We like to talk Business and Finance. Figured we should do it for a living. Join us as we chat on three of this week's key stories.
By Yves Doz, INSEAD Emeritus Professor of Strategic Management, and Keeley Wilson, INSEAD Senior Researcher. The Dynamics of Corporate Collapse are Caused by Three Phenomena. The annals of business history are replete with the names of once great companies that dominated an industry, only to lose pre-eminence and become shadows of their former selves or even disappear. Understanding why powerful companies fail and how to avoid such failure is one of the holy grails of business and management research, not to mention having spawned an enormous and lucrative consulting industry. Yet, the very fact that successful companies continue to fail is testament to an incomplete understanding of the drivers of corporate demise. Some argue that strategic outcomes and ultimately a firm’s future are determined by the choices, commitments and actions of top management. In this logic, stellar performance is linked to incumbent CEOs (think Jack Welch at GE, Lou Gerstner at IBM, Alan Mulally at Ford or Andy Grove at Intel) as is poor performance, even if the leader has only been in office for a short time (like Ellen Kullman at DuPont, Fritz Henderson at GM, Christopher Galvin at Motorola or Jorgen Centerman at ABB). Another school of thought puts the emphasis of corporate demise on an organisation’s structures, processes and business models which foster rigidity and so make adaptation and change extremely difficult, if not impossible. And finally, proponents of Schumpeterian creative destruction attribute corporate decline to a firm’s inability to adapt to a radically changing external environment – which has become all too apparent across a range of industries from bricks-and-mortar retail to publishing and communications in the face of technological disruption. While all three of these arguments are compelling, none alone is sufficient in explaining why and how companies fail – this calls for a more holistic view of a company over its lifecycle. We have been very fortunate and privileged to have such a perspective with over 20 years of research at Nokia Mobile Phones; a business that shaped an industry it came to dominate with one of the strongest brands in the world, only to all but disappear in a fire sale to Microsoft. “Ringtone: Exploring the Rise and Fall of Nokia in Mobile Phones”, our recent book which won the 2018 Academy of Management’s prestigious Terry Book Award, charts and analyses Nokia’s journey. But our findings are relevant far beyond the realms of Nokia’s experience in attempting to explain why successful companies fail. We found that what leads a company down a competitive dead-end is a combination of management volition, organisation adaptation and industry evolution, with each playing a more or less prominent role over time, and the interdependencies between them becoming lethal. Management Choices Management choices obviously contribute to a company’s decline, but it isn’t just the decisions of the incumbent management team that play a role. The seeds of strategic stasis are usually sown by management choices made a decade or so earlier. It is these decisions that lead to the heuristics, creeping commitments and hubris that create a context in which future action is taken. Strong heuristics, particularly from the unconscious or unintended learning a company experiences as it grows and overcomes crisis situations, become implicit ‘principles’ in decision-making. So, for example, in its early days, having invested huge sums in technology development, Polaroid found there was a very limited market for its expensive instant cameras and certainly not one large enough to sustain the company. In the face of this crisis, Polaroid adopted a film-first, ‘razor blade’ model whereby it sold cameras at cost but made a huge margin (around 70%) on the film for its cameras. This simple heuristic, that only film makes money, became entrenched and shaped future management decisions for the next 30 years. Even though Polaroid recognised the need to invest in digital technologies as early as 1985, successive management teams framed the challenge too narrowly in terms of ‘printing’ digital images rather than producing affordable cameras to capture images (as Japanese competitors Sony and Canon were doing). After numerous CEOs, restructurings and ‘new strategic directions’, Polaroid filed for bankruptcy. Poor and inadequate cognitive framing can also result from ‘creeping commitments’ – past decisions to which a company becomes hostage and which sets them on a direction from which it is difficult to deviate. Here, Nokia’s Symbian operating system provides a good example. Initially adopted by a consortium of mobile phone producers in 1998 in a bid to stave off the threat of Microsoft entering the industry, over time Nokia’s commitment to and continued investment in this device-centric operating system had a profoundly negative impact on its ability to adapt to a platform and ecosystem approach. Success tends to breed hubris and this, in combination with the voracious appetites of certain classes of shareholder, can lead to managers focusing on the operational issues which will drive greater efficiency for the benefit of short-term results and not long-term sustainability and growth. This is what happened at IBM under the leadership of Sam Palmisano, who was so focused on doubling shareholder returns every five years he failed to see, or acknowledge, that the competitive environment was changing. With no response to this shift, IBM was in serious trouble – although this wouldn’t become apparent to the outside world until a few years later. Organisation Adaptation Management choices lead to the implementation of structures, processes and business models which if left unchallenged can result in dysfunctional rigidity and become a formidable constraint to much needed adaptation further down the line. At IBM, it wasn’t long after Ginni Rometty succeeded Palmisano as CEO that the depth of problems began to show. Fewer corporate customers were buying hardware in favour of cloud solutions and ‘software as a service’ (SaaS) and this had a significant impact on the firm’s performance. Yet IBM was trapped in a highly integrated, symbiotic business model in which hardware sales were tied to both high margin software sales and the proliferation of IBM consultants to install and maintain this. For years, this business model had stifled growth initiatives and made change extremely difficult. After brave choices and a long, difficult and painful reorganisation, IBM is finally beginning to re-emerge to fight in a new competitive environment. Organisation structures can prove just as big an impediment to much needed change as out-of-date business models. Both ABB and Nokia found themselves mired in infighting and intense internal competition due to matrix structures which proved difficult (and ultimately impossible) to manage as different groups with vested interests sought to protect their corners. In this scenario, under performance pressure, misinformation from business groups tends to filter upwards giving senior management a false impression of how a company is faring. Combined with a lack of internal collaboration that prevents people from ‘connecting the dots’ which point to changes in the external environment, it becomes clear how structure can play a large part in pushing a company towards failure. Changing Environment When the very nature of an industry changes, this is bound to result in casualties and successful incumbent companies are perhaps the most vulnerable as they are more likely to be locked into a co-evolution with existing partners, suppliers and major customers when it comes to a vision for the future. In addition, both management choices and the level of organisational adaptation will make it more or less difficult for a firm to step out of its current business model and recognise the environment around them is radically changing. Neither the board nor the management of Kodak understood how fast the environment was changing from film to digital photography, and so management choices fatally reinforced the importance of the core film business. With the support of IBM’s board, Palmisano was so focused on increasing shareholder returns that he failed to see the locus of competition was shifting to the cloud and on-demand. And Nokia was so locked into its product-centric view of the industry, its management couldn’t conceive of the platform-based future Apple and Google were creating. Weathering the Storm While external shifts in the nature of an industry clearly play an end-stage role corporate failure, it’s the interdependencies between these changes, management choices past and present, and the structures and business models a firm has adopted which ultimately determine whether a company has the ability to ride that change or be brought down by it. It is only companies that have made bad management decisions and have poor organisation structures and business models that succumb to the external forces of change. Yves Doz is an Emeritus Professor of Strategic Management at INSEAD and the Solvay Chaired Professor of Technological Innovation, Emeritus. He is the programme director for the Managing Partnerships and Strategic Alliances programme. Keeley Wilson is a senior researcher at INSEAD. Follow INSEAD Knowledge on Twitter and Facebook. This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
To say the Indian banking sector is in turmoil is an understatement. The NPA crisis has only snowballed since getting started with no end-point in sight. Lawyers, insolvency professionals, borrowers, and banks are having a field day in and around our country’s bankruptcy tribunals. What was condescendingly declared as an issue sitting within public sector banks quickly morphed into something much broader, catching private sector banks off guard. Side drama is not in short supply, with intermittent episodes showing newer governance lapses. In an almost seasonal fashion, we had the PNB scam end of winter, Chanda Kochhar’s conflict of interest saga early summer, now the IL&FS debt crisis kicking off autumn. Whips are being cracked, albeit selectively. Case in point being RBI’s actions on private bank CEOs. First casualty was Shikha Sharma, Axis Bank CEO, whose term extension was reduced to year end (instead of the original request which would have lasted her tenure till 2021). Surge in bad loans and systemic lapses were reportedly cited as reasons by the Central Bank. More recently, similar fate befell YES Bank’s promoter and CEO Rana Kapoor, whose tenure was also shortened till Jan 2019, a position he has enjoyed for 15 years since founding the financial institution. Weak compliance culture, weak governance, and wrong asset qualification reported as drivers. Mr. Kapoor’s ‘dismissal’ is different from Ms. Sharma's. Unlike the latter, he is in effect a 20% shareholder in a ‘not so much’ widely-held stock. No wonder the share price tanked -29% the day after, partly due to the shock value of dismissal, part because of fears around regulatory over-reach and the possibility that the RBI may know something about YES Bank’s asset quality that investors don’t. In any case, it is interesting to assess if the Central Bank is following any recognizable logic while dismissing top management. Let us first ignore that a similar crackdown hasn’t transpired across public sector banks. But that question, to start with is too distant from the doors of logic, so better to ignore. I map India’s 6 biggest private sector banks on a few common criteria. Aside from type of ownership and entrenchment of CEO, former denoted by share of promoter holding and latter by length of tenure, I also lay down the bank’s expected Return on Equity and Loan growth (to indicate management’s ability to generate profitability and grow) and its forward P/B or price to book ratio (indicating investor’s perception of the bank’s valuation). Lastly, have included the bank’s net NPA ratio to indicate the size of its bad loan problem. The results of this exercise and its comparison against RBI’s recent decisions have been revealing. Source: Market data and Company disclosures Interestingly, YES Bank and Axis, whose CEOs have been shown the door are not the worst when it comes to NPAs, ROEs, P/B and loan growth. In fact, YES Bank has shown best-in-class growth and returns and the second lowest proportion of NPAs. Though Axis Bank is an underperformer and perhaps Ms. Sharma as a result deserved the action taken against her, she would perhaps sit in the same category as ICICI/Ms Kochhar, the latter demonstrating the slowest growth, the highest NPAs, and a much more questionable reputation. The logic behind Mr. Kapoor’s dismissal is elusive. Based on this framework, it could might as well be Mr. Puri, Mr. Kotak, or Mr. Sobti, all enjoying equivalent terms in their respective institutions, equivalent performances to Mr. Kapoor, and a certain degree of entrenchment. It is good that the RBI is cracking the whip to resonate across D-street, but it needs to demonstrate a certain degree of fairness and transparency while it does so. Managing expectations could go a long way to maximise shareholder interest, instead of delivering shock value which has become its norm lately. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
