nation at that time, this comparison resonated with the government and prompted it to take the idea seriously. The state quickly realized the immense scope of exporting its culture as an industry, leading to the establishment of the Cultural Industry Bureau within the Ministry of Culture and Sports.   The first definite steps taken by the Korean government in this direction came in the wake of Korea’s 1997 financial crisis and the need to repay International Monetary Fund’s (IMF) $58.4bn bailout.   The government laid aside 1% of its national budget for subsidies and low-interest loans to its cultural industries, launched agencies to promote and expand K-pop exports, and set up more cultural departments within universities.   Investments were made under the Kim Dae Jung government (1998-2003) to build concert halls and improve visual effects technology to support the music-form.   Drivers   The push to the cultural industry was prompted by two primary reasons:   First, the government intended to target the entertainment industry as a means to restart the economy post financial crisis, and second, an attempt to preserve the Korean culture from the Japanese. The crisis was followed by the liberalisation of Japanese imports, and this had re-awakened the colonial-era fear of Japanese cultural domination, leading the government to invest heavily on its entertainment and culture industries.   While the government policies gave K-pop the initial push that it needed, it was Lee Soo Man, Founder of SM Entertainment, who took advantage of the building momentum to truly launch K-pop into the global sphere.   SM Entertainment trained and managed boy-band H.O.T., girl-band S.E.S., and teen sensation BoA –who became the first K-pop acts to break into Japan and China.     Asian Domination, and Beyond   The need for cheaper programming in other Asian countries such as China (considering Japanese or Hong Kong TV dramas were four to ten times more expensive than Korean dramas) further fueled the Korean cultural industry’s expansion. The term “Hallyu”, or Korean Wave, was coined in Taiwan in 1997 to refer to the global spread of Korean dramas, films, and music.   Until a few years ago, the success of K-pop had been confined to Asia despite its multiple attempts to crack into the West. That however changed, with the recent and sudden explosion of boy band BTS and girl band Blackpink.     BTS frequently discusses serious and relevant issues such as mental health, the fear of failure, dreams, and ambition in their songs, which resonate strongly with youth all over the world, thus resulting in a massive worldwide fan base. Western influences in their songs and active social media accounts which keeps fans engaged, are some of the reasons for their widespread popularity.   BTS’ past three albums all scored number 1 on the US Billboard 200 chart.   It seems that the government’s huge investments into Korean music have brought back returns after all, with K-pop having become a $5bn industry (2017), according to a report by Korean Creative Content Agency. The market experienced a 17.9% increase in revenue growth in 2018 and was also ranked at no. 6 among the top 10 music markets worldwide, according to the International Federation of the Phonographic Industry’s “Global Music Report 2019.”   Bandwagon   K-pop has also helped other sectors of the economy to flourish, especially the tourism and beauty industries, with BTS alone having attracted 796,000 tourists (7.6% of the total tourists) to Korea in 2017 through concerts, exhibitions of behind-the-scenes photos, and fan meetings. Exports of BTS-related products, such as albums, merchandise, and products that they endorse made up 1.7% of total South Korean consumer goods exports in 2017, according to Hyundai Research Institute.   Other markets have also tried to export their culture to reap economic benefits in a similar way – case in point being the “Cool Japan” fund of 2013, which sought to promote Japanese culture through J-pop, manga, and anime, among other things, to which the Japanese government committed a sum of $500m over 20 years. However, this movement has received a lot of criticism through the years on grounds of poor management of funds and improper execution.   Countries like France, Spain, Italy and Portugal have also made efforts to spread their culture globally – for instance, through language. The governments of these countries have established language-training institutions with multiple centers worldwide, e.g. Instituts Français and Alliances Françaises for French.   Promoting local languages globally helps in the growth of local businesses around the world. It also causes the influx of more foreign students, with these making 60% of the total students in France.   Lessons for India   It is rather evident that the benefits of promoting local culture worldwide, if done properly, are immense.   India, with its rich musical heritage can use this to its advantage and emerge as a soft power. There are some natural alignments such as for Punjabi music, owing to the large Punjabi diaspora in countries such as US, UK, Australia, and Canada. Punjabi musicians also emulate Western styles like EDM or rap, thereby making their music more acceptable to Western audiences. At the same time, they maintain their localized touch, which could engage the diaspora by invoking nostalgia and re-enforcing their cultural identity.   Promoting local musicians on global stages is another low hanging fruit. In 1999, H.O.T. and S.E.S. performed alongside Michael Jackson at a charity concert in Seoul that was broadcast across Asia. India could do something similar, for instance, by staging cultural performances at the Cricket World Cup, which it will host in 2023. Promoting Indian music with a Westernized touch on such a platform would help people from foreign countries gain exposure to a culture which has been mostly limited to the subcontinent.   Economic benefits aside, expanding its culture worldwide to become a soft power would aid India create a certain image for itself across the world, and a positive one could even help in improving diplomatic relations with other countries. In a world where there is no escape from globalization, a “glocalised” approach to preserving culture – that is, keeping its local aspect in mind while also redefining it with respect to the rest of the world – could thus prove to be very advantageous.   (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 Much Choice Should Consumers Have?

INSEAD Knowledge

Consumer Behaviour

Amitava Chattopadhyay, INSEAD Professor of Marketing.   The retail sector bends over backwards to give the consumer an inordinate number of product choices, and yet, does the consumer want so much variety?   Variety packs are everywhere, whether they’re multi-coloured sock packs, multi-flavour yoghurts or multi-packs of chocolate bars. Retailers believe that bundling different items together is answering consumer demand, but the reality is something else. In fact, they would do better to offer more of the same in bundled packs. We all have preferences, whether it is in terms of our favourite colour, flavour or song, and when we find ourselves in the supermarket aisles, buying in bulk, these preferences make themselves no less felt.     However, as our research shows, a lot of it has to do with how many choices we are actually making when we stand in front of the supermarket shelf.  In my paper, “The Offer Framing Effect: Choosing Single versus Bundled Offerings Affects Variety Seeking” co-authored with Mauricio Mittelman, Eduardo B. Andrade and C. Miguel Brendl, we show that when there is only one choice act to make, participants were systematically less interested in seeking variety in their product choices.    This is the case when we are looking at, for example, a six-pack of soft drinks — in order to purchase six cans, we only have to make one choice if they are packaged together — compared to buying six cans individually where we are making a choice six times over.  The implication for retailers is that you don’t have to indulge in price promotion on multi-packs because by offering consumers more of the same, they will get what they want and be happy to pay the price.   Variety is the Spice of Life   As individuals, when we have the option of making more than one choice, we tend to seek variety.   In our first experiment participants were presented with cans of Coca-Cola and Sprite and asked to select two. Of those that were asked to make two separate decisions – choosing one can each time - 62% chose two different drinks.  However when participants were asked to make one decision and choose between two packaged drinks (either two Coke, two Sprite or a can of each) only 32% chose the mixed option.   What was most interesting in our research was that of the participants who were given two choices, 12 out of 41 who had expressed a strong preference for either Coca-Cola or Sprite, made a different selection in their second choice. While none of the participants who had a strong preference and were asked to choose from the two-packs selections chose the mixed option.   In a further experiment to determine how strongly the wish to make a different choice made itself felt, we went as far to pit the amount of variety possible in the choice process against the amount of variety the participants would end up with in their set of chosen items.  Here, there was once again a comparison made between having one choice to make or two choices. One set of students was asked to choose between a high variety candy selection or a low variety candy selection, where only one decision was needed. A second group of students was asked to choose six candies in two stages. In the first stage, they were given a high variety consisting of one cherry, grape and apricot candy and then in the second stage, they had to choose between a high variety bundle of cherry, grape and apricot candies (the same as they already had) or a low variety bundle of three cherry candies.     As expected, participants avoided choosing the same thing they already had and preferred to choose something different even though ultimately it meant they had less variety in the candies they owned at the end. In the first bundled option where only one decision was made, 66% of participants ended up with the high variety offering, whereas in the two-stage decision process, only 36% of participants ended up with the high variety option.   This strong desire to feel that a different choice has been made during the choice process is good news for smaller stores and for retailers hoping to introduce new products to the market.  Customers who tend to shop in smaller stores are generally buying in smaller quantities and can more easily be captured as they will be more inclined to seek variety.   24/7   A further implication is for online retailers as our findings hint that more sales of the same item are likely to be made online compared to shopping in-store. This is because when purchases are made online, only one choice is needed per item — that of typing the number of required items in the designated spot on the screen.  This simplifies the purchase process compared to an in-store experience where multiple choices are made when purchasing single offerings. For bricks-and-mortar retailers, the emphasis should be on offering single serves, whereas online retailers should expect to sell more bundled items.   So, whether we’re looking at the question of how the products are packaged from a retailer’s point of view, or from the consumer’s point of view, one thing is clear, choices will always be there.  The important understanding for retailers is that they have the ability to bundle or separate items depending on what they want to push —and without the need to discount as originally thought.   For consumers, you should know that if you’re buying in large quantities, you can take comfort from knowing you’d be better to buy more of the same in a bundled pack with the added benefit that those pineapple-flavoured yoghurts you weren’t too keen on anyway in the multipack, will not go off in your fridge. And for consumers who tend to buy in smaller quantities, be reassured that our desire to seek variety is often stronger than our logic telling us what our preferences are.  Do we want so much variety in our shopping experience? The answer is yes and no.   Amitava Chattopadhyay is The GlaxoSmithKline Chaired Professor in Corporate Innovation at INSEAD. He is also co-author of The New Emerging Market Multinationals: Four Strategies for Disrupting Markets and Building Brands. You can follow him on Twitter @AmitavaChats.   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 strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Can A Social Beverage Save Your Life: The Good, The Bad, and The Ugly Side of Alcohol