A single conversation with a wise man is worth a month’s study of books. - Chinese proverb Continuing with my investing chat series with smart minds, I had a deeply thought provoking conversation with Anshul Khare. Anshul Khare works as a software freelancer in the IT industry in Bangalore. He studied engineering at IIT Bombay. An avid reader of books from various disciplines including investing, business, personal finance, human behavior, and decision-making, he is a guest blogger at popular value investing blog www.safalniveshak.com. Anshul has also authored a book called Mental Models, Investing, and You. He can be reached on Twitter @anshul81. Anshul is an engineer, value investor, author and blogger- all rolled into one! When I reached out, Anshul was gracious enough to spare some time for a chat. I believe that many hundred hours spent on reading, thinking and blogging has permeated into this conversation. So dear friends, please grab a cup of coffee; sit back and (hopefully) enjoy the conversation. Ravi: Hi Anshul, Please tell us something about yourself and how you got into the world of investing/behavioral investing with an IIT background. Anshul: Hi Ravi. Thanks for inviting me. I come from a place called Bilaspur — a small town in the state of Chattisgarh. In 2003, I graduated with a B.Tech degree in chemical engineering from IIT Bombay. Few months into my first job, which was in a chemical manufacturing company, I figured that I didn’t want to pursue a career in that industry. So I came to Bangalore and joined the IT industry. Since then I have been in here and have worked with companies like AOL, Symantec, and Paytm. Currently, I work as a freelance software consultant. Around 2010 I chanced upon a book named "The Warren Buffett Way" and instantly got hooked to Buffett’s way of life, business, and investing. But do you know what a bigger discovery than reading about Warren Buffett was? Finding Charlie Munger. Munger’s insights on multidisciplinary learning and behavioral finance punched a big hole in my worldview. The more I studied Buffett and Munger the stronger I felt that my temperament suited their way of investing — the value investing way. Their philosophy on making investment decisions and the way they defined risk, made a lot of sense. That way, my initiation into the stock market was a bit unusual. Until I discovered Buffett, my exposure to equities had been approximately zero. I got pulled towards value investing as a result of my fascination with Warren Buffett. Ravi: There is a popular saying which goes like this “When the student is ready, Master appears”. I believe that is what happened here and completely agree that Buffett and Munger have been an outstanding source of inspiration to investors all over the world. I am now curious to know how has your investing philosophy/process evolved over the last 8 years. What has influenced your present line of thinking? Anshul: I started investing in the stock market in 2010. So I am yet to witness a severe market decline first hand. And I believe, to really call oneself a long-term value investor, one needs to experience one full cycle of the stock market, which includes a bull run as well as a severe market crash. So I’ll only know how fragile or robust my investing process is when I find myself in the middle of a market panic. Which means, it’s highly likely that my investment process might change significantly once I see a crash. With that disclaimer, let me share a few things about what has changed in the way I invest today as compared to a few years back. I started out looking for bargain stocks. Which means I focused a lot on the numbers and didn’t think much about the qualitative factors. And part of the reason is that it’s easy to focus on what’s easy to measure, e.g., financial numbers. Quality and the intangible aspects of a business are difficult to quantify. However, that strategy didn’t work well and I ended up investing in quite a few value traps, i.e., businesses that were cheap because they deserved to be cheap. Bartronics is one name that I can recall. Fortis was another. In last few years, I have slowly gravitated towards stocks where the underlying business is of high quality. For example, companies that own consumer brands or companies run by people who are intelligent, smart and have a long history of being ethical and shareholder friendly. Ravi: Completely agree on investing in quality business run by honest management. Buffett put it best when he said “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Based on your current thought process you have mentioned, what are the criteria’s or characteristics you look for in a business for it to be considered investment worthy? Anshul: Being a part-time investor, if I expect to generate investment returns similar to what Warren Buffett did then I would be fooling myself. It’s maddeningly hard to beat the average market return by more than 10% over the long-term. And that’s true even for a full-time investor. Which means it’s virtually impossible for someone like me who has only a few hours a week to spare for investing. With those constraints, I think it makes a lot of sense to leverage others who I respect for their investing wisdom. Great scientist Sir Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of Giants.” Which brings me to Cloning — an idea made popular by famous value investor Mohnish Pabrai. Cloning simply means that you begin with companies that other smart investors are buying, and then you see if those investment ideas fit into your own investment framework. Remember, the gap between cloning and blindly acting on a stock-tip is ten miles wide. Still, many investors miss the difference and invest based on the news on what other famous investors are buying and selling without really understanding what they are getting into. Even I am guilty of making this mistake. Copying an investment idea is just the first step. So that’s the first characteristic I look for — is this company owned by any of the smart value investors that I know? After that, I look at numbers. Has the business grown its revenue and net profits consistently over the last few years? I prefer more than 12-15% CAGR over 7-10 years. How does the return on invested capital look like? It should preferably be more than 15%. Does the company generate consistent free cash flows and are they growing? How leveraged is the balance sheet? A debt to equity of more than 1 makes me uncomfortable. All the things that I have listed above are like screening tests. Very few businesses that I pick up for analyzing pass all the tests. Once a business is through these filters, I read the annual report and try to understand what drives the business engine for the company, i.e., I try to answer questions like — how does it generate revenue? Who are the customers and the competitors? I also try to wrap my head around the industry. Is it growing? Is it an organized or unorganized industry? Who are the major players? And finally, I try to figure out if the people running the business — the CEO or the promoters — are ethical and shareholder friendly. Ravi: Scanning the portfolio of successful investors is a great starting point for sourcing of your investment ideas. Corollary to the above question, if there were to be “Anshul’s 5 rules for successful stock investing” then what would that be? Anshul: Before we can discuss any rules, it’s important to lay out two things. First, investing is a field where rules are very subjective. What works for me may not work for others and part of the reason is that the definition of success differs from person to person. Are you investing to build a retirement corpus? Or are you comfortably wealthy and investing just to preserve the capital? Maybe you are doing it for the thrill because you’re fascinated with the idea of compounding money rapidly. So the term “successful stock investing” is very broad. That said, my reason for investing is to beat the inflation. So if I can manage to compound my money at a CAGR of 15-18% over the long term (30+ years), I would consider myself a very successful investor. Second, even if you have defined what success means to you, there are several methods and strategies to be successful in the stock market. In this regards, I had an epiphany when I read the book called "What I Learned Losing a Million Dollars." Let me reproduce an excerpt to make my point – “Why was I trying to learn the secret to making money when it could be done in so many different ways? I knew something about how to make money; I had made a million dollars in the market. But I didn’t know anything about how not to lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person’s method was making money, another person with an opposite approach would be losing — if the second person were in the market. And that’s just it; the second person wouldn’t be in the market. He’d be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money. The moral, of course, is that just as there is more than one way to deal blackjack, there is more than one way to make money in the markets. Obviously, there is no secret way to make money because the pros have done it using very different, and often contradictory, approaches. Learning how not to lose money is more important than learning how to make money. Unfortunately, the pros didn’t explain how to go about acquiring this skill. So I decided to study loss in general, and my losses in particular, to see if I could determine the root causes of losing money in the markets.” This idea — learning how not to lose money — rehashes Charlie Munger’s unconventional advice for dealing with problems in life and business. Some problems, Munger says, are best solved backward. So to answer your question, let me use Charlie’s inversion trick and talk about “rules for avoiding loss in the stock market.” And instead of five, as you asked, let me list only three; for in investing less is more. First rule: Avoid debt. Personally as well as in the companies that I invest. I never borrow money to invest and I stay away from companies that have unreasonable debt on their balance sheets. Rule Deux: Avoid bad partners. Remember, a man who steals for you will steal from you. I avoid investing in companies where the management has a history of corporate governance issues. In this context, I consider government also a lousy partner. Not that government has bad intentions, but the government’s interest is usually misaligned with minority shareholders. So I avoid all PSUs. Rule number three: Avoid dogmatism. All my beliefs, views, and rules can change in the future. The famous British economist John Maynard Keynes is often quoted as saying: “When the facts change, I change my mind. What do you do, sir?” Strong opinions loosely held are a very useful principle to follow. Ravi: I had previously done a compilation of investing rules by successful investors. I must admit that your set of rules is refreshingly unique. Next up, what has been your best investment idea (need not be the most profitable) till date? Can you also elaborate on the thinking that went behind the investment idea? Anshul: Thanks for pointing out that the best investment idea doesn’t need to be the most profitable one. And it took me a long time to understand this concept. Investing is a lot like poker. In the world of poker, the quality of the outcome of each game is loosely connected to the quality of decisions. A right decision can result in an undesired outcome and vice versa. But over a long term, i.e., over several games of poker, the player with better decisions will come out ahead. It’s not very different in investing. Which means, a better way to think about your investment decisions is to look at them as a series of bets instead of analyzing every decision and its outcome in isolation. Here’s an excerpt from Anne Duke’s book "Thinking in Bets" that I strongly recommend for every investor. “Decisions are bets on the future, and they aren’t ‘right’ or ‘wrong’ based on whether they turn out well on any particular iteration. An unwanted result doesn’t make our decision wrong if we thought about the alternatives and probabilities in advance and allocated our resources accordingly…Poker teaches that lesson. A great poker player who has a good-size advantage over the other players at the table, making significantly better strategic decisions, will still be losing over 40% of the time at the end of eight hours of play. That’s a whole lot of wrong. And it’s not just confined to poker.” In light of the above insight, if I were to talk about my best investment idea, I would say it was Noida Toll Bridge. I never made any money on the stock. I ended up selling it at no profit and no loss. It had qualified in all my investment filters, which I have mentioned earlier in this conversation. However, it turned out to be a bad investment because of things outside my control. Government intervention was a low probability event in this case, but it did happen. In my view, it was a case of “good-decision-bad-outcome.” In future, if I get to make that kind of investment again, would I do it? Yes, absolutely. Ravi: Talking of “Thinking in Bets”, my thoughts went to Michael Mouboussin’s 10 attributes of great investors where one of the key attributes is to “Think Probabilistically” (there are few sure things). From masterstroke let’s move on to mistakes. Mistakes are sometimes referred to as “unexpected learning experiences.” Can you share any investing mistake(s) you have made? Anshul: Mistakes indeed are potential learning opportunities. But when I repeat the same mistake, it means I didn’t learn anything from it. So I want to take this opportunity to talk about those “mistakes’, the ones that I continue making even now. The ones which I should be learning from, but I fail, again and again. It’s the mistake of omission. There have been many instances where I should have bought a stock, but I didn’t because I let the behavioral bias dictate my decision. Anchoring bias is one where I got fixated on a particular price and waited for the stock to drop to that number. Unfortunately, the stock didn’t know that I was waiting for a certain price tag. Not allocating sufficient capital to a high-conviction stock is another mistake that I continue to make. Some stocks that fall in this category are Cera Sanitaryware and VST Tiller. In both the cases I started with very small positions and then kept waiting for the stock to come back to my buying range. Mistakes arising out of behavioral biases are hard to correct. But I am working on it. I know I can never eliminate them completely, but I hope I can minimize them. Ravi: John Templeton put it nicely “The only way to avoid mistakes is not to invest — which is the biggest mistake of all”. Mistakes are a proof that we are at least trying! Related to this, what has been the most important investing lesson(s) you have learnt from your time in the market? Anshul: There are many. But let me talk about the one that I keep reminding myself frequently. After a few years in the stock market, I learned that there are broadly three types of edges that any investor can exploit to generate superior returns. First is the informational advantage, i.e., having privileged information. Earlier, only large institutions had this advantage. But today, in the Internet era, everyone has access to almost all the information instantly. When everybody has the advantage, it ceases to be an advantage. Second is analytical advantage. If you can draw unconventional insights from the public data then you decidedly have an edge over others. But very few people (like Warren Buffett) are wired to have that kind of deeply analytical mind. Moreover, the large institutions (with armies of analysts poring over mountain of market data using sophisticated tools) leave very little chance for a part-time investor to discover any unnoticed insight. So that leaves the small and the part-time investors with only one thing to capitalize on; the time advantage. As a small investor, if I am investing my surplus cash, nobody is looking over my shoulder and pushing me for quarterly performance targets. Which means, once I have bought a good quality business, no one can force me to sell it if I don’t want to. That gives me the staying power and that creates opportunities for small investors. Patience and willingness to hold for the long term — that is our edge. This is a valuable lesson that I have learned in the stock market in last eight years. Ravi: Thinking in terms of years rather than days or months to have a long-term orientation is definitely an invaluable lesson for an individual investor. Seth Klarman put it eloquently when he said, “The single greatest edge an investor can have is long term orientation.” From investing lesson let us move on to investing advices. What has been the most important investing advice(s) you have received on investing? How has it influenced your investing process? Anshul: It’s hard to single out anyone as the most important. Developing an investment philosophy is an incremental process. Every book I have read, every investor I have interacted with, every investing video I have watched, had some impact on the way I think about investing. One that immediately comes to mind is a post that Prof. Sanjay Bakshi wrote a while back. It was titled "Return Per Unit of Stress." I always assumed that as investor, my primary goal was to maximize the risk adjusted return on my portfolio. However, I never gave importance to intangible factors associated with that goal, i.e., the stress it brings. If I have stocks in my portfolio that give me sleepless nights, even occasionally, it’s not worth it. And that may not be true for every