Dr Arun K Chopra

Ship Shape

Alcohol is commonly perceived as a "social beverage" - a friendly drink to lighten up your mood, relieve tension, induce sound sleep, and to top it all...protect one from heart attacks! Could you have asked for more!   Alcohol has been part of our culture for nearly 5000 years (described as Sura in the Vedic period). According to the WHO Global Status Report on alcohol and health 2018, nearly a third of the population of the world (age 15 years or more) - a mind-boggling 2.35 billion people (about 39% of males, 25% of females) consume alcohol. This is nearly twice the population of India. Just slightly more, about 2.4 billion are abstainers, while just over 2/3 of a billion are former drinkers who have now quit. Over a quarter of the world’s population between 15 -19 years, and 1/3 to over 1/2 of the 20-24 year old group, currently drink.   Studies conducted across the globe have common findings - low to moderate drinking protects against heart attacks, and probably diabetes as well. Only high drinkers (> 4 drinks per day for men, > 3 drinks for women) have higher mortality, largely due to alcoholic liver diseases (fatty liver, cirrhosis, etc.) and rare higher volume drinkers risk the chance of a heart failure (alcoholic cardiomyopathy).     The common thread is the presence of a J-shaped curve, i.e., low to moderate drinkers are less prone to some diseases than always abstainers (non-drinkers). The risk rises once people start consuming high volumes of alcohol daily - the most consistent evidence being found for heart attacks or occurrence of Coronary Artery Disease (CAD). It would be interesting to note that some of the diseases apparently less likely in low-volume drinkers are deafness, hip fractures, common cold, dementia, cancers and even cirrhosis liver.   This concept came about from the so-called French Paradox. The French consumed large amounts of saturated fats and smoked regularly, yet had a much lesser risk of CAD than other populations. Wine was postulated to be one of the possible causes for this unexpected finding.   Guidelines have consistently permitted (even endorsed) low-volume alcohol consumption regularly as a protective measure against heart attacks (Coronary artery disease or CAD), while stopping short of recommending never drinkers to start drinking, as the data wasn’t solid enough. Red wine has been noted to have the maximum data, probably due to the presence of a compound called resvetarol, and some other compounds.     All-in-all, the overriding belief has been one of tangible benefits with modest regular consumption of alcohol, apart from its positive social implications.    No wonder, a recent study conducted by AIIMS, New Delhi, reported alcohol as the most common drug used for substance abuse. Nearly 15% of the adult Indian population were regular drinkers, 1in 5 being addicted to or dependent on it.   Independent analysts, however, found these conclusions problematic. Subjects reporting self-consumption generally tend to under-report the amount of alcohol consumed. Moreover, data on patterns of drinking and binge drinking are often missing, and several health problems associated with alcohol tend to be ignored (uncontrolled blood pressure, accidents, inter-personal violence, depression, etc.). Many studies had been pooling previous drinkers who gave up drinking, often due to diseases, in the same group as never-drinkers, further confounding the analysis.     Recently however, a shift has been noted. Since it is a little tricky to collect data on huge numbers of individuals (hundreds of thousands, followed up over several years, in different age groups) to conclude benefit or harm with social drinking, combining results of multiple studies with similar design is a common statistical method used in clinical Medicine (meta-analysis and systematic review). This provides a rather unique look into the outcomes of millions of individuals from different parts of the world.   A major such analysis in 2016 on nearly 4 million individuals found no evidence of a survival benefit with alcohol. Next year, they analysed the impact on CAD events, and failed to find solid evidence of a positive effect on nearly 3 million subjects. This analysis found a protection against heart attacks in Whites over the age of 55 with low to moderate consumption, but none in individuals < 55 years of age, or in Asians.   So, to drink or not to drink, that is the question!   This was the background for the largest ever study on alcohol in 2016. Funded by a neutral organisation (Bill & Melinda Gates Foundation), the investigators reported on the outcomes associated with alcohol consumption in 28 million individuals from 195 countries and territories (in age group 15 years to 95 and above) from 1990-2016 by the Global Burden of Disease (GBD) 2016 Alcohol Collaborators in August, 2018.   They found that alcohol was associated with a disturbing 2.8 million deaths in 2016 vs 5.5 million associated with smoking, making it the seventh largest contributor to disease and mortality. Further, in the age group 15-49 years, it was the leading risk factor for disease burden worldwide, including 12.2% of all male deaths and 3.8% of female deaths. Apart from alcoholic liver disease, its regular consumption also increased the risk of uncontrolled hypertension, strokes (clot formation or bleeding inside the brain), tuberculosis, road accidents and several types of cancers. Data for interpersonal violence was missing, and may further increase the morbidity than what is reported here.   Some protection against heart attack was found in females > 50 years of age, and males > 60 years. This showed a J-shape curve, with the maximum benefit being for low-volume drinkers, consuming < 1 standard drink per day (10 g of ethyl alcohol). However, this benefit was offset by the much greater increase in risk of the above mentioned diseases, ultimately leading to no beneficial effect.   The investigators concluded that the net amount of alcohol correlating with minimum risk of disease or mortality is zero. As guidelines continue to uphold the cardio-protective effects of alcohol, a revision is urgently needed to correct this fallacy and prevent a big chunk of preventable diseases, just as for smoking.   In summary, alcohol is not the panacea it is often made out to be. Occasional social drinking, < 1 drink per week may be acceptable and even beneficial for the heart. Regular drinking is not better for heart attack prevention, and in fact, increases the risk of multiple other health issues, totally reversing all the putative cardiac benefits.   This is a recurring column published every Sunday. Click here to view my other articles on health, nutrition and exercise.    (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Calorie Counter: Why "Calories In, Calories Out" Hypothesis May Not Be Telling You the Whole Story

Dr Arun K Chopra

Ship Shape

We discussed some limitations of the “Calories In, Calories Out” hypothesis here last week, which suggested that assiduously counting one's calories does not help in fat loss or weight maintenance.   Are we really looking at the “Death of the Calorie”, as suggested by a recent cover story of The Economist's 1843 Magazine?   Do calories matter at all? Of course, they do! But not in the way most people think.   Calories In   Let's look at why calories are thought of to be critical for weight loss/gain in the first place. If we were to give a group of people food prepared with a pre-decided calorie and nutrient content (ratio of carbs: fat: proteins), and control everything else (i.e., work done, calories spent, etc.) without allowing for any extra food, one is unlikely to observe much difference in the weight lost or gained in the short term (within a few days or weeks).   However, there is now sufficient data available that proves that different foods are handled by the body differently. While carbohydrates are quickly digested (within 2-3 hours, with lesser calories burnt), proteins and fats take much longer (about 8-12 hours, with many more calories burnt in the process).    This implies that net calories gained from eating foods is different from a simple addition of all calories consumed.     Further, the gut responds differently to different foods. The hormones that signal satiety (a sense of fullness after a meal) are secreted most profusely in response to fat consumption. Therefore, one feels fuller earlier and for a longer duration while consuming a fatty meal vs. a carbohydrate-based meal.   There is data available which proves that the net calorie intake in a day is lower if the fat content is higher than the recommended 30% of all calories (perhaps closer to 40-50%). And that’s how calories indirectly kick in - if we consume more fat and protein compared to carbs, we eat lesser (total calories in a day) and crave food less than if we consume >50-55% calories from carbs (which is the norm in most parts of the World today).   Over the long term, a difference of 100-300 calories per day in the food intake and the extra work done in digesting fats and proteins is responsible for the greater weight loss and fat loss that’s seen with low carb diets.   Also, the real world is not like a controlled study. Here, there are meetings, deadlines, sleepless nights, travel, parties, and much more, which makes it much harder to ensure portion control. The easy digestion of carbs encourages frequent snacking, often leading one to consume unnecessary calories. Carbohydrates are also known to activate brain reward mechanisms, that lead to the pleasurable experience associated with intake of high-calorie, especially high sugar foods, that one craves repeatedly, which is why people get addicted to desserts and colas.   Is it then not better to eat foods that provide early satiety, that we can eat to fullness, not feel hungry or cranky all the time, rather than eating a measured proportion of food that leaves one dissatisfied?   Calories Out   The other side of the equation is exercise. Undoubtedly one of our healthiest activities - exercise, goes a long way in maintaining health and fitness. It also helps in weight maintenance, when accompanied by a good diet. However, despite being intuitive, it comes as a surprise that in the absence of a healthy diet, exercise alone does not help in weight loss, especially as one ages. A study published in 2006 showed that even regular runners would gain weight year on year, unless they increased their running distance by about 3 km per week for men, and nearly 5 km for women.   This suggests that people running in their 20s would need to run marathons every week in their 50s in order to avoid gaining weight - a very impractical idea. The only exception could be elite athletes, who can burn over 1000 calories in their workouts.     Another problem is the apparent lack of energy or disinclination to exercise that many people face after a few weeks of diet control. Again, the carbs in our diet make everything else (fats and proteins) unusable for providing energy - carbohydrates get digested first while all the other calories get stored as body fat. This means that one has to eat still more to find the energy to exercise or eat less and feel lethargic all the time. Also, as one grows heavier by eating more, the appetite increases further, and a vicious cycle ensues.   Thus, our appetite appears to be a function of what we eat, as is our ability to exercise.   Conclusion: A healthy diet is better than calculating CICO and getting frustrated.   In summary, calories do matter, but different foods are metabolized differently by the body, and thus have variable effects. If you are watching your calories, please watch your food choices first. Moving towards healthy foods may avoid the need for any rigorous portion control or calorie count, which is nearly impossible to achieve in any case. Eating healthy also improves our exercise capacity, making the circle complete.   This is a recurring column published every Sunday. Click here to view my other articles on health, nutrition and exercise.    (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Your Thoughts Can Cost You More Than Just a Penny

University of North Carolina Kenan-Flagler Business School

Investment

Financial losses affect your brain and how you think about risk. They don’t just hurt your bottom line – they affect your brain, too.    The emotional part of your brain reacts differently to bad and good news – and that affects your economic decisions.   People learn differently from losses than from gains, research by finance professor Camelia Kuhnen shows.   After losses, they develop overly pessimistic beliefs about how future investments will pay off and tend to shy away from risky investments, she said. “The effect is even greater when our own money is at stake.”    A pioneer in behavioral finance and the new field of neuroeconomics, Kuhnen seeks to create better economic models to explain financial decisions by learning how the brain drives human behavior. She studies the brain and genetic mechanisms responsible for learning and risk taking in financial markets.    Her findings shed light on how bad economic times could affect economic choices made by households, firms and other economic agents.   Kuhnen earned two bachelor's degrees – in finance and neuroscience – from MIT and a PhD in finance from Stanford. Early in her career, she worked on a brain-imaging study with a neuroscientist to predict whether people were drawn to or avoided financial risk depending on which parts of their brain were stimulated before they made their decisions. Kuhnen realized that neurologically, people are wired to learn differently from good experiences than from bad experiences. She calls that asymmetric learning.                    “Your brain has very primitive structures that either push you toward something you think is good for you or make you avoid something you think might be bad for you,” Kuhnen said. “From neuroscience, we know that bad things and good things have different effects on your brain.”   Kuhnen examined the influence of asymmetric learning on investment decisions, which she writes about in “Asymmetric Learning from Financial Information” in the Journal of Finance. In the study, participants completed two financial decision-making tasks:                                                                                           In an active task, they made 60 decisions to invest in a stock with risky payoffs coming from either a good or bad distribution or a bond with a known payoff. After choosing a stock and seeing the dividend, they estimated the probability that the stock was paying from the good distribution.  In a passive task, they observed only the stock payoffs – they did not experience it as a choice they had made – and then estimated the probability that the stock was paying from the good distribution.   Study subjects developed overly pessimistic — thus inaccurate — views about the future after experiencing negative payoffs, which Kuhnen calls pessimism bias.   Her results would surprise economists, who have been taught that people learn by Bayesian updating, a mathematical rule about updating probabilities that does not depend on whether people learn from positive or negative outcomes.    “To be told that people don’t use the same rule to update their beliefs across all scenarios and that they update in an overly pessimistic way when they observe bad outcomes or receive negative information,” she said. “That’s a big deal to economists.”    The pessimism bias can affect asset-pricing models, too. Pessimistic investment advisers might price risky assets, such as stocks, too low during a recession, which could prolong a bad market.    Pessimistic investors also might shy away from the stock market during periods of economic adversity, cutting themselves off from opportunities to buy low.    Such asymmetric learning can extend to investing in human capital, such as whether to invest in a child’s education in times of economic adversity. Other researchers have shown that people who grew up in poverty are less likely to believe that human capital investments of any kind will pay off.    “All of these decisions to underinvest have the same effect: They keep you in a bad situation,” she said.   Kuhnen will continue to test the theory that economic adversity – either from reeling financial markets or other financial shocks – leaves people too pessimistic about what they can achieve. And she hopes to find a way to undo the pessimism bias.    “Investors who can overcome their pessimism are likely to do better in their investments,” she said. “People going through adversity have to look to the future and see the upside, too.”    Camelia Kuhnen is associate professor of finance at UNC Kenan-Flagler.   This article originally appeared in the R.O.I. Research Magazine published by UNC Kenan-Flagler.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Dr Lal Path Labs: Good Biz. But Something’s Not Right