investor. It’s been an advice that resonated a lot with my temperament. Ravi: This is the first time I have come across this idea/advice of thinking in terms of 'return per unit of stress'. Sounds interesting. Moving ahead, are there any particular investor(s) or author(s) who have had a significant influence in your investment thinking? How? (In terms of say mentoring or inspiration.) Anshul: I think what I said for the previous question holds equally well for this one too. Consciously or subconsciously, every single investor or author I’ve met in my life has had some influence on my thinking. But if I had to take few names I would say Nassim Taleb is one author who has influenced my thinking a lot. Although he is a trader, all his books have refreshing insights on value investing and decision making in general. Mohnish Pabrai is another author/investor who I admire a lot. He is a great simplifier not just in words but also the way he has structured his investment philosophy. Ravi: Next up is one of my favorite questions. Let us say a bunch of enthusiastic beginners approached you for advice on how to be a successful stock investor. What would your advice for them be? (If you could elaborate on the Do’s and Don’ts, it would be really helpful). Anshul: In the movie “Wall Street” (the older one), Charlie Sheen’s character — a promising big shot in the stock market—tells his girlfriend: “I think if I can make a bundle of cash before I’m 30 and get out of this racket, I’ll be able to ride my motorcycle across China.” Riding a bike across China is passed off as such an impossible dream that most people would believe that one needs to be a retired millionaire before he can live that dream. First, this “riding a bike across China” dream doesn’t really require you to be a millionaire. Second, “riding a bike across China” isn’t all it’s cracked up to be. Most of the times our goals and ideas of success are borrowed ones. So the first thing I would urge the bunch of enthusiastic beginners is to define what success means to them. Are they really after success or is it something else? Perhaps being a successful stock investor is a stepping-stone to a larger goal. Have they figured that out? It’s extremely important to be clear about what we want. And what we want may keep changing with time and that’s absolutely fine, I guess. However being aware of what is it at this moment, is very crucial. Am I evading your original question? Yes, because I want to nudge those enthusiastic beginners in the direction of asking a more important question. If they begin chasing the wrong rabbit, it doesn’t matter how well they do it. Once a person has zeroed on what exactly he’s looking for — the true north — then it’s just a matter of navigating through a maze of trial and error and incrementally stacking the odds in his favor for achieving the goal. Ravi: Finding “the true north”!! Brilliantly put, Anshul. Remembered the following lines from Lewis Carroll’s masterpiece Alice in Wonderland: “One day Alice came to a fork in the road and saw a Cheshire cat in a tree. ‘Which road do I take?’ she asked. ‘Where do you want to go?’ was his response. ‘I don’t know,’ Alice answered. ‘Then,’ said the cat, ‘it doesn’t matter’.” Continuing with my previous question, if they sought your advice on the best book(s) for them to read as a stock market beginner then which book(s) would you recommend? Why? Anshul: Warren Buffett’s annual letter to shareholders. Technically, it’s not a book but it’s available in book format also. Buffett’s letters aren’t just about investing. They have tremendously useful lessons on business and on life. It’s a super text, i.e., its content is timeless. In my first reading, I focused on what Buffett was saying. In the second reading, I learned how Buffett communicates his philosophy, i.e., by using simple communication style, by using humor, and by using analogies. In the third reading, I noticed what Buffett was not saying. For example, he never makes predictions about the stock market. The second book I’ll recommend is "The Dhandho Investor" by Mohnish Pabrai. It’s a great book for beginners. It explains various value investing principles in an easy to understand language and lots of real examples and case studies. Ravi: Moving on, let us say there is a situation where you could retain only three books from your entire book collection, which books would those be and why? Anshul: The first would be "Sapiens" by Yuval Noah Harari. I consider it to be the best book that I have ever read outside the field of investing. Harari is a gifted writer and an outstanding historian. I wish my history teacher taught like him. Before reading Harari’s books, I never thought that history could be so interesting and so useful. In his narrative, Harari weaves in powerful insights. Second, Peter Kaufman’s "Poor Charlie’s Almanack" (PCA). As investors, we don’t just invest our money. We invest our time too. And unlike money, time is severely limited and irrecoverable. Which means learning to invest one’s time wisely is much more important skill to learn than investing money. And the principles of wise investing are applicable everywhere - in business, in stock market, at work, and in relationships. My third pick would be "Antifragile" by Nassim Taleb. Antifragility as such an important idea that I feel it should be compulsorily taught in the schools. Antifragility is not a novel idea. Mother nature is inherently antifragile. If we can arrange our lives to bring in the elements of antifragility, it would not only bring financial wealth but it can make us physically, emotionally, and mentally super strong. Now that I have already told you my three picks, I want to add another spin to your question. My current library is a reflection of the kind of thoughts and ideas that occupy my mind most of the times. Had I not picked up Warren Buffett’s book back in 2010, perhaps my library would have looked very different. Finding Buffett’s book was a serendipitous event in my life. I sometimes imagine, had I picked up a book on arts or music and had that subject interested me as much as Buffett’s book did, I might be doing totally different things and thinking different thoughts today; and that wouldn’t be a tragedy. It’s just an alternate reality that didn’t happen. So coming to your question again, if I am forced to retain only three books from my entire book collection, subconsciously I would probably want those three books as the seeds which can eventually become the full blown library very similar to the one I have right now. But that way, I am giving up on the opportunity to experience a totally different alternate reality, isn’t it? What if I don’t retain any book from my current library and start with a clean slate? That will allow the serendipity to send a totally new book my way and possibly a different but equally exciting future. Wouldn’t that be fascinating? Ravi: Anshul, it was wonderful picking your brains. I thoroughly enjoyed every bit of this conversation and I am sure readers also would love it. Last question from my end, do you have any special message for the readers of stockandladder.com? Anshul: Greek philosopher Socrates once said, “An unexamined life is not worth living.” I think there’s a lot of wisdom in those words. Thinking deeply about whatever we do, endlessly questioning the things that seem to be important to us, and an unbiased examination of every aspect of our lives (which is devilishly hard) would probably bring satisfaction and joy for most people. Ravi: That was an insightful, informative and intellectually stimulating conversation, Anshul. Thanks for sharing your thoughts, experiences and wisdom with Stock and Ladder readers. Wishing you the very best for your life, career and investing journey. Investing is a marathon where we try to get better every single day and hope that all the daily improvements we make will compound into something big. To that end, dear reader, I sincerely hope that you enjoyed this conversation as much as I did. I also wish that you found at least a little something in this conversation to ponder about or add value to your investing journey. Keep Learning and Happy Investing!!! Originally Published in Stock and Ladder (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
By Benjamin Kessler, Asia Editor and Digital Manager, and Steven Sweldens, INSEAD Distinguished Research Fellow. With literally thousands of ads hitting us every day, it’s impossible to avoid being influenced. Society has long been of two minds about advertising. On the one hand, it promotes marketplace efficiency by educating consumers about new products. On the other hand, people justifiably worry that its power to impart information may outmanoeuvre our rational controls. For example, market researcher James Vicary’s 1957 experiment with subliminal messages—in which he claimed to have sent cinema snack-bar sales soaring after flashing plugs for popcorn and soda at unsuspecting patrons for one three-thousandth of a second—prompted a panic that swiftly reached Capitol Hill. Vicary was ordered to repeat his experiment before an audience of lawmakers. Subliminal advertising bans were summarily introduced in several U.S. states, with one congressman calling the technique “made to order for the establishment and maintenance of a totalitarian government”. However, Vicary later admitted his findings were fraudulent, and more recent studies failed to find evidence for subliminal advertising’s effectiveness in changing attitudes. So can advertising, in fact, “teach” us things without the assent of our conscious mind? Perhaps the answer is hiding in plain sight, rather than in the subliminal under-layers of consciousness. In a 2012 paper in the Journal of Experimental Psychology: General, a research team led by Mandy Hütter (of Eberhard Karls University Tübingen) and Steven Sweldens (of RSM, Erasmus University and INSEAD) recounts experiments where visual stimuli presented in full view appeared to precipitate unconscious learning. Following on this research, their recently published article in the Journal of Consumer Research delves deeper into automatic mental impressions triggered by supra-liminal stimuli. Their evidence seems to suggest that at least part of our response to advertising is beyond our control. How Advertising Works Hütter and Sweldens’ research focuses on a technique that has long been employed by advertisers: evaluative conditioning (EC), which pairs things in hopes that the positive or negative associations of one will rub off onto the other. EC is the reason so many brands rely on celebrity endorsements, and cute animals often feature in television commercials, e.g. Coca-Cola’s polar bear spots. Advertisers have found that a quick way to win love for their product is to position it alongside something or someone people already love. The researchers investigated whether the enduring success of marketing techniques such as EC could be partly due to automatic response. Drawing upon past research, they identified several conditions that would have to be satisfied for a response to be deemed uncontrollable or automatic. For example, it should appear regardless of a strongly motivated attempt to repress it, and it should be present even when the conscious mind is occupied with something totally different. Six EC-based experiments were run in the lab, in which a neutral image—human faces in the first set of trials, product logos in the later ones—was paired with something either pleasant (e.g. beautiful natural scenery, people having a fun day out) or unpleasant (e.g. cockroaches, graveyards). Participants were then asked to register their opinion of the face or logo. Some participants received no prior instruction; others were told to directly disobey the EC cues, by liking images paired with ugly things and disliking those paired with appealing things. With each experiment, the researchers varied the above paradigm to test for different aspects of automaticity. In one study, half the participants were asked to perform the EC task while memorising four-digit numbers. In another, the stakes were raised with a €20 payout promised to the participants who followed instructions best. To trace the invisible processes underlying participant responses, results from all six experiments were put through a model designed to disaggregate the data and generate granular estimates of controllable and uncontrollable effects. The model allowed Hütter and Sweldens to analyse effects for each face or logo used in the experiments. Overall, they found consistent statistical evidence of automaticity. Even when participants made a conscious effort to flout EC, their ability to do so never quite matched the impact of EC itself when working at full strength. The difference may correspond to a subtle but indelible influence exerted by associative techniques such as EC, despite our attempts at rational resistance. Faces vs. Logos Moreover, the uncontrollable effect was far greater for the experiments mimicking marketing scenarios. In one experiment using logos of bottled water brands, the portion of participant response owing to automatic effects was approximately twice the average for the face-based studies. Sweldens speculates that abstract marketing messages such as logos are better at bypassing our rational defences because we come to them with less real-world baggage. Their neutrality is a kind of blank canvas that can more easily be filled with associations and connotations via EC and other techniques. Once applied, the “paint” dries quickly and forms a complete picture in our minds. At least sometimes, this picture will likely help determine our impression of the brand in question. As Sweldens says, “If you see 20 commercials, and are trying not to be influenced, for four or five of them, you are going to fail and your attitudes are going to be changed despite your best efforts.” The Two Systems Consider Sweldens’s comment in light of reports that the average adult is exposed to as many as 5,000 ads in a given day. Consumers may need more than a caveat emptor approach to withstand the daily advertising barrage, especially in sensitive domains such as food advertising, pharmaceutical advertising and advertising targeting children. For example, a 2016 article in the Journal of Bioethical Inquiry found that pleasing imagery of the sort commonly used in American prescription drug advertisements strongly affected consumer opinions of pharmaceutical brands. The authors saw reason for federal regulators to mull more serious involvement. Beyond the marketing sphere, the findings provide supporting evidence for the two-track learning process detailed in psychologist Daniel Kahneman’s bestseller Thinking, Fast and Slow. Our cognitive faculties, Kahneman wrote, are split into an instantaneous and intuitive “System 1” and a reflective and deliberate “System 2”. Hütter and Sweldens’ experiment combining EC with number memorisation demonstrated that while “System 2” has its hands full, “System 1” is as receptive as ever to outside impressions. Advertisers, then, seemingly have nothing to fear from our world of ever-increasing distraction. Steven Sweldens is Endowed Professor of Marketing and Consumer Behaviour at RSM, Erasmus University, and the Director of Doctoral Education at the Erasmus Research Institute of Management. Sweldens has been affiliated with INSEAD since 2009, first as an Assistant Professor of Marketing (2009-2015) and as a Distinguished Research Fellow since then. 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.)