Nikhil Arora

Equities

Extending upon an earlier theme of looking at valuations of well known companies with a rather consumer-interfacing operational footprint (e.g. D-Mart), the world of diagnostics offers an interesting case study.     Dr Lal Path Labs, a diagnostic and pathology services company, has an almost ubiquitous presence in Northern India. With its country-wide distribution network through 200 clinical labs, 2,569 Patient Service Centres, over 6,400 “Pick-Up” points), and a rich retail-oriented proposition (including prompt home collection, quality door-to-door service etc.) there’s a good chance that you (or one of your loved ones) have been their customer…if not investor.   And at its recent price of INR1,070-ish per share (39x PE, 26x EV/EBITDA), it is perhaps better to be the former.   Wish you the best of health. Of course.   Dr Lal Path Labs Actuals   Why so Grim?: First things first. Dr Lal Path Labs is a good business. Its revenue this FY grew by 14%, earnings by 17%. It has demonstrated solid 24% plus EBITDA margins and a healthy Return on Equity (ROE) of 23%. The company is very light on leverage, with a relatively controlled capital spend.   But the price is too high. Considering a 39x P/E, there is an inherent growth story which is expected, and naturally one would think the stock would be immune from any top-line slowdown or margin pressure.   Unfortunately, it has witnessed both. Revenue growth was 20% in 2016, and now at 14% (trending downwards). Similarly its EBITDA has also eroded from 26.5% in 2016 to 24.4% in 2019.   Dr Lal Path Labs Forecasts   Still: To avoid any accusation of superflous glumness, one can grant the company some benefit of doubt while building its Free Cash Flow (FCF) projections.   How?: I assumed an upward sloping revenue growth (tapering from 14% in 2019 to 19% in 2029), improving EBITDA margins (spiking from 24.4% in 2019 to 26.4% in 2029 i.e. in-line with historical high) and stable capex amounting to 6% of revenues (in line with last 4 years). I have assumed a historically high revenue/earnings trend & healthy/improving margins…thereby ignoring recent pressures visible on the actuals. Optimism overload.    Still: Even with such a rosy picture, one is compelled to discount this stock at 11.8% to square the Discounted Cash Flow (DCF) value with its present market valuation – almost akin to D-Mart, where anything above a 12-13% WACC was making the stock look overvalued.   Is 11.8% defendable?!   Well…as per Finance 101, India’s risk-free rate (i.e. proxied by Government of India 10-year bonds) is hovering around the 7-ish% mark. Add 8-9% of country risk premium on top (thanks to Damodaran), and one still arrives at 15%. Anything below that just doesn't do.   Conclusion: Good Business, but just too rich. I pass.   Click here to view the full spread sheet. Sensitivities shown below.       (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 Airlines Manage Conflicts Between Profits and Safety

INSEAD Knowledge

Aviation

By Henrich Greve, INSEAD Professor of Entrepreneurship, and Vibha Gaba, INSEAD Associate Professor of Entrepreneurship   Warning: Don’t Read this Just Before Your Next Flight.   Commercial air travel is an industry in which relatively small mistakes can result in disproportionately dire consequences. While it is best not to think about this when on the tarmac, it is comforting to know that safety, for airlines, is a major priority. Even so, there are limits to how much an airline can spend, and firms must balance the demands of safety and profitability to avoid running financially aground.   In other words, when it comes to safety, it is not so much a matter of “how safe can we be?” as “how safe can we afford to be?”   The question of safety vs. profitability is an example of the conflicting operational objectives firms face on a regular basis and the focus of our recent research, “Safe or Profitable? The Pursuit of Conflicting Goals” (forthcoming in Organization Science).   The study examined how airlines balance the dual focus of safety and profits, and the influence these factors have on the costly decision of whether to change the configuration of their fleet of aircraft after an accident.   Updating fleets, replacing older aircraft or those perceived to be less safe, with newer, more reliable models, is an important way that airlines ensure the safety of their operation. However, fleet replacement can be a costly transaction involving selling at a discount and buying at a premium, and decisions are not made without close scrutiny of an airline’s balance sheet.   It may seem intuitive that more profitable airlines are in a better position, and therefore more likely, to replace aircraft perceived as less safe. We found that this was not the case. In fact, while more profitable airlines are generally ahead on the safety front, when it comes to making changes to their fleet after an accident, it was the less profitable carriers that were more likely to sell off aircraft and replace them with models considered more reliable.   Less Profitable Firms are More Reactive   To track aircraft sales and purchases, we used fleet composition data from the website www.airfleets.net, which includes full data on passenger aircraft across the industry, as well as accident records of all global airlines. We then narrowed these accident statistics down to those accidents in which an aircraft was deemed permanently unfit to fly (referred to as “hull loss accidents”).   An analysis of these statistics showed that following a hull loss accident, among the group of airlines that boast above-average safety records, low-profit carriers increased aircraft sales by 55% while high-profit airlines increased aircraft sales by 29%.   Profitability played an even more decisive role among airlines with relatively high accident rates. When we assessed airlines with a similar below-average safety record, firms with low profitability were 50% more likely to sell aircraft than those with higher profitability.   We also examined the tenor of media coverage for each aircraft model following an accident and found that public relations, while not as influential as accident rates, were a consideration for decision makers. Less profitable airlines were more inclined to sell when the media tenor regarding their fleet was least favourable.   In short, while underperforming airlines were more likely to replace aircraft in a bid to improve safety, prosperous firms were not so reactive, being less at risk and more able to survive a scandal.     Should Boeing be Concerned?   These findings are particularly interesting when looking at the industry today, as airlines consider their response to the recent air tragedies involving the Boeing 737 Max. After two fatal crashes and the worldwide grounding of the model, air carriers are faced with the costly decision of what to do next. The Boeing 737 Max is a relatively new model but one that has been widely accepted by airlines, particularly low-cost carriers. As of February 2019, 376 aircraft have been delivered and another 4,636 are on order. Already, Garuda Indonesia, Lion Air and a number of other carriers are reportedly dropping or reviewing their orders with Boeing.   However, given our findings and the fact that budget airlines, which make up the bulk of Boeing 737 Max’s top customers, are generally more profitable than full-service carriers, it is unlikely that too many airlines will cancel their orders. Southwest Airlines, the number one customer of the Boeing 737 Max, recently completed its 46th straight year of profitability. Ryanair, another top customer, posted a 2018 net profit of €1.45 billion, a 10 percent increase on the previous financial year. That flydubai, the Boeing 737 Max’s second biggest customer, has posted full-year profits since 2012 and came out earlier this month with assurances the aircraft remained integral to its future, further supports our findings.   The Ultimate Objective is the Firm’s Survival   While the results of our study may fly in the face of general expectations, they actually confirm the premise that when companies perform below aspirations (i.e. less profitably), managers become more risk averse and take actions aimed at improving their firm’s survival.   This is not to suggest that nervous travellers should bypass the more profitable, industry-leading carriers in favour of their less successful competitors. There is already good evidence that an airline’s safety record will decline when its margins or profitability are low. However, aircraft sales and buys are made at the top level of an organisation, by individuals who are well aware of the safety consequences of their actions and of the consequences that any accident will have on the firm. Senior managers may even suspect that cost-cutting occurring in other areas of the firm’s operations has the potential to endanger safety, and therefore attempt to compensate for that possibility when deciding what to do about aircraft replacement.   Ultimately, what our study found was that both safety and financial objectives are taken into consideration when airlines decide whether to replace aircraft models after an accident. The goal that triggers the stronger reaction is the one perceived as being more important for the firm’s survival.   Henrich R. Greve is a Professor of Entrepreneurship at INSEAD and the Rudolf and Valeria Maag Chaired Professor in Entrepreneurship. He is also the Editor of Administrative Science Quarterly and a co-author of Network Advantage: How to Unlock Value from Your Alliances and Partnerships. You can read his blog here.   Vibha Gaba is an Associate Professor of Entrepreneurship at INSEAD. She is also the Programme Director of Leading Successful Change and Learning to Lead, INSEAD Executive Education programmes.   Follow INSEAD Knowledge on Twitter and Facebook.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

D-Mart: Something Left on the Table or All Soaked In?

Nikhil Arora

Equities

Indian equities are a diverse bunch.   On one hand you have a Jet Airways or NDTV…sexy as brands but fabulously pointless as investments (thanks to their decade-long range bound share price charts), every once-in-a-while you can find a stock which investors love from day one. A company whose solid fundamentals, an almost workman-like quality, focus on efficiency, complemented by a sober and austere management adding to its aura.   D-Mart, a supermarket chain listed (as Avenue Supermarkets Limited) in March 2017 fits that bill. Promoted by veteran Mumbai investor Radhakishan Damani, who directly and indirectly holds more than 80% of the company, the stock has quadrupled since issuance and remains a market favourite.   Currently trading at c. INR1,300, almost 70x its 1y forward earnings, DMart’s growing retail base (from 131 stores in 2017 to 176 in 2019, major footprint in Maharashtra & Gujarat but gradually spreading all across), rising ‘per store’ earnings (from INR7.5cr EBITDA per store in 2017 to INR9.3cr per store in 2019), low leverage and ROEs regularly touching high teens is perhaps why investors love it.   No doubt it is a robust business! Its “Everyday low cost – Everyday low price” philosophy i.e. to become the lowest priced retailer in the region they operate in, finds phenomenal resonance in the rapidly transforming Indian retail landscape.   But Is It Trading At A “Fair” Price?   Assessing fundamental value can be a lot of fun. Even more so if done quick-and-dirty and without any skin in the game. You know…spending one Sunday afternoon to put the company’s basic numbers in a spread sheet and get a feel of things.   D-Mart currently trades at INR1,292 per share translating into market capitalisation of INR80,991cr, surely places it at the higher end of the retail spectrum. But it does post higher ROEs, while demonstrating discipline with leverage, so why not!?   The Future   Discounted Cash Flow (DCF) valuation basics: project the free cash flows (FCF) of the company and discount it by a suitable (tricky point, always) weighted discounted rate (or WACC) to get the present enterprise value (EV). Deduct the company’s net debt from EV to calculate its equity value.   Let us look at its actuals then to project future FCF.   Revenues: D-Mart’s revenues grew by 38.6% in 2017, 26.4% in 2018, and 33.1% in 2019. Slowing, but come on! Newstores take time to gestate. Will simply assume a 1% drop in growth every year for the next 10 years (as the base becomes bigger, growth will slow down), but still a healthy 23% expected growth in 2029 – not bad.   EBITDA: EBITDA margin have been roughly between 8-9%. Taking a word from the CEO’s book of 8-8.5% margin as comfortable, let us assume a conservative and stable 8% (considering there has been some margin pressure lately).   FCF: Will simply project working capital as proportion of revenues and assume the capex as 1% of revenues (again very conservative). Deducting change in working capital and capex from EBITDA and you have the FCF.   Discount Rate: Don’t really have a strong view on suitable discount rates within the Indian retail space…but here are a few references...D-Mart’s cost of debt is around 9%. Considering D-Mart’s ROE is 18%, one can guess its cost of equity would be somewhere in between. As per Prof Damodaran (if you don’t know him and you’ve managed to read so far, it is your loss alone! Now go and cry in shame.), Indian equities currently hold a risk premium of 8.6%. Hence even with a beta of 1.0 for D-Mart, we’re looking at an expected cost of equity of 16%. Considering its low leverage, we can assume D-Mart’s WACC to be circling around 14%, though considering beta in real terms would be more than 1.0, we can lock in around 15%-16%.   But wait, let’s plug in our numbers and goal-seek to see how investors view D-Mart’s WACC coming to its current value of INR80,991cr.   The answer...drumroll...12.6%! Now that’s optimistic. Too many bubbles?   In my view, yes! Think about it. We’ve assumed practically zero margin expansion, gradual growth slowdown, conservative capital spend, a status quoist approach towards working capital, and still need to apply a relatively aggressive 12%-13% discount rate (vs. 15%-16% IMHO or not less than 14% at least) to square with present market value.   Don’t think much is left on the table.   Nevertheless, enclosing some valuation sensitivities for you to ponder over. Also click here to view the full spread sheet.          (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