Yesterday, several mainstream news outlets reported that Flipkart is progressing towards buying an unknown stake in Hotstar. While the reports are largely speculative and unsubstantiated, there might be some merit in assessing this grapevine, nevermind its far-fetched nature. First things first, the attractiveness of Hotstar within the Indian OTT marketplace is hardly refutable, as I have alluded to in a previous post. It is a fast-growing front runner in the Indian Video-On-Demand (VOD) space. Live sports and key content rights have helped drive robust growth in subscribers to over 75mn in a trice. A heightened risk profile emerging from meaningful reliance on third-party programming might be the only loose end in an otherwise high quality asset. So Why Would Flipkart Be Interested in Hotstar? The rumored investment appears to be broadly in-line with recent industry-wide M&A activity. As such, Flipkart-Hotstar comes across more as a play right out of Amazon’s playbook i.e. use video as a pull into the core e-commerce business. However, there are nuances. First, Amazon did not purchase Prime Video but built out its video business. Amazon’s Video play is centered around its multi-faceted membership programme aimed at creating an extensive eco-system in which Prime Video is just one of the several moving pieces, albeit an important one. In that context, a stake in Hotstar is hardly a parallel. An equity investment in video platform does not really suggest an entire eco-system play but rather a strategic long position in a high quality asset with a promising growth outlook. Second, if the objective is to create a membership play akin to Amazon’s Prime Membership where content and e-commerce services are bundled in together, then unless it is a majority stake or an outright acquisition, the investment as such seems like an overkill. The bundled value proposition can be created via partnership agreements. In fact, Hotstar already is one of the Internet partners for Flipkart Plus – Flipkart’s customer loyalty programme which competes with Amazon Prime. Third, the argument that Hotstar is a fantastic high-growth asset and Flipkart/Walmart want to take a bullish stance and in effect go long Hotstar appears far-fetched. While it might be logical rationale, it would make more sense if Flipkart were a private equity or an asset management firm notwithstanding the fact that Flipkart can very realistically make a profitable exit from the position via a secondary sale or even a potential Hotstar IPO in future. However, by that logic, tomorrow they could perhaps even buy stocks of Netflix and Amazon because they feel bullish about the underlying business. Flipkart is not an investment firm. All this leads me to believe that the key reason supporting Flipkart’s Hotstar chase is data. Perhaps buying stake in Hotstar is the only way for Flipkart to get access to consumer data that Hotstar hoards and continues to generate on the mobile device. Recall that about 90% of Hotstar’s watch time is on mobile and with 75 million subscribers on board, it is highly conceivable that there are several data points that could be of interest for Flipkart to understand consumer behaviour. This could potentially bode well for Flipkart’s underlying e-commerce business and subsequently uplift Flipkart’s membership programme. However, there is a caveat - to what level Flipkart can access Hotstar’s data library via an equity investment is debateable specially when size of the stake is unknown. However, all this is just one side of the equation. The other side is what makes the proposed transaction even harder to digest in my view. Why Would Hotstar Want Flipkart as an Investor? This is where things get blurry really fast. What is it that Walmart-owned Flipkart brings to the transaction other than just capital. Hotstar is owned by 21st Century Fox which itself is in process of getting taken out by Disney. In that context, would Disney/Fox even want Walmart to gain exposure to their prized Indian OTT asset? It is not an easy question to answer but it certainly makes the rumored transaction slightly perplexing. In my view, Flipkart ought to bring more than just capital to the table. First, Hotstar has Fox and Disney behind it both of whom have access to robust American capital markets in addition to fairly deep existing coffers. Consequently, Hotstar appears to be a well-resourced company. In fact, Hotstar recently raised INR 500+ crore from its parent. Second, why would Hotstar want to dilute its shareholders. The only plausible explanation I see in this regard is the case of a rich valuation that perhaps Hotstar can fetch. A valuation that exceeds what Hotstar possibly values itself might help it gain traction in future capital raises and more interestingly support the stock prices of Disney/Fox who can possibly argue that the true value of Hotstar is not reflected in their stock price. Third, the timing is puzzling. With Disney’s acquisition of Fox looming, how does Flipkart fit into the picture. Disney has its own video-streaming platform in the offing which will open up an interesting synergistic relationship with Hotstar anyway. So why does it need an India based e-commerce giant as an investor now? It is hard to believe that the cash injection will be the pivotal reason. Perhaps the only case that makes somewhat of intuitive sense is that Hotstar’s lumpy advertising driven revenue profile with the injection of some sort of recurring revenue arrangement from Flipkart will perhaps paint an optically positive picture from a monetization standpoint. Outside of that, the transaction as such appears to have more question marks than an intuitive fit. Having said that, the dynamic world of media has seen mysterious things and this is yet another interesting development, one worth keeping a close eye on. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
One of the poster worthy targets of the present government that has been recently announced is its intention to “double the income of farmers by 2022”. A number of schemes and policies have been put in place to make this happen - one among them is a commitment to increase the Minimum Support Price (MSP) so that farmers get a 50% return over cost. On paper, these are extremely good initiatives. However, I personally am wary of any generalizations. In the particular case of ‘providing a return of 50% over cost to farmers’, a number of questions immediately pop up in my head. How is the cost for farmers calculated - i.e. what are the inputs that are included? As a farmer, if I produce any crop in any amount, does the MSP policy guarantee that I will be able to sell all of it at a 50% margin? Who decides the MSP and how do I as a farmer sell at MSP? An increase in MSP is not going to solve a lot because it is an imperfect system. This is probably a good time to repeat the purpose of this column. This column is not written by an expert - far from it. My day job is as far away from the world of policy and government as it could be. But that is exactly the point. Those of you reading this are probably in a similar position - and yet want to understand what exactly is happening at a broad level in our polity. Is the government following through with its policies? What impact does something happening in far away Delhi have on your life? How can you become an informed citizen? I have a tenet: In a world with all the answers, the trick is to ask the right questions. That is the purpose of this column - take an issue, deconstruct it, and ask the right questions. I will try my best to point you in the general direction of the answer, but it is unlikely is that going to be the complete picture, largely because these are complex and temporal issues, changing day by day. However the hope is that the next time you come across someone talking about MSP and the government’s efforts for farmers, you will keep this background in mind, and ask the right questions. What is the Minimum Support Price? It is a price at which the government “guarantees” that it will purchase “certain crops” from the farmer. It is primarily to ensure that farmers are not pushed to do a distress sale of produce in years of excess production. The MSP is typically below the market price, so it essentially sets a floor price for crops. It also ensures food security, since a large percentage of the procurement is towards distribution via the PDS (Public Distribution System aka ration shops). Who Decides the MSP? The Committee for Agricultural Costs and Prices (CACP) in the Central Government’s Ministry of Agriculture recommends prices based on a set of factors. The final decision to set the MSPs is taken by the Cabinet Committee on Economic Affairs (CCEA) - one of the highest executive bodies in India, which includes the PM and the FM. The recommendations of the CACP to the CCEA are based on a number of factors, including input price, estimated demand and supply of the crop, international price movements, price levels of different crops, effect of the MSP on market conditions and so on. Details from the CACP website here. When is the MSP Announced? It is announced generally at the beginning of the crop sowing season, and gives farmers indications on the capacity of the government to buy what they produce. Is the MSP Valid For All Crops? No, it is not. There is a set of 23 crops for which MSP is recommended by the CACP. As of now, CACP recommends MSPs of 23 commodities, which comprise 7 cereals (paddy, wheat, maize, sorghum, pearl millet, barley and ragi), 5 pulses (gram, tur, moong, urad, lentil), 7 oilseeds (groundnut, rapeseed-mustard, soyabean, seasmum, sunflower, safflower, nigerseed), and 4 commercial crops (copra, sugarcane, cotton and raw jute). How is MSP Calculated? To answer this question we will have to dive into what the government considers as ‘cost of production’. There are three broad classifications of the cost given by the CACP - A2, A2 + FL, and C2. The difference between the 3 classifications is the variables that are considered to be inputs to each. A2 - All costs actually paid out by the farmer - including costs of seeds, fertilizers, hired labour, fuel, irrigation etc. A2 + FL - This includes everything in A2 and also includes the cost of family labour, considering that farming in India is largely a household activity where members of the family actually till the land and use their time. This measure adds a cost of this time to the cost of production as well. C2 - This is called the comprehensive cost. It includes everything in the above two measures and also adds assumed rents for owned land and machinery i.e. a cost for acquiring fixed assets required to complete the farming activity. In 2004, the Union government constituted the National Committee on farmers (headed by MS Swaminathan and hence also called the Swaminathan Commission). The MS Swaminathan Committee report had recommended a minimum support price of 50% profits above the cost of production classified as ‘C2’ by the CACP, among other long term policy changes. Details here. So What Does the 50% Above Cost of Production Actually Mean? First - the recent announcement for the government is based on taking cost of production as A2, not C2 as recommended by the Swaminathan Committee. So if you’re a farmer who has just bought a tractor to till land, the rent/interest on the tractor would not be taken into consideration while arriving at the MSP. This is the primary concern with the recently announced hike. Here is an Indian Express article with math, which shows that the recommendation of 50% return over costs is satisfied for all crops only if the cost of production is taken as A2, i.e. the lowest level possible. If C2, or comprehensive cost is taken into account, the 50% above cost is satisfied only for a single crop. So even at a very high level, a farmers or his family’s labour, interest costs etc are not included in the calculation of MSP. Essentially the farmer’s time and effort for actually working on the land are not considered in the cost of production. The 50% margin is not something that goes into his pocket - he has to pay out interests, satisfy the bare minimum food, livelihood etc requirements, and only then can he count what he has left for longer term expenses. Read it again & think about it for a second before you move on. Are Farmers Able To Sell Anything They Produce? This brings us to the second problem with MSPs. They are announced only for a few major crops (23) - and the list does not include any perishable items like fruits and vegetables or milk. (Hence the frequent images of farmers dumping tomatoes and milk on roads - these crops simply are not supported by the government MSP). Okay, so does this make life better for the farmers who do produce from among the 23 crops? Now we get into some implementation details. How does the government assure that MSP is guaranteed for these 23 crops? Government organizations like the Food Corporation of India buy from farmers at MSP. This has two objectives - price security for farmers as well as ensuring food security by building up buffer stocks needed in emergencies (eg: the recent floods in Kerala, Karnataka, now Nagaland). However, the capacity for procurement is not infinite i.e. there is no situation where ALL surplus crop which can’t be sold in the market can be bought at MSP. This is because the procurement operations on the ground are not good enough and also because state governments don’t have enough money for purchasing. For all intents and purposes, only rice and wheat (being staple crops) have a near guarantee of procurement at MSP. For the rest of the crops, it fluctuates year to year and state to state. So...What Does This Mean? Essentially, MSP is NOT a guarantee of procurement at that price for any crop. If that is the case, how can successive governments claim that this is big step to increasing farmers incomes? The answer is - it is not. MSP is a short term step, and it is extremely tactical, not strategic. Any increase in MSP is good optics for any government in power, since 50% of India’s labour force is engaged in agriculture, and the rest of us don’t really understand what happens on the ground, having given up using our ration cards a long time ago. Additionally, since procurement for rice and wheat is robust, this incentivizes farmers to produce these two crops, irrespective of the demand in the market, or the capacity of their land to have high productivity for these two crops (rice and wheat need a lot of irrigation and fertilization). This is just one of the ways the MSP mechanism distorts market demand supply. However, until such a time as infrastructure and supply chain linkages between demand and supply centers are fixed, MSP remains a necessity - even though it does not guarantee anything! Here’s an article detailing the issues with procurement at MSP. What’s Next? Considering the imperfections of the MSP mechanism in delivering actual prices to farmers, the government has also announced another set of schemes (it’s election year, so this is going to be the norm). One of them is called Price Deficiency Payments - where the farmer sells his produce in the market (not to the government) at the market price. If the market price is below the MSP, the government compensates the farmer with the difference in prices directly to the farmers bank account. On paper it seems solid, but again ask yourself - is it implementable? This means the government has to identify each farmer individually, figure out how much he has sold at what price and then transfer money to his account. It’s an ideal solution, and we can only hope the government machinery can implement it properly. The government is also considering using private players to add to the procurement infrastructure. I’d be wary, because this opens up avenues for corruption - the private sector is not known for its compassion towards consumers, and its not implausible to think of a scenario similar to the politician - contractor - bureaucrat nexus that exists in road construction today. Here’s a good article with the latest. Phew, so that was long. But important. Indian agriculture is in a mess. Don’t let anyone tell you otherwise. This article covers only a minuscule part of the problem, and again, the focus is on asking the right questions. Read, be informed, and make up your own mind. Until next week. References MSP basics - A summary of MSP Reports on Doubling Farmers Income - Ministry of Agriculture - This is a list of longer term measures Government Procurement operations - Food Corporation of India You can subscribe to my weekly letter series titled "Policy & Governance for Dummies" by clicking here. View the letter archive by clicking here. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