First Among Equals: Differential Voting Rights in India

Kushan Chakraborty

Legal

India has for long held the common perception of one-share one-vote, which assumes that all shares represent an equal percentage of a corporation and that all shareholders have equal rights and obligations. This common perception is likely to witness some churn in the times to come. Capital markets regulator, Securities and Exchange Board of India (“SEBI”) has issued a consultation paper on issuance of shares with differential voting rights (“DVRs”) and invited public comment on it till April 20, 2019.   Let’s try and unbox the concept of DVRs.    DVRs or dual-class shares (“DCS”) is a system in which a single company may issue different classes of shares with distinct voting rights and dividend payments. Typically, the shares issued to general public are distinct from the shares issued to the founder(s)-promoter(s) and investor(s) in that the latter class may have higher voting power or more control over the company. Jurisdictions like the United States have had DCS structures for a few decades now, while others like Singapore and Hong Kong have recently jumped on that bus. Still others like the United Kingdom and Australia are more circumspect about the disparity the DCS structure creates between shareholders' economic and voting rights, and have thus far, not permitted it.   The American affinity to the DCS structure is, among other reasons, why certain companies like Manchester United (UK) and Alibaba (China) chose to list their IPOs on the New York Stock Exchange even though football and Alibaba aren’t as popular in the US. Others like Facebook and Google, which had huge listings in the US deployed versions of the DCS structure to great effect. On the other hand, SNAP Inc., the holding company of the massively popular social media app Snapchat by offering shares with no voting rights in its IPO, raised more than a few eyebrows.   Voting is important as it provides the shareholders control over the company’s affairs. Under the Companies Act, 2013, shareholders have the right to vote in matters relating to the company’s merger, appointment of director, amendments to the constitutional documents of the company, etc. In a single-class structure of shares, A with 10 votes will exercise the same degree of control over the company as B, with 10 votes. In a DCS structure, if A holds 10 shares with higher voting power, she will exercise a higher degree of control over the company than B, who may hold 10 ordinary shares.       Interestingly, SEBI had prohibited companies from issuing shares with “superior” rights with regard to voting and dividends in 2009. This had acted as a barrier to Indian companies issuing shares with DVRs, prompting several companies to list outside India in order to incorporate a DCS structure in relation to their shares. This new step by SEBI is seen by some as an attempt to make India a more friendly jurisdiction for Indian as well as foreign companies to incorporate and list.   SEBI's consultation paper proposes two routes for issuing DVRs:   For companies that are unlisted but propose to list on the stock exchange with DVR structures (primary listings); and For companies that are already listed that propose to list DVRs (secondary listings)   Further, it discusses the concepts of “superior” and “inferior” rights as to shares, i.e. when shareholders receive voting rights in excess of one vote per share, there would be share with superior voting rights (SR share) and conversely, with inferior or fractional voting rights (FR share).     SR shares may only be issued by unlisted companies and that too only to promoters. The idea is to ensure that promoters maintain more control via their voting rights in addition to their economic rights before the company opts to list its shares. Once the company is listed, it can no longer issue SR shares. There are a few other conditions related to SR shares:   Since they can only be issued to promoters, there can be no encumbrance over them. This means that promoters will not be permitted to pledge these SR shares for any debt funding.   They are restricted to a perpetual lock-in after the company’s IPO.   They can constitute a maximum ratio of 10:1, i.e. they cannot exceed 10 votes per share.   They will not carry superior voting rights on every matter. On certain matters, all shareholders (including those holding SR shares) must be subject to the default rule of one vote per share. These are crucial matters that are fundamental to the existence and business of the company. In this regard, SEBI has proposed some "coat tail" provisions, under which SR shares will be treated at par with ordinary shares and FR shares on matters such as appointment and removal of independent director or auditor, change of control, entering into a contract with a person holding SR shares, alteration of the constitution of the company, voluntary winding up of the company, etc.   SR shares will be subject to a sunset clause, under which they would automatically convert into ordinary shares at the end of 5 years from the date of listing, at which point their voting rights will become at par with ordinary voting rights. However, the life of SR shares may be extended for a further period of 5 years if the same is approved by a special resolution by all shareholders on a one-share one-vote Promoters, of course, have the discretion to accelerate the conversion of SR shares to ordinary shares.   The addition of the sunset clause highlights that DVRs are mostly required at the initial stages of a company’s lifecycle. During and immediately post incorporation, DVRs play an important role in enabling the promoters to assume business risks without ceding control. Subsequently, once the business is more established, shares with DVRs lose their purpose and are converted into regular shares. The sunset clause also has a corporate governance play, effectively preventing promoters from exercising control over a company by holding on to a small number of shares for a large period of time.   On the other hand, the paper proposes that FR shares may only be issued by companies whose shares have been listed on the stock exchange for at least a year. FR shares are usually issued to outsiders and investors who want control in the company. Voting rights on FR shares cannot exceed a ratio of 1:10, i.e. one vote for every 10 shares. Companies may pay a higher dividend on FR shares as an incentive for investors to opt for them, in lieu of lower control rights.     The paper also recommends amendments to the Companies Act, 2013 and various other SEBI Regulations such as those relating to capital issuances, continuous listing requirements, buyback and takeovers, which reflect the impact of DVRs on these legislative and regulatory provisions.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Fending Off Disruption: Incumbent Strategies for Digital Transformation

Prof Sia Siew Kien

Digital

With all the hype about technological disruption, companies are scrambling to jump onto the digital transformation bandwagon. An international Ernst & Young survey, conducted on over 900 companies in 2017, shows that 90% of these companies are elevating digital priorities in their strategic planning over the next two years. But more digital initiatives do not mean stronger transformation strategy. You need to understand the tech disruption scenario in your specific context when you formulate an effective and targeted transformation strategy.     Clarify your Specific Tech Disruption Scenario   According to Professor Ron Adner (Tuck School of Business at Dartmouth College) and Rahul Kapoor (The Wharton School at the University of Pennsylvania), a specific disruption scenario is the unfolding of competitive forces between the new and the old technology ecosystems.   The greater the challenges (e.g., industry resistance, regulatory constraints) confronting the new technology ecosystem, the slower the disruption. The more positive the improvement prospects of old technology ecosystem, the more incumbents will remain relevant and competitive. The different competitive dynamics would yield four disruption scenarios - creative destruction, illusion of resilience, robust coexistence, and robust resilience.     Creative destruction will take place very rapidly, where the new tech ecosystem is emerging fast, and the old tech ecosystem is no longer relevant.   Illusion of resilience is a period of inactivity followed by rapid disruption, where the old tech ecosystem is no longer relevant but the speed of new tech ecosystem emerging is slow such that incumbents will continue its dominance until new entrants resolve emergence challenges.   Robust coexistence occurs when incumbents and new entrants each have their respective advantages because the new tech ecosystem is emerging fast and the old tech ecosystem is still relevant.   Robust resilience is the best scenario for incumbents, where the old tech ecosystem continues to be relevant and the speed of new tech ecosystem emerging is slow.   Align Your Digital Transformation Strategy   In the Creative Destruction scenario, passive participation is most sensible as it is too late for incumbents to develop new capabilities and old tech ecosystem is no longer relevant. Refusal to acknowledge the reality can be costly. For example, to counter the rapid rise of mobile payment in China (e.g., AliPay and WeChat Pay), ICBC, China’s largest bank, invested aggressively in its own payment app and e-commerce site, but still failed to challenge the dominance of these disruptors. Instead, incumbents should focus on their niches to do what they do best, and ensure that they are readily connectable to these platforms to participate in the growth of the disruptors.     In the Illusion of Resilience scenario, incumbents should focus on preemptive reinvention. This is what DBS Bank has done. To preempt disruption of its core retail banking business, it embarked on a radical tech transformation to ramp up its digital capabilities to be like a tech giant. It invested heavily on its people to be a 22,000 person startup. It also disintermediated itself to “make banking invisible” by embedding itself in the lives of its customers.   However, preemptive reinvention is still a defensive strategy. DBS is only getting itself on par with the tech disruptors in terms of new capabilities. With the disruptors’ entrance into Singapore (e.g., Ant Financial and Grad Pay), the competitive battle is still out there to be fought. But DBS would be so much more ready to compete with these disruptors now.   Under the Robust Coexistence scenario, incumbents still have some relevant old capabilities but have no time to develop new capabilities. On the other hand, disruptors have new capabilities, but they need access to some old resources. Since they each have a piece of the puzzle, incumbents should seek to develop a win-win strategic collaboration with the disruptors.   Citibank, for example, has accumulated deep global treasury management expertise in enterprise banking, but it lacks new digital capabilities. Its strategy was to actively seek partners with complementary capabilities. KJ Han, Chief Executive of Citibank Singapore, coined the term “fintegration” and noted that banks will need to become extraordinarily adept at integrating the best fintech innovations into their operations.                                                                Finally, in Robust Resilience, incumbents have the opportunity to entrench their competitive position through platform transformation, given their advantageous positions. For example, Ping An, China’s second largest insurance provider, went beyond reimbursement for social health insurance to build a digital ecosystem that integrated relevant healthcare services around its customers. Ping An Health Cloud facilitated sharing of patients’ electronic medical records across stakeholders (i.e., patients, clinics, insurance providers, government). Ping An Good Doctor enabled online medical consultation and Ping An Wanjia offered offline healthcare services linking to thousands of clinics. The transformation leveraged its strong incumbent advantages - high quality medical data, extensive hospital network, and massive user base.   Measure Your Digital Transformation Efforts   There is no one-size-fits-all digital transformation strategy. Ask these two questions:   Which tech disruption scenario are you encountering?   What should be the focus of your digital transformation strategy?   Such clarity should help you establish appropriate measures to track the progress of your transformation efforts (e.g., KPIs for “platform transformation” versus “preemptive reinvention”).   The truth is that your digital transformation efforts will be scrutinized! Unlike venture funding for startup disruptors, investments for incumbents’ digital transformation must come from its traditional businesses. You need to continuously justify the resource bridging from the old to the new. Having little to show after pouring in huge sum of money is the surest way to kill such transformations. You need to demonstrate real business value as you progress along.   Co-written with Mou Xu   About the authors   Sia Siew Kien is associate professor of Information Technology and Operations Management at Nanyang Business School at NTU Singapore while Mou Xu is research associate at the business school’s Asian Business Case Centre.   (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Inside Epic Games' Fortnite Battle Royale: Is "Free to Play" the Way to Go?

Prince Thomas

Digital

Fortnite has lately emerged as the poster child for the video gaming industry, having established itself as a cultural phenomenon within the community in a very short time. Even leading entertainment outlets such as Netflix now recognize it as competition.   With c. 200 million registered players, Fortnite was the biggest earner amongst video games, making $2.7bn of  revenue in 2018, as per Analyst firm SuperData. This is the highest annual earnings for any game, ever! The significance of this achievement is only escalated when one considers the fact that Fortnite is a "free to play" game and requires no initial investment from the consumer’s side.   Designed around a "games as a service" philosophy wherein games are viewed as a service rather than a product, somewhat like Hotstar which with its freemium model helps you enjoy select content free of charge, while members who pay get get access to exclusive content.     Along similar lines, Fortnite releases content on a regular basis in the form of battle-passes. The release of these passes are spread out over multiple seasons throughout the year and contain cosmetic items that alter the appearance of your character and weapon models. These cosmetics can be purchased via the in-game currency namely “V-bucks”, obviously exchangeable for real life money.   Paid vs Free   To put things into perspective, PUBG, the top earner in the premium games category earned around $1bn in  revenues  in 2018.   Note, premium games are those for which you need to pay an upfront cost, while free to play games are those that require no initial investment (like Fortnite).   Thereby vs. free to play games, PUBG doesn’t even make it to Top 10. Yes! There are more than 10 free to play games making more than $1bn in 2018 as compared to only one  in the premium list.   It has to be noted that while PUBG is a $20 title, it is also offered as a free to play version. In fact, a substantial portion of the money PUBG earned came from its free version that was released on mobile platforms. If we take away this portion of the revenue, PUBG won’t even cross the billion dollar mark.     An Example   The success of Fortnite and other similar free to play games has attracted attention of big players within the industry. There is a moving  focus towards games as a service model with a free to play "in-game economy".   A prime example of this shift would be publisher Electronic Arts’s latest release APEX Legends, one of Fortnite’s prominent competitors. The game was launched as free to play title in early February with zero publicity. Within a week of the launch, it snagged  over 25million registered players. Their shares surged more than 16% - their best single-day gain in more than four years.   Yet another example would be that of publisher Valve who launched a free to play version of their popular shooter CS:GO in 2018. This shifting trend is likely to continue throughout 2019 with more and more multiplayer titles like Unreal Tournament and Total War going the free to play way.   Will It Work?   Fortnite’s success bears testimony to the fact that free to play model can work and work rather well.   For multiplayer games that make most of their revenue through in-game transactions, charging for the game upfront makes little sense as it limits accessibility for potential players who might have tried the game had it been free of cost. Think of it this way, would 200 million players have bought Fortnite if they had to pay $20 for it? Would it bring in the same amount of money as it is bringing in now?   Shifting towards a free to play model would  allow publishers to reach a wider audience, which in turn will lead to increased customer engagement which in turn is bound to increase profits.   But Not Without its Challenges   Apart from the success that the free to play model brings in, it also brings with it its own set of problems. A free game like Fortnite will have more trouble keeping its player base engaged than a developer who has already charged an upfront cost. These games need to keep releasing content on a regular basis to prevent the formula from going stale. Also as the developer of a new “free to play” game, you run the risk of your game not being recognized among an ocean of similar releases. The more crowded the market gets, the more difficult it will become for the game to find an audience.     Conclusion   Is a company following Fortnite’s footsteps likely to enjoy the same amount of success? Not necessarily. Fortnite is a different beast in itself, it provides an environment for social interaction like none other. You can think of it as a Facebook for gaming. You log in at any time of the day, find your friends online and have a fun  time with them. But this time, the fun is more interactive and that’s what keeps bringing people back for more. The cosmetic system allows users to create unique designs for their characters and show it off to the world – a bit like Instagram this time .   There have been many attempts to replicate the Fortnite formula, but until now, none has succeeded. Additionally the developer, Epic Games also puts in considerable amount of resources in the analysis of player data obtained through feedback to constantly evolve the game into something that the players want. This truly highlights their achievement in keeping their large customer base engaged since the game’s release.   The benchmarks set by Fortnite might be hard to replicate as it launched into a market which had a demand, but offered little competition. However, that’s not to take away from the fact that free to play titles can’t succeed in crowded markets. Take for example League of Legends - a free to play game launched in 2009. The game brought in around $1.4 billion in 2018 in a market crowded with similar games.   Thanks to Fortnite, gaming has gone from being a niche market to a mainstream one, with more players coming in every day, bringing in different tastes and preferences on the type of games they like to play. This provides the publishers with enough breathing room to make good money without stepping on each other's toes. Video Games taking the free to play route will have an opportunity to attract a wider audience, all the while bringing in more money.   (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. LongShorts Podcast E:37

We like to talk Business and Finance. Figured we should do it for a living.

Transfin. Podcast E36: Brand Power, Clean Slate, Human Element

Professor S

LongShorts

Transfin. Podcast E35: Secrecy First, Immersive Power, Offline Works

Professor S

LongShorts

Transfin. Podcast E34: Legal Eagle, Value Chain, Business Ease

Professor S

LongShorts

Transfin. Podcast E36: Brand Power, Clean Slate, Human Element

Professor S

LongShorts

    Our podcast with Arjun Guleria (of Beam & Words, a Delhi-based brand communications & brand strategy firm) started with a conversation on Brands, but gradually changed course to reflect on his personal journey as an entrepreneur, the human element which is key for creative solutions, and the blessing that is his accountant!   P.S. He also humoured our usual digressions towards AI/ML, the myriad evolutions of consumer tech, for better, and for worse!   When Arjun started with his co-Partners, Beam & Words wanted to look at "Communications as a Whole", avoid siloes, and not become a hostage of platforms. 7 years later, seems not much has changed.    The TOC:   Why Brands First, Platforms Later?   We start by talking about brands and communication, the two main areas of focus of Beam & Words. Arjun tells us in detail about his “brands first, platforms later” ideology, through which the company places emphasis on identifying the story of a brand and not on the platform of promotion, which are often only momentary.   Starting Business with a Clean Slate   We move on to talk about Arjun’s relatable phase of imposter syndrome and feeling like the odd-one-out in the beginning, given the PR and advertising background of his co-founders, and his own in finance. It seems to have worked out to their advantage though, allowing them to start their business with a clean slate, bringing together different ideas and perspectives. This proved to be so important in the ever-evolving world of business and communication, that the company has now taken to hiring people from a variety of backgrounds!   Can AI get Creative?   Touching upon a topic from our previous podcast, in our last section we talk about offline versus online marketing, and similar to our previous guest, Arjun also talks about the benefits and the emotive aspect of the offline.   This discussion organically leads us to the topic of Artificial Intelligence (AI) and Virtual or Augmented Reality and their role in the marketing industry. We question whether the ever-more lifelike bots could ever replace humans when it comes to data interpretation and communication with clients, with Arjun arguing that despite being advantageous as efficiency tools, there’s still a long way to go before they can begin to offer creative advice.   (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

RBI Stance, Bank Downgrade, $100mn Raise and More...