A Brexit deal is still no closer, but trade will not cease even if the March deadline passes; In the short-term, UK and EU economic growth will suffer; Medium-term new arrangements will hold back capital investment; Long-term, there are a host of opportunities, in time they will eclipse the threats. N.B. In a departure from the my usual format, this Macro Letter is the transcript of a speech I gave earlier this week at the UK law firm, Collyer Bristow; Thomas Carlisle may have dubbed Economics ‘the dismal science,’ but I remain an optimist. Setting aside the vexed question of whether Brexit will be hard, soft or stalled, the impact on financial services (and, indeed, the majority of UK trade in goods and services) will be dramatic. Financial markets (and businesses in general) loathe uncertainty. Ever since the referendum result, investment decisions have been postponed or cancelled. When investment is being made, it is generally tentative and defensive. Exporters and importers alike are striving to develop alternative strategies to maintain and protect their franchises. As a long-term economic commentator, I try to look beyond the immediate impact of events, since near-term expectations are usually reflected in the valuation of an asset or currency. Brexit, however, is a particular challenge, not only due to near-term uncertainty but because policy decisions taken now and in the wake of the March 2019 deadline could set the UK economy on an unusually wide array of possible trajectories. Near-term To begin an analysis of the impact post-Brexit on financial services, there are several near-term threats; here is a selection: House Prices Earlier this month Mark Carney, the Governor of the Bank of England, warned Cabinet Ministers that a ‘no-deal’ on Brexit could see house prices decline by as much as one third and a rapid rise in defaults. The subsequent impact on financial institutions balance sheets and the inevitable curtailment of bank lending could be severe. Jacob Rees-Mogg even dubbed him, ‘The High Priest of Project Fear.’ Passporting Assuming no deal is agreed, the access which financial services providers in the UK have had to the EU27 will not be available after March 2019. Many existing contracts and licensing agreements will need to be rewritten. Regulatory Equivalence Divergence between the regulatory regime in the UK and Europe remains a distinct risk. The types of legal issues surrounding, for example, ISDA Master agreements (Deutsche Bank AG v Comune di Savona) will inevitably become more widespread. Systemic Risks to the Euro The ECB is vocal in its mission to maintain control over the clearing and settlement of Euro denominated transactions. Many financial services activities which currently take place in the UK may need to be transferred to another EU country. In the near-term, these types of factors will reduce trade and economic growth, both in the UK and, to a lesser degree, in Europe. In May 2017 I wrote an essay entitled ‘Hard Brexit Maths – Walking Away’ in which I estimated the negative impact a no-deal Brexit would have on the EU. The UK’s NIESR estimated the bill for a Hard Brexit to the UK at EUR66bn/annum. I guesstimated the cost of Hard Brexit to the EU at EUR 62bn/annum. Both forecasts will probably prove inaccurate. The reduced free movement of workers from the EU is another significant factor. It will lead to a rise in a toxic combination of skill shortages (due to new immigration controls) and unemployment, as companies are forced to conserve capital to weather the inevitable economic slowdown. There are, however, several near-term opportunities, here is a small selection: Sterling Weakness The currency has already weakened. Whilst this may be inflationary it makes UK exports more competitive. Whether the UK can take advantage of currency weakness remains to be seen, history is not on our side in this respect. A US Boom Aided by a lavish tax cut, the US economy is growing faster than at any-time since the financial crisis, underpinning its currency. Its trade deficit is growing despite tariff barriers. US Trade Policy The Trump administration appears to have focused its ire on trade surplus countries, of which Germany is the largest European example. The UK is not under the White House microscope to the same degree. Seizing the opportunity presented by these financial and geopolitical shifts is easier to speak of than to grasp. Nonetheless, just this month Absa Bank of South Africa (recently spun-off from Barclays) announced plans to open a London office to capitalise on post-Brexit opportunities connected with the fast-growing economies of Africa. Medium-term The medium-term risks will mostly be borne out of inertia. Until the shape of Brexit is clear, decisions will continue to be postponed. Once Brexit occurs there will be inevitable technical problems, stemming from systems issues and new procedures. Growth will slow further, business operating costs will need to be cut, employment in financial services (and elsewhere) will decline at exactly the moment when greater investment should be undertaken. But, new trade deals will be negotiated, not just with Europe and the US, but also with the countries of the British Commonwealth, notably (but not just) India. Many of these countries are among the fastest growing economies in the world, often imbued with benign demographics. Here is a rapidly expanding working age population in need of capital investment and financial services. Ruth Lea, Chief Economist at Arbuthnot Latham has commentated on this subject at length during the last two years. In April she wrote: Commonwealth countries, taken together, have buoyant economic prospects and their share of global output continues to increase (especially in PPP terms). The EU28 share, in contrast continues to decline. UK exports to the top eight Commonwealth countries rose by over 31% between 2006 and 2016, but total exports rose by 40%. And the share of UK exports going to the top eight Commonwealth countries fell from 7.5% in 2006 to 7.0% in 2016… There is little doubt that Commonwealth countries have the potential to be significant growth markets for the UK’s exports, given their favourable growth prospects and demographics. This is all the more likely given the probability of trade deals with individual Commonwealth countries after Brexit. Long-term David Riccardo defined the law of comparative advantage just over two hundred years ago. Perhaps one of the best examples of the continuance of the phenomenon is Switzerland, which has seen its currency appreciate against the US$ by approximately 3% per year, every year since fiat currencies were freed from their shackles after the collapse of the Bretton Woods agreement in 1971. Here is a chart of the US$/CHF exchange rate over the period: Source: fxtop.com The Swiss turned to pharmaceuticals and other value-added businesses. The success of this strategy, despite a constantly appreciating currency, has spawned an entire industrial region – the Rhone-Alp economic area, which incorporates German, French, Italian and Austrian companies bordering Switzerland. This region is among the most economically productive in the EU. The UK has an opportunity, post-Brexit, to focus on economic growth. As a trading nation, we should concentrate our efforts on re-forging links with the fast-growing countries of the Commonwealth, where the advantages of a common language and legal system favour the UK over other developed nations. An example of this opportunity is in education. We have a world class reputation for education and training. Combine this redoubtable capability with the abundance of new technologies, which permit the delivery of content globally via the internet, and we can provide the full gamut of instruction, ranging from primary to tertiary and professional via a combination of video content, on-line examination and tailored digital collateral. A recent MOOC (Mass Open On-line Course) in which I enrolled, attracted students from across the world. The course was dedicated to finance and among the students with whom I interacted was a Masi tribesman from Kenya who hoped to develop micro-finance solutions for the local farming community. The world is our veritable oyster. Conclusion – The Bigger Picture The economies of the developed world are growing more slowly than those of developing nations. Providing goods and services to the fastest growing economies makes economic sense. Many of the largest companies listed on the UK stock market have been oriented to take advantage of this dynamic for decades. Brexit is proving to be cathartic, we should embrace change; the sooner the better. The Austrian economist, Joseph Schumpter, described the cycle of economic development as including a period of ‘creative destruction’. Brexit could be an extreme version of this process. The patterns of trade which have developed since the end of WW2 have been concerned with promoting cohesion between European nations, but, as Hyman Minsky famously noted, ‘stability creates the seeds of instability.’ I believe the political polarisation seen in Europe and elsewhere is a reaction against the success of the global financial and economic system and the institutions and alliances created to insure its success. We are entering an era of change and Brexit is but one personification of a growing trend. Technology has shrunk the world, empowered the individual and (in the process) undermined the influence of nation states and international institutions. Individual freedom is ascendant but with freedom comes responsibility. One of the greatest challenges facing the UK and other developed nations, in the long run, is the provision of pensions and health insurance to an increasingly ageing population. Many of the financial products required by these ageing consumers are ones in which the UK is a world leader. The developing world is rapidly growing richer too. Their citizens will require these self-same products and services. Brexit is an opportunity to look forward rather than back. If we embrace change we will thrive, if not change will occur regardless. Post-Brexit there will be considerable pain but, if we manage to learn from history, there can also be long-term gain. Originally Published in In the Long Run (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
From an Indian perspective, the year thus far has been jolted by several macro themes which I believe are notable headwinds for the economy. First, a hawkish environment in the western world characterised by monetary tightening is a marked reversal to an elongated period of quantitative easing and declining interest rates. Consequently, a textbook “flight to quality” thesis is at play, in effect driving capital outflow from India and other emerging markets inducing a real contagion risk. Second, an uptick in crude oil prices through the year (crude oil is up 7%+ year-to-date) has pressured fiscal deficits and could pull the handbrakes on the growth profile of an economy that relies on overseas supply of crude oil for nearly 80% of its demand. The combined effect of the aforementioned two factors have induced the Third - a swift depreciation in the INR which is down nearly 14%+ year-to-date against the USD. Fourth, escalating US-Sino trade tensions have certainly taken some shine off the global growth outlook. A deep-dive on these macro themes and others can be found in this excellent opinion piece by Nikhil Arora: Current State of the Indian Economy: Is it Time to Go Bearish? However, the domestic stock market headlines numbers illustrate a somewhat different narrative. Nifty 50 and BSE Sensex have seen fairly robust growth year-to-date. Nifty 50 is up around 9% and the BSE Sensex is up around 12%. If one were to look at Nifty 50 through just the macro-lens, one could just as easily have expected the opposite movements in the markets. An equally palatable outcome one might argue. In that context, one wonders if the strength in domestic headline numbers is indeed a proxy for underlying economic health? A Look Into The Nifty 50 – “Weights” Matter Nifty 50 is considered the flagship index on the National Stock Exchange, tracking the behaviour of the largest and most liquid blue chip stocks. Given its diverse constituents, healthy liquidity and general clout, it is often treated as a proxy for overall economic health. However, due to its float-adjusted market capitalization based indexing method, the bigger and larger constituents can meaningfully sway the entire market. While, this is true for all market capitalization based indexing methods, a detailed look at the index constituents makes for an interesting read through. This is all the more interesting given that there are a plethora of macro catalysts simultaneously at play in the current environment. From a simplistic perspective, higher the weight of the stock in the Nifty 50 index, more is its directional pull on the index. An example that demonstrates this fairly well is Reliance Industries Limited (RIL). RIL has close to 10% weight on the Nifty 50 due to its lofty market capitalization. RIL stock is up around 35% year-to-date, a remarkable surge which would make even a high risk-high return type growth investor fairly content with the year-to-date return. However, what one might miss easily is the massive say that RIL and its 35% surge has had in moving the Nifty 50 headline numbers, which are the ones that are usually reported by the mainstream press anyway. Another example is a yet another heavy ’weight’ - HDFC Bank, also constituting nearly 10% to the Nifty 50 weight and somewhat similar to RIL has also seen its stock climb year-to-date. HDFC is up a robust 10% year-to-date and consequently has significantly contributed to Nifty 50’s upward movement. Source: nseindia.com Weights are as of Aug 31st market close Reliance Industries Ltd, HDFC Bank, Housing Development Finance Corporation, Infosys Ltd and ITC Ltd together accounting for nearly 40% of overall weight of the Nifty 50 and are all up meaningfully. In fact, all top ten stocks by weight on Nifty 50 are all up year-to-date. On traversing down the Nifty 50 constituents, one can quickly decipher that bigger weight stocks have generally seen upward movements year-to-date and in turn helped galvanize the broader Nifty 50. An example from closer to the other end of the spectrum is Hindustan Petroleum Corporation Ltd which is down 40% year-to-date making it the worst performer in the Nifty 50 but has less than 1% weight on the Nifty 50 index. In fact, the top 10 constituents by weight on the Nifty 50 are all in the green year-to-date and collectively have enough pull to dictate Nifty headline numbers. However, drilling down into the Nifty 50, one can see less than half i.e. 24 (at the time of writing) are in the green while the other 26 are in the red. But the 24 stocks in the red i.e. trending down year-to-date, on account of weight asymmetries have significantly lower impact on the broader index. In that context, while the headline numbers intuitively paints an optically pleasing picture, a deeper-dive into the index portrays a less optimistic picture. One wonders if Nifty 50 with just 50 stocks and such diverse market capitalization ranges is even a fair representation of the overall market. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
It was a fine evening in November 2016 and I was walking back home from work. I received an SMS cryptically asking me to tune into the PM’s broadcast that night. I plugged in my earphones and heard what everyone in India would find out in the next 30 mins - Rs 500 and Rs 1000 notes were now worthless. Thus began a saga that lasted a few months - old notes were to be deposited, new notes printed and distributed, and the economy was to get a reboot. While people shout at each other on the 9 pm news about alleged Urban Naxals and pass judgments while the Courts are yet to pronounce theirs, objective discussions on costs and benefits of demonetisation have stayed off the airwaves. RBI's Annual Report has finally given us some numbers to look at and analyze how the costs and benefits of demonetisation compare. Why Demonetisation? A few reasons were (in the order they were shared with the public) Black Money: The idea being that money hoarded illegally would be flushed out of the system - since the government was going to keep a track on deposits into the banking system and use that information to find people who now had money in the banking system disproportionate to their known sources of income. Counterfeit Currency: A) Old notes were worthless, so any cash hoarded by terrorists/criminals would now be worthless B) Counterfeiters would also now have to rework their infrastructure to copy the new notes, and in a best case scenario, not be able to counterfeit at all. Digital Payments: The retrospective notion that forcing people to adopt digital methods of payments would reduce the amount of cash in the economy, increase the traceability, and improve financial inclusion. All in all, It was supposed to be a short-term shock to the economy which would provide long-term benefits. Demonetisation is so 2016. Why Are We Talking About It Again? Because the Reserve Bank of India finally released its Annual Report last week detailing how much of the cash in the system actually came back. So finally, we have some objective numbers with which to evaluate the impact of demonetisation. What Does the RBI Report Say? 1. Did the amount of black money in the system reduce? 99.3% of the 15 lakh crore which was in circulation in November 2016 is now in the RBIs vaults. So two things could have happened. There wasn’t a lot of black money as cash in the economy to begin with. Initial estimates ranged from 5%-10% of currency in circulation being black, much higher than the 0.7% which was not returned to the RBI. This could make sense - there aren’t a lot of people who would be holding illegal money in cash, it would more likely be in real estate and gold. The other option is that the black money is now white in some form - some of it is deposited in the RBI, some in the form of assets, some still in cash, and is now for all practical purposes, legit. How did this happen? I mean we’ve all heard stories about a neighbourhood uncle with political connections who converted all his old notes into new via a ‘connection’. How much of this is true is still anybody’s guess. (unless the government starts prosecuting people who have too much cash in their accounts and can’t explain how - we are yet to hear about this happening. In fact FM Arun Jaitley has made this point in a Facebook post, saying 1.8m depositors have been identified for this enquiry - as seen below.). 2. Counterfeit currency: Overall detection of fake notes in 2017-18 was 31% lower than the previous year. Detection of Rs 500 and Rs 1000 notes has decreased by around 50%. But the new Rs 500 notes are still being counterfeited. Also, the Rs 2000 note is now the pick for counterfeiters. The RBI report says that only 638 pieces of fake Rs 2,000 notes were detected in 2016-17, but in 2017-18, 17,929 pieces (worth Rs 360 million) were detected. 3. Digital payments: Overall digital payments have increased massively since November 2016. In 2017-18, digital payment volume rose by 29%. But does this also mean households now prefer digital over cash? Not really. Household preference for cash: In November 2016, around Rs 18 lakh crore was the amount of currency in circulation, out of which around 86% was demonetised. Today, around Rs 18 lakh crore of currency is still in circulation! So even though digital payment volume has increased, people still have a preference for cash. What Was the Impact? We all faced the micro impact, but a sharp drop in GDP (~1%) was a predominant economic impact - much of India’s industrial sector runs in the unorganized sector where lack of cash constrained production and productivity. In addition, the RBI spent around Rs 13,000 crore to print the new notes and transport it across the country (whereas only around Rs 10,000 crore of the banned currency did not return into the system). So based on these costs, it does seem that demonetisation did not achieve its objectives. However, there are some long term impacts which are yet to be quantified - notably the effect of demonetisation on formalization of the economy i.e. more traceability of cash. better accounting, and higher tax collections. We have yet to see how that pans out. You can subscribe to my weekly letter series titled "Policy & Governance for Dummies" by clicking here. View the letter archive by clicking here. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Emerging market stocks have stabilised, helped by the strength of US equities; Rising emerging market bond yields are beginning to attract investor attention; US tariffs and domestic tax cuts support US economic growth; US Dollar strength is dampening US inflation, doing the work of the Federal Reserve. To begin delving into the recent out-performance of the US stock market relative to its international peers, we need to reflect on the global fiscal and monetary response to the last crisis. After the great financial recession of 2008/2009, the main driver of stock market performance was the combined reduction of interest rates by the world’s largest central banks. When rate cuts failed to stimulate sufficient economic growth – and conscious of the failure of monetary largesse to stimulate the Japanese economy – the Federal Reserve embarked on successive rounds of ‘experimental’ quantitative easing. The US government also played its part, introducing the Troubled Asset Relief Program – TARP. Despite these substantial interventions, the velocity of circulation of money supply plummeted: and, although it had met elements of its dual-mandate (stable prices and full employment), the Fed remained concerned that whilst unemployment declined, average earnings stubbornly refused to rise. Eventually the US economy began to grow and, after almost a decade, the Federal Reserve, cautiously attempted to reverse the temporary, emergency measures it had been forced to adopt. It was helped by the election of a new president who, during his election campaign, had pledged to cut taxes and impose tariffs on imported goods which he believed were being dumped on the US market. Europe and Japan, meanwhile, struggled to gain economic traction, the overhang of debt more than offsetting the even lower level of interest rates in these markets. Emerging markets, which had recovered from the crisis of 1998 but adopted fiscal rectitude in the process, now resorted to debt in order to maintain growth. They had room to manoeuvre, having deleveraged for more than a decade, but the spectre of a trade war with the US has made them vulnerable to any strengthening of the reserve currency. They need to raise interest rates, by more than is required to control domestic inflation, in order to defend against capital flight. In light of these developments, the recent divergence between developed and emerging markets – and especially the outperformance of US stocks – is understandable. US rates are rising, elsewhere in developed markets they are generally not; added to which, US tariffs are biting, especially in mercantilist economies which have relied, for so many years, on exporting to the ‘buyer of last resort’ – namely the US. Nonetheless, the chart below shows that divergence has occurred quite frequently over the past 15 years, this phenomenon is likely to be temporary: Source: MSCI, Yardeni Research Another factor is at work, which benefits US stocks, the outperformance of the technology sector. As finance costs have fallen, to levels never witnessed in recorded history, it has become easier for zombie companies to survive, crowding out more favourable investment opportunities, but it has also allowed, technology companies, with no expectation of near-term positive earnings, to continue raising capital and servicing their debts for far longer than during the tech-bubble of the 1990’s; added to which, the most successful technology companies, which evolved in the aftermath of the bursting of the tech bubble, have come to dominate their niches, often, globally. Cheap capital has helped prolong their market dominance. Finally, capital flows have played a significant part. As emerging market stocks came under pressure, international asset managers were quick to redeem. These assets, repatriated most often to the US, need to be reallocated: US stocks have been an obvious destination, supported by a business-friendly administration, tax cuts and tariff barriers to international competition. These factors may be short-term but so is the stock holding period of the average investment manager. Among the most important questions to consider looking ahead over the next five years are these: Will US tariffs start to have a negative impact on US inflation, economic growth and employment? Will the US Dollar continue to rise? And, if so, will commodity prices suffer, forcing the Federal Reserve to reverse its tightening as import price inflation collapses? Will the collapse in the value of the Turkish Lira and the Argentine Peso prompt further competitive devaluation of other emerging market currencies? In answer to the first question, I believe it will take a considerable amount of time for employment and economic growth to be affected, provided that consumer and business confidence remains strong. Inflation will rise unless the US Dollar rises faster. Which brings us to the second question. With higher interest rates and broad-based economic growth, primed by a tax cut and tariffs barriers, I expect the US Dollar to be well supported. Unemployment maybe at a record low, but the quality of employment remains poor. The Gig economy offers workers flexibility, but at the cost of earning potential. Inflation in raw materials will continued to be tempered by a lack of purchasing power among the vastly expanded ranks of the temporarily and cheaply employed. Switching to the question of contagion. I believe the ramifications of the recent collapse in the value of the Turkish Lira will spread, but only to vulnerable countries; trade deficit countries will be the beneficiaries as import prices fall (see the table at the end of this article for a recent snapshot of the impact since mid-July). At a recent symposium hosted by Aberdeen Standard Asset Management – Emerging Markets: increasing or decreasing risks? they polled delegates about the prospects for emerging markets, these were their findings: 83% believe risks in EMs are increasing; 17% believe they are decreasing 46% consider rising U.S. interest rates/rising US dollar to be the greatest risk for EMs over the next 12 months; 25% say a slowdown in China is the biggest threat 50% believe Asia offers the best EM opportunities over the next 12 months; 20% consider Latin America to have the greatest potential 64% believe EM bonds offer the best risk-adjusted returns over the next three years; 36% voted for EM equities. The increase in EM bond yields may be encouraging investors back into fixed income, but as I wrote recently in How To Identify Valuable Bond Markets With High Yields there are a limited number of markets where the 10yr yield offers more than 2% above the base rate and the real-yield is greater than 1.5%. That Turkey has now joined there ranks, with a base rate of 17.75%, inflation at 15.85% and a 10yr government bond yield of 21.03%, should not be regarded as a recommendation to invest. Here is a table looking at the way yields have evolved over the past two months, for a selection of emerging markets, sorted by largest increase in real-yield (for the purposes of this table I’ve ignored the shape of the yield curve): Source: Investing.com Turkish bonds may begin to look good value from a real-yield perspective, but their new government’s approach to the imposition of US tariffs has not been constructive for financial markets: now, sanctions have ensued. With more than half of all Turkish borrowing denominated in foreign currencies, the fortunes of the Lira are unlikely to rebound, bond yields may well rise further too, but Argentina, with inflation at 31% and 10yr (actually it’s a 9yr benchmark bond) yielding 18% there may be cause for hope. Emerging market currencies have been mixed since July. The Turkish Lira is down another 28%, the Argentinian Peso by 12%, Brazilian Real shed 6.3% and the South African Rand is 5.7% weaker, however the Indonesian Rupiah has declined by just 1.6%. The table below is updated from How Trade Wars May Impact The Emerging Markets: Is Turkey the Canary in The Coal-Mine. It shows the performance of currencies and stocks in the period January to mid-July and from mid-July to the 28th August, the countries are arranged by size of economy, largest to smallest: Source: Investing.com It is not unusual to see an emerging stock market rise in response to a collapse in its domestic currency, especially where the country runs a trade surplus with developed countries, but, as the US closes its doors to imports and growth in Europe and Japan stalls, fear could spread. Capital flight may hasten a ‘sudden stop’ sending some of the most vulnerable emerging markets into a sharp and painful recession. Conclusions and Investment Opportunities My prediction of six weeks ago was that Turkey would be the market to watch. Contagion has been evident in the wake of the decline of the Lira and the rise in bond yields, but it has not been widespread. Those countries with twin deficits remain vulnerable. In terms of stock markets Indonesia looks remarkably expensive by many measures, India is not far behind. Russia – and to a lesser extent Turkey – continues to appear cheap. ‘The markets can remain irrational longer than I can remain solvent,’ as Keynes once said. Emerging market bonds may recover if the Federal Reserve tightening cycle is truncated. This will only occur if the pace of US economic growth slows in 2019 and 2020. Another possibility is that the Trump administration manage to achieve their goal, of fairer trading arrangements with China, Europe and beyond, then the impact of tariffs on emerging market economies may be relatively short-lived. The price action in global stock markets have been divergent recently, but the worst of the contagion may be past. Mexico and the US have made progress on replacing NAFTA. Other countries may acquiesce to the new Trumpian compact. The bull market in US stocks is now the longest ever recorded, it would be incautious to recommend stocks except for the very long-run at this stage in the cycle. In the near-term emerging market volatility should diminish and over-sold markets are likely to rebound. Medium-term, those countries hardest hit by the recent crisis will languish until the inflationary effects of currency depreciations have fed through. In the Long Run, a number of emerging markets, Turkey included, offer value: they have demographics on their side. Originally Published in In the Long Run (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