Professor S

TheWeekThatWas

Transfin. Podcast E35: Secrecy First, Immersive Power, Offline Works

Professor S

LongShorts

    We sip Coffee with Shreya Soni, CEO & Founder of Delhi Secret Supper Club (DSSC) - India’s first-of-its-kind platform with a vision to enable "like-minded people to get together without an agenda". More than 6 years since inception, DSSC is now a leading curator of immersive experiences for the country’s most exclusive member base.   A former London-based Consultant, Shreya walks us through her journey as an Incognito (yes!) CEO and shares how Secrecy, even for herself, created the very hook and moat differentiating DSSC. Her thoughts on the value of curated discovery, the changing ebbs and flows of online/offline marketing, and her admirable forbearance for food and water allergies makes for a mighty interesting chat! The Agenda:    Deploying Secrecy in Business Our usual discussions on business acquire a different dimension in this episode, with Shreya bringing to the table a new approach – that of business executed in secrecy. We talk in detail about how she maintained the mystery surrounding the club with her innovative use of email (and even voice diffusers!), and its challenges and benefits. From Experiences to Experiential Marketing We move on to talk about how the company organically expanded from just curating experiences to experiential marketing and creative services. Shreya tells us all about what kind of work the company does for different clients, while going into detail about its marketing model and its approach for the online versus the offline. The Return of Offline (and Authentic Regional Cuisine) After the sudden explosion of the online world and social media a few years ago, people are now moving back to the offline world of privacy, and are more conscious than ever before about what they consume online.The topic of online and offline marketing naturally leads us to this discussion, with Shreya telling us how the offline world offers a kind of intimate approach to marketing that one can never find over the internet, making her prefer the former over the latter. Lastly, we touch upon the growing popularity of authentic regional cuisine and the idea of returning to our roots by embracing what we’re known for. Oh, and also how parental pressure and food are the factors that drive her business! :)   (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

New Unicorn, Auto Merger, Secondary Listing and More...

Professor S

TheWeekThatWas

Draft National E-Commerce Policy: Treading the Thin Line Between Regulation and Restriction

Professor S

LongShorts

Backdrop: The government recently released a draft e-commerce policy for stakeholder comments, barely two months post rollout of its new FDI policy which shook the nascent industry, especially major players. The Draft deliberates upon a comprehensive framework aiming to preserve consumer interest by creation of suitable regulatory mechanisms.   However, like most policy actions, it walks on a fine line of managing citizen interest at the expense of creating a less-than-conducive regulatory environment for the industry at-large - one that may not allow the country to reap the maximum benefit from the rapid digitalization of the domestic, as well as the global economy.   Let’s Start from the Start: India’s burgeoning e-commerce market was valued at $38.5bn in 2017 and is estimated to rise to $200bn in 2026. Electronic commerce and data are emerging as key enablers and critical determinants of India’s growth and economic development, facilitated by cheap smartphones and even cheaper data.   Here’s a rundown of the key points:   On Point?: Six broad issues have been touched, including i) data, ii) infrastructure development, iii) e-commerce marketplaces, iv) regulatory issues, v) promotion of domestic digital economy and vi) export.   Data is the New Oil: There’s an overwhelming push for a robust administrative, regulatory and legal mechanism to control data flows. The word “data” itself has been quoted more than 200 times within the 42 page document. The principal case has been that an individual consumer/user who generates data retains ownership rights over it.   Viewed in conjunction to the Personal Data Protection Bill submitted to the government (for consideration by the Justice BN Srikrishna Committee on 27th July 2018), the policy at the least envisages to regulate cross-border data flow while enabling sharing of community data (data collected by IoT devices installed in public spaces like traffic signals or automated entry gates).     Breaking it Down:   No data collected or processed in India shall be made available to a third party or to other business entities outside India, for any purpose, even with the consent of the customer. Neither can it be made available to a foreign government, without the prior permission of Indian authorities. The document, however, is light on details around potential implementation mechanisms. Push for a three-year data localization requirement    Backbone: Development of data-storage facilities/infrastructure is another vital part of the value chain recognized.   Data centres, server farms, towers and tower stations, equipment, optical wires, signal transceivers, antennae etc. will be accorded ‘infrastructure status’ – facilitating access to longer maturity loans, easier lending terms, and even cheaper foreign currency funding through the external commercial borrowing route. An ‘infrastructure status’ also seeks to streamline the regulation of the sector. Budgetary support to be provided for the exploration of domestic alternatives to foreign-based clouds and email facilities   Supply Chain Transparency:    To streamline functioning of the e-Commerce sector under the FDI Policy, e- commerce websites/applications are required to ensure that all product shipments from other countries to India must be channelized through the Customs route. The Policy provides for integrating Customs, RBI and India Post systems to improve tracking of imports through e-Commerce. All ecommerce sites/apps operating in India must have a registered business entity in India as the importer on record or as the entity through which all sales in India are transacted. All parcels under the ‘gifting’ route to be banned, with the exception of life-saving drugs. This move comes in light of companies exploiting India’s “gifting” rule whrein personal gifts priced below INR5,000 are exempt from duties. Several red flags have been raised in the recent times over numerous “gift” deliveries being made to the same address and heavy 15 kilogram parcels being brought in with a declared value of just INR3,000.     Watchdog: Given the inter-disciplinary nature of the sector, a Standing Group of Secretaries on e-Commerce (SGoS) would be appointed to regulate the issues effectively. No standalone regulator proposed, so far.   Bonus: The Policy also proposes regulation of advertising charges in e-commerce (including social media platforms), to create a “level-playing field” for small businesses, who otherwise have to allocate an excessively high proportion of their budget and working capital to advertising to find their potential customers. In our view such a stance borders on regulatory overreach and we’d be very wary of its detailed wording, whenever it comes out.   In Conclusion   While the draft ecommerce policy means well for MSMEs and startups who seek to break through the competitive space, it is also likely to increases their compliance costs having to restructure means of how they store and share data.   Giants such as Amazon and Flipkart will likewise be hit in a significant manner, forced to make huge changes to comply with the proposed rules, even as they have often been known to find legal or other ways to circumvent potential downsides.   The enhanced cost of compliance may also have an adverse bearing on the rate of investment in Indian e-commerce, specifically on FDI inflows.   As for the consumers, the policy seeks to offer some respite with strong anti-counterfeiting and anti-piracy measures, pushing e-tailers to publicly share all relevant details of the sellers listed on their portals and ensuring speedy redressal of consumer grievances.   While the draft at multiple instances reiterates the need for the creation of a facilitative regulatory environment for growth of e-commerce sector, it falls short of providing specific details on implementations or addressing any operational nuances.     Moreover, the manner in which the policy addresses the question of ownership of personal data has been termed as “unusually parochial”, often directly at odds with the recommendations of the Justice Srikrishna Committee and the decision of the Supreme Court in its right to privacy judgement.   With the Department for Promotion of Industry and Internal Trade having kicked-off a round of stakeholder consultations on the draft policy, one can only hope that the future iterations don’t propose ham-fisted solutions to problems, rather push for a more definite and implementable framework.   (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 Invest in REIT in India

Professor S

LongShorts

Global investment giant Blackstone and Bangalore-based real estate developer Embassy launched the first real estate investment trust (REIT) in India 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.)