The Narendra Modi government is nearing the completion of its term. Unsurprisingly, it is keen to list its achievements in the past four years and has deployed its entire machinery to spread its message across the country, writes Pradeep S Mehta. One of the key success stories propagated by the Government of India is regulatory reform or reduced regulation. It involves eliminating archaic laws and rationalizing existing laws. The objective is to optimize regulatory stock and flow to reduce regulatory burden on different stakeholders. This espouses the ideals of sabka saath, sabka vikas and “maximum governance, minimum government” conceptualized when the National Democratic Alliance came to power. These themes are now being merged into the slogan of “ease of living for all”, of which “ease of doing business” is an integral part. Since 2014, by way of four repealing and amending laws, the government has scrapped around 1,178 laws. Of these, approximately 335 were Acts which amended existing laws, 16 were Acts which repealed existing laws, and 758 were Acts which authorized appropriation of funds. Presumably, all these Acts had outlived their utility. In other words, only around 69 Acts were actually operational when repealed. By government’s own admission, most of the Acts repealed were irrelevant. They had ceased to be in force, or had become obsolete, or had lost their meaning, or their retention as a separate Act was unnecessary. The last repeal happened in 2015. In 2017, the government introduced two repeal and amending Bills to scrap around 239 Acts, of which around 101 are amendment Acts, 11 are appropriation Acts, 20 are repeal Acts and nine are ordinances. The Bills are yet to be passed. Repeal of inoperative legislations might not be the best tool for regulatory reform when the objective is to highlight it as a major achievement in making life easier for citizens or businesses. The utility is limited to reducing the thickness of the statute book. The government’s resources are limited and should be judiciously used. The efforts required in identification and repeal of such legislations may outweigh the benefits from such repeals. In addition to the repeals, in the past four years, the government has amended close to 65 existing legislations and has introduced 33 new legislations. Around 39 ordinances have also been issued during this period. A close analysis reveals that during the Modi regime, for every two relevant Acts repealed (total around 69), close to three new Acts (including amendment Acts) have been introduced (total around 98). This is not a record to be proud of, especially when deregulation is claimed to be one of the key success stories of the government. The issues which new Acts relate to include the goods and services tax, insolvency and bankruptcy, real estate, labour laws and financial sector, among others. While these Acts intend to address key problems and make life easier for stakeholders in relevant sectors, it appears that this is unlikely to happen soon. Interpretation, administration, compliance, and transition related challenges are keeping affected parties busy, resulting in high compliance costs. Even if prevailing issues are addressed, new issues are expected to crop up. Despite good intentions, the deregulation initiatives of the government do not appear to have had significant positive impact. This is because good processes are far more important than good intentions in a law-making process. Key components of a good law-making process are: Clarity in problem to be addressed/objectives to be achieved High likelihood of the proposed law of achieving such objectives The costs at which such objectives are achieved are likely to be substantially outweighed by the benefits Such ex-ante assessments of objectives, costs and benefits form the core of regulatory impact assessment (RIA) framework, a globally recognized good practice in law making adopted by different countries, including the UK, US and Australia. RIA can be applied for designing new legislations as well as reviewing the effectiveness of existing laws and designing amendments. It is as suited for legacy issues such as regulation of small and medium enterprises, as for emerging issues such as regulation of two-sided markets and network industries. For instance, the Government of Maharashtra recently issued the Maharashtra City Taxi Rules to regulate taxis linked with app-based aggregators. Utilizing the RIA framework, we estimated that if the rules are adopted, the per day cost to consumers and drivers may increase by 40% and 93%, respectively (details available here). Similarly, the Government of Rajasthan is considering amendments to the Rajasthan Shops and Commercial Establishments Act. Based on a rapid cost-benefit analysis, we found that the total net monetary cost to stakeholders is likely to marginally increase (details available here). Appropriate suggestions to reduce costs and enhance benefits were made in both cases. Several expert committees have recommended RIA for India. At present, the Better Regulatory Advisory Group (BRAG), chaired by the secretary, department of industrial policy and promotion, is considering adoption of RIA for India. As a member of BRAG, we have suggested a model for adopting RIA in India. The government should consider these suggestions to attain its deregulation agenda and ensure ease of living for all. Pradeep S. Mehta is secretary general of CUTS International. This article was originally published on LiveMint. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Less than a year to the General Election is a tricky time for setting a stable Economic narrative. The government will hold no punches in glorifying its achievements. The opposition will skew comparisons against its own track record, preferring to affirm how things used to be “much better”. An objective analysis of forces shifting our economic realities is much wanting. An analysis which, when stripped of all embellishment, simply tells us... ...how are we really doing? I will humbly attempt to (at least) contextualize a few things. For starters, let us omit challenging the very purpose of an economic policy (i.e. I won’t question whether demonetization actually reduced black money. Would GST turn out to be a net positive? Whether RERA would bring or is bringing in more transparency in real estate?). Also excluded are comparisons across preceding political tenures. Why? While analyzing existential factors with a historical baggage is an intellectually stimulating exercise, I am more comfortable in presenting a more current, apolitical, and technical version of things, using data to highlight the actual state of the economy along with its expected trajectory. The logic stems from the reality that policy actions are already set in motion. Let us discuss their effects instead of their basis. So, What Are the Set Pieces Here? Interest Rates and Capital flows Chart 1 The most significant trend driving global economies since late 2007 has been an unprecedented drop in interest rates in the rich world. Be it Federal Reserve, the Bank of England, or European Central Bank (ECB), the combination of bond-buying and a deliberately loose monetary policy gave the rich world access to ridiculously cheap capital for a large part of last decade. Japan in the far east ventured towards negative rates in 2016 (joined by ECB) after suffering decades of stagflation, which technically meant investors would be charged for depositing their money in Japanese and European banks (Chart 1). Rates in major emerging markets, including India, were moving in the opposite direction, hitting highs from 2010 to early 2016. Rising domestic inflation, driven by increasing crude oil prices, supply chain inefficiencies, and a growing consumption base resulted in a high rate environment. This rate differential meant global capital flows in the early and mid-segment of last 10 years moved from the rich world to the emerging markets. Foreign investors were flocking to Asia hungry for yields, leading to significant rallies in domestic equity and bond markets. The last segment of the bygone decade has been different. Rich world interest rates (with the US taking lead) have been tipped to rise since 2016. The Federal Reserve has already announced its 7th rate hike in last 3 years. Europe will follow suit, albeit in a more gradual manner from 2019 onwards (Chart 2). Chart 2 Key emerging markets during the same period have begun to loosen monetary policy leading to rate reductions. The divergence of early and mid-decade is repeating itself, albeit now in the opposite direction (Chart 1). The result is a capital flight back to the rich world. The foreign investor flight seen in India is a case in point (Chart 3a, 3b). Chart 3a Chart 3b Though there are noises around monetary tightening coming back to the Emerging world (considering a second crude oil price rise in the decade with recent consecutive rate hike by RBI as a reaction) – capital outflow, especially in the Indian scenario, should not be expected to correct itself immediately. India would hence need to depend on domestic investors and liquidity to fund its growth. Crude Joke India sources 80%+ of its annual Crude Oil requirement externally, making us one of the largest oil importers in the world. Being a relatively price inelastic product, such an external dependence makes crude oil a key force driving our macroeconomic realities. Chart 4 Crude oil’s second price rise (Chart 4) brings with it another leg of rising trade and current account deficit (trade deficit hit a 61-month high in June) for the country. Domestic retail inflation is at a 5-month high. Interest rates are expected to go up. INR is at an all-time low. Assuming the upward (or moderately upward) trajectory of oil continues, is that a sufficient precedent to be worried? The Fiscal Deficit quandary The single biggest lever a higher oil bill can pull is to reduce the government’s appetite to spend. Our fiscal deficit is already widening thanks to petroleum subsidies etc. Petrol and diesel pricing pains can exert additional pressure on excise duties leading to further revenue loss. Another pain point is the rise interest payments on government debt. 10-year government bond yields have been continuously increasing (Chart 5) since the beginning of this year (due to a weakening Rupee, which is driven off other macro factors). These higher interest payments would only constrain government spending further. Chart 5 However, the present government’s commitment to fiscal consolidation implies there would be a hard stop at around the 3.3% FY19 target mark. Considering we’ve already reached more than 50% of the deficit target in the first 2 months of the fiscal means that the government would be severely constrained to drive further investment in the next few months (Chart 6). Chart 6 Slowing Investment And we do need investment, especially with a wave of capital outflow thanks to a rate differential with respect to the rich world as illustrated earlier. The country’s gross fixed capital formation (an indicator of investment) also corroborates with the low investment hypothesis we’ve already set (Chart 7). Chart 7 The US China trade war is only expected to accentuate other headwinds, including possibilities of moving to faster interest rate appreciation in the US (thanks to increasing prices due to push down of Chinese imports). Though Trump is pushing for a less aggressive rate hike plan, I don’t see the Fed suddenly change its trajectory. US unemployment is at an all-time low and corporate tax reliefs ensure equity investors stay bullish. The interest rate appreciation links to our capital outflow hypothesis and will also further weaken the Rupee. Private Sector to the Rescue? To assess whether the private sector can fill this capital shortage, it is key to see how some forward-looking indicators are panning out. A significant starting point may be to look at growth of credit across manufacturing, services, and agriculture. The underlying logic being that sectoral credit can be a proxy for investment appetite. Considering scheduled commercial banks still form the backbone of India’s financial ecosystem, this data can be quite revealing (Chart 8). Chart 8 Looking at sectoral credit growth as per RBI data, lending to both agriculture & industry has not really picked up. Industrial credit growth trend is mostly driven by large companies (Chart 9). Though already sluggish, if we break the numbers into its further constituents, it is visible how micro & small, and medium industries are hit even worse, with not much indications of recovery. Chart 9 Such a credit crunch, driven by the twin balance sheet problem plaguing India’s banking system, further accentuated through retributive actions against the banking community would be difficult to normalize. Short to Medium Term View There is not much to be excited with respect to the Indian economy in the short to medium term. Government spending is expected to stay muted, considering external headwinds such as a rising crude oil and an increased cost of funding. Government’s fiscal consolidation target is an additional constraint. Private sector investment looks no better, thanks to outflows expected to go up due to widening rate differential with respect to the rich world, as well as Indian banking system’s twin balance sheet problem crippling access to credit. RBI’s stress tests under its current macroeconomic outlook does not exude confidence, with an expectation of gross NPA of the banking sector to go further up from 11.6% this year to 12.2% by March 2019. Unless the government i) drops its pursuit of fiscal tightening and enhances spending to drive public investment, AND / OR ii) accelerates reforms with sound implementation around land, labour, and capital to spur private investment, it is fair to say that things look rather bleak. With the advent of an Election year, one can expect some progress on the spending side in an ad-hoc, populist manner. A splurge is however unlikely - given budget estimate for the full year would be aligned by February 2019 i.e. before the general elections. It is indeed wishful thinking to expect a complete wash out of the fiscal consolidation narrative right before hitting the polls. Worse, I expect no progress on ii) as that’s too long-term a strategy to reap any immediate benefit. Either way, from an economic perspective I don’t see anything aside from the status quo pan out and hence would continue to be a closeted Bear. Chart Data obtained from websites of concerned Central Banks and relevant Government departments. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
As mentioned earlier, guidelines recommend up to 150 minutes of regular/moderate physical activity or 75 minutes of vigorous/intense Exercise per week to achieve a holistic goal of Health and Fitness. Why is Regular Physical Activity Important? The important role played by regular physical activity came to light after a 1953 study, which demonstrated that bus conductors have a consistently lower risk of heart attack vs. the sedentary bus drivers (Morris et al, The Lancet, 1953). Fifty years later (in 2012), the same journal published data suggesting that mortality related to physical inactivity (5.3 million in 1 year) exceeded that related to smoking (5.1 million), leading to a campaign last year, titled “Sitting is the new Smoking”. For hypertensives, regular Exercise is considered equivalent to 1 drug, suggesting that almost one-third of all patients could control their blood pressure (BP) without drugs. Considering c. 29% of India’s adult population suffers from high BP, this means literally millions of patients can be managed without medicines. Exercise reduces blood sugar by 20-40 mg/dl, or between 0.5-1 units of glycosylated haemoglobin (i.e. Hba1c or the 3-month average blood sugar). Furthermore, all-cause deaths and heart attack-related mortality demonstrate an incremental trend in relation to increased daily consumption of television, a frequent sedentary activity. Exercise can change all this. The public health implication of exercise is huge. However, it is barely recognized. Think about it. If any new drug were shown to have similar efficacy, it would be the toast of International Media. But since it is just good old exercise, it is simply postponed for the pill. Moderate activity for adults includes brisk walking, swimming, cycling, gardening, running household chores, dancing, walking a pet, playing games with children and carrying weights under 20 kg while walking. Vigorous activities are running/jogging, fast cycling or swimming, aerobic dancing, competitive sports or games and moving heavier weights (> 20 kg). Healthcare authorities believe that benefits will accrue even from low impact exercises such as brisk walking, which have a minimal potential for causing injury while improving the overall effort tolerance, blood pressure and sugar. But How Can One Apply This on a Regular Basis Through Aerobic Exercise? A fit adult can easily walk a kilometer in about 10-12 minutes, so 4-6 km is doable in 45 minutes to an hour. The minimum effective duration is at least 10 minutes a session. Is time really the issue then? When done periodically (ideally 5-7 days a week, but minimum of 2 days a week), this should be enough to provide tangible health benefits, as noted above. But that’s not to say that one can’t or should not do vigorous exercise: there is incremental benefit accrued up to about 750 minutes of exercise per week, or over 1.5 hours daily. Even more potent fitness and health benefits are gained from speed walking, dancing, aerobic dancing, playing games or moving weights; these have greater bang for the buck. Walking or running on the treadmill or cross-trainer is favoured by many. Here one has the advantage of tracking burnt calories and the achieved heart rate, though accuracy of these devices can vary. Their monotonous nature as exercises can also create inertia after some time. Keeping in mind the injury potential of regular long-term running (discussed earlier), walking may be a more suitable activity for adults, especially after 30 years of age. While habitual runners who have been running since childhood may consider continuing as they enter their 30s and 40s, people who begin an exercise program for the first time after 30 would be well advised to study the frequent injuries (foot, ankle, knee, back and neck) that they may face. It is important to find the right shoes for the activity concerned, with the help of a coach or a podiatrist. Barefoot running or using shoes without any padding to mimic barefoot running is also in vogue. The concept of target heart rate is also useful here. The maximum predicted heart rate (i.e. the number of heart beats per minute when the heart is working at its maximum) for an individual can be estimated by the simple formula of: MPHR = 220 - age For instance, a 40-year old has an MPHR of 180 approximately. The training effect is good at 70-85% of the MPHR, and this can be used to guide a newbie into the amount of stress needed to provide significant health benefits. Older people over 60, especially those who are starting to exercise for the first time can start with smaller goals (aiming for a target heart rate around 120-130 beats per minute), before gradually moving to faster speeds and longer distances. They should aim for a session of at least 10 minutes at a time, while striving progressively for 20-60 minutes per session in the long run, and a total weekly exercise duration of 150-300 minutes for best results. Cycling has become very popular of late. There are safe cycling tracks available in many cities, and several regular groups too. They make for social bonding opportunities, in addition to endurance and strength training with remarkable long-term benefits. Swimming is one of the best exercises – injuries are rare (ear/nose/throat infections, if one is predisposed) and salutary improvements are seen in effort tolerance and weight loss. Perhaps, no other exercise comes close to it in terms of weight loss, especially if done in cool water, as the body needs to work twice as hard in cool water for the same output, so as to keep the body warm. Younger and/or healthier people can manage by playing games such as badminton, football, cricket or table tennis. Apart from the social benefits, they are more effective in burning calories while being enjoyable activities. They also improve reflexes and build muscles, which are a big advantage especially as one ages. In summary, regular Aerobic Exercise is an excellent investment, bringing improved BP, sugar, body weight and overall health, fitness and survival benefits, that is a must for all. This is a recurring column published every Sunday under the title: A Guide to Exercise. Next week, we shall discuss the concept of resistance training and Anaerobic Exercise. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
By Amitava Chattopadhyay, INSEAD Professor of Marketing The tipping point when the unrestrained repetition of ads goes from informative to downright irritating. Watching the recent cricket test match between India and England on TV in India, I was staggered at the level of advertising repetition I experienced. During one hour, I decided to keep track of the commercials aired. The brands and the number of times they advertised during the hour period are below. As one can see, 17 different brands advertised during the hour. These brands covered a broad range of categories across products (e.g., Blenders Pride, CEAT and Panasonic) and services (e.g., Amazon and McDonald’s), as well as domestic (e.g., Idea, Fogg and Kent) and global (Axe, Google and Suzuki) brands. Of the 17 brands that advertised, 11, or a whopping 65%, aired their ads three times or more, with Gionee, the Chinese mobile phone maker showing the exact same “creative” a mind-numbing seven times during the hour! Why so much repetition? Theory has it that consumer response to repetition follows an inverted-U shape. That is, initially, consumer response increases with repetition, as consumers learn about the brand, but then declines, as repeatedly watching a brand’s advertising becomes boring and irritating. The point at which additional exposure has a negative impact depends on the complexity of the advertising, the amount of attention consumers pay to advertising, and the like. Most lab studies, which show participants advertisements embedded in a TV programme during a viewing episode of less than one hour, find that optimal impact is reached with three exposures, declining thereafter. Change the Channel In an earlier paper, “To Zap or Not to Zap: A Study of the Determinants of Channel Switching During Commercials,” in Marketing Science, S. Siddarth and I find in field data that incremental repetition starts to have a negative impact on consumer responses between 14 and 15 exposures. We show that, across product categories, this makes consumers likely to change the channel while watching TV if they see a given commercial more than 14.5 times. We also show that channel switching negatively impacts purchase behaviour. Importantly, these results were obtained using a dataset spanning two years. Our findings are consistent with other research using field data which show that repetition starts having a negative impact on consumer responses, somewhere between 12 to 15 exposures over a two-month period. For those of you who don’t know about cricket, a day of test cricket spans three, two-hour sessions. The ads above were repeated throughout the day. Thus, 65% of those brands mentioned would have been seen 18 times or more while viewing a single day’s play; for Gionee, the most advertised brand, there would have been 42 exposures. Across the five days of a cricket test match, an ardent follower of the game would have seen 65% of the ads a nauseating 90 times or more and even the lightly advertised brands, well above the 15 exposure threshold. Gionee’s ad would have been seen 210 times by the test match viewers! However one slices the data, there is cause for concern. Are these brands overexposing themselves to their own detriment? Yes, and others’ as well. Since ads are normally broadcast in “pods” with ads from other brands, a customer who is fed up and changes the channel during an ad break also reduces viewership for other brands in the pod. Better Exposure The research data on repetition effects I refer to in my paper are from American consumers. So one question to ask is: are Indian consumers different? My intuition suggests that they cannot be that different. In my paper, I found that at least the time of day during which a commercial is aired and household demographic characteristics are unrelated to a household’s propensity to switch off an ad, suggesting that nationality may not matter. Seeing an Amazon ad 90 times, an Axe ad 120 times, a Raymond ad 150 times, and a Gionee ad 210 times cannot reasonably be expected to not turn off a consumer through overexposure. Repetition beyond a reasonable level is annoying and turns consumers off a brand, be they American or Indian. What should managers do about this? Change the message of each ad. However, in my study, while we found that the effect of doing this was statistically significant, it’s not substantial enough to make a difference to consumers zapping away from your ad. Another method is to change the length of each ad. We compared 15-second and 30-second ads, but again there is no difference in the effect on zap probabilities. Using a combination of the two just made things worse. There might be one way to mitigate the likelihood of being zapped and that’s slot timing. We found significantly higher likelihood of viewers switching away during ads at the top and bottom of the hour compared with other times. With this information, brands could justifiably ask for a rate reduction if they’re in these slots or ask instead to be slotted in at 10 minutes or 20 minutes past the hour. The main takeaway should be to simply reduce the ad frequency, which will reduce wasteful expenditures and maximise potential purchases. I would submit that there is a significant degree of over-advertising in the Indian marketplace especially, which is not doing the sponsoring brands any good, and most likely hurting them. If readers have any data on India or elsewhere in support of this theory or against it, I’d like to hear from you. Amitava Chattopadhyay is The GlaxoSmithKline Chaired Professor of Corporate Innovation at INSEAD. He is 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.)
India is one of the Largest Gold Markets in the World, with growing affluence strongly driving demand. Every 1% increase in an Indian household’s income results in a 1% increase in their Gold demand, as per a World Gold Council (WGC) report. Gold has a central role to play in our culture, as a store of value, a symbol of wealth and status and a fundamental part of many rituals, making it a very popular investment. In a WGC survey, one-third of all respondents (Indians, aged between 18–33) said they would invest in Gold if they're handed out INR50,000. No wonder banks have capitalized on this fascination and accordingly structured various lending products. What? The Gold Loan is a product which can help you fund a personal finance requirement by securing one’s Gold ornaments or jewellery. With Gold acting as a collateral, the loan amount depends on the amount pledged. The personal finance requirement can range from education, a vacation, to a medical emergency. The use of funds is not a factor driving the sanction of funds. How? Maximum loan amount sanctioned depends on the amount of Gold pledged. RBI restricts banks from advancing loans crossing 75% of the Gold value pledged (i.e. loan-to-value ratio). Absolute amounts, in general, can range between INR1,500 to INR1cr, depending on the eligibility criteria of the concerned bank. RBI has also put in place guidelines to standardize the valuation methodology adopted by a bank while valuing the pledged Gold. Valuation is driven by the average closing price of 22 carat Gold for the preceding 30 days as quoted by the India Bullion and Jewellers Association Ltd. (or the historical spot Gold price data publicly disseminated by a commodity exchange regulated by the Forward Markets Commission). If purity is less than 22 carats, the pledged amount in grams should be adjusted pro rata. The maximum allowable duration for repayment (“loan period”) cannot exceed 12 months. Repayment can be structured via: Equated Monthly Instalments (EMIs) Upfront payment of interest with repayment of principal upon end of loan period Payment of interest monthly with repayment of principal upon end of loan period An EMI plan essentially spreads the total principal and interest due equally over the loan period and is chargeable on a monthly-basis. Interest Rate? Like car, home and education loans, the EMI is calculated based on the principal to be borrowed, the applicable interest rate, and the loan period. The applicable interest rate is set by the bank. Other Charges? There is usually some processing fee (in general not exceeding 1% of the loan amount), late payment charges, valuation fees (for determining the value of the underlying collateral) etc. for Gold Loans. You can check an online loan marketplace to get a sense of the applicable interest rates and processing fees. They are usually expressed on an annualized basis. Things to Watch Normally, shorter is the loan period, lower would be the interest rate applicable In most cases, a pre-payment charge is omitted Gold Loan is ideal for fast and low documentation financing The lending institution will usually not lend the 100% of the Gold value A Gold Loan is one of the few products where the borrower’s credit score is not given much importance. Nevertheless, proper repayment of a Gold Loan does contribute to one’s credit score. This will be a recurring column published every Friday under the title: “How to Make Sense of the Indian Economy”. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Dr Kenneth Cooper ushered in the Aerobics Revolution, with his seminal work titled Aerobics some 50 years back. He published several other books that focused on running, over the next two decades, making this activity almost synonymous with Aerobic exercise. Brisk walking, jogging/running, cycling, dancing and many more have been the most popular Health and Fitness exercises worldwide, forming the cornerstone of slimming efforts imbibed by millions of aspirants! The bid to achieve better Health and Fitness have led to the mushrooming of gyms, stadia, Fitness gadgets and ‘rapid’ Fitness programs in recent years; obesity has however only grown in the same period. An Incomplete Understanding of Health and Fitness Perhaps for starters, a relook at the definition of ‘Health’ and ‘Fitness’ is warranted. The World Health Organisation (WHO) defines Health as “complete physical, mental and social well-being, and not merely the absence of disease or infirmity” making it perhaps a difficult goal to aspire to. Fitness is defined as the state of being physically fit and healthy or being able to fulfil a specific role or task. CDC defines it as “the ability to carry out daily tasks with vigour and alertness, without undue fatigue, and with ample energy to enjoy leisure-time pursuits and respond to emergencies” – again a comprehensive definition. The traditional view has been to visualise a linear relation between the two i.e. as one grows fitter with regular exercise, one becomes healthier simultaneously. As with anything as complex as the human body, this is true only until a point. A quick review of the later life of champion athletes will reveal that a majority suffer from musculoskeletal injuries a few years after their regular training ceases. Most are past their prime in their 30s, and for sure by their 40s. In the light of this, one of the best definitions I have found for Exercise is by McGuff and Little in their 2009 Masterpiece Body by Science. They define Exercise as: “A specific activity that stimulates a positive physiological adaptation that serves to enhance Fitness and Health; and does not undermine the latter in the process of enhancing the former.” This is difficult to digest! But if we consider statistics that reveal that well over half (close to 60%) of all regular runners get injured once a year, with one running-related injury for every 100 hours of running, we are forced to pay attention to the above definitions. This data does not even include the innumerable running enthusiasts who have chronic knee pain while climbing stairs or nagging low backache in their 40s and 50s. This also does not include the disconcerting news of heart attacks, or even deaths of enthusiasts during or just after running. An oft-quoted instance is the death of running enthusiast James Fixx at age 52 while on a run who wrote The Complete Book of Running in 1977, and was instrumental in popularizing running for Fitness in the USA. Recent reviews of long term studies however, are more reassuring. Apparently, the risk of dying suddenly while running is 5 times higher in a runner, but this is considerably lower than than the 56-74 times higher risk in an individual who is normally sedentary and has to run or strain himself suddenly. So exercise minimally increases the risk while exerting, but pretty effectively reduces the risk of dying the rest of the day. Achieving ‘Balance’ Studies have shown that most humans beings, c. 60%, are physically inactive, and only a small minority (about 8%) exercise regularly. Considering the aphorism “Sitting is the New Smoking”, (nearly as many people die worldwide due to physical inactivity, as due to smoking, about 5 million each per year) almost everyone will benefit from an active lifestyle, leading to increased effort tolerance, improved immunity and reduction of body weight, blood pressure and blood sugar. We need to however find the optimal balance to achieve good Health and Fitness. The other tough question to consider is that of genetics. Running or swimming would make us slimmer and fitter (if we continue to run long-term), but hardly anyone will become an Usain Bolt or Michael Phelps. Top performing athletes have excellent genes combined with years of committed practice and coaching. Many youngsters are prone to come under the sway of ads and movies, and start taking a variety of supplements in gyms in a bid to develop muscles and “abs”, often of questionable quality and value. Sometimes, they develop complications or injuries as a result, bringing exercise, especially weightlifting into disrepute. So, in the pursuit of Health and Fitness, it is good to remember one’s natural limitations while continuously working towards enhancing our innate capabilities. All this is not meant to dampen your enthusiasm, rather is just a reminder that exercise is a lofty long-term goal, being easier to initiate than to maintain. This is not just because of weakness of moral fibre, but due to the repeated cycle of fatigue, injuries and improper diet. However, as has been said earlier, most people overestimate what they can achieve in a year, but underestimate what they can achieve in a decade. Starting with Aerobic Exercise What makes for effective Aerobic Exercise? Without going into the nuances of optimizing Aerobic by excluding the Anaerobic component (to be discussed in another article), let us consider our options. Guidelines recommend up to 150 minutes of regular moderate physical activity or 75 minutes of vigorous or intense exercise per week in the pursuit of these goals. Moderate activity for adults includes brisk walking, swimming, cycling, gardening, running household chores, dancing, walking a pet, playing games with children and carrying weights under 20 kg while walking. Vigorous activities are running/jogging, fast cycling or swimming, Aerobic dancing, competitive sports or games and moving heavier weights (> 20 kg). Healthcare authorities believe that benefits will accrue even from low impact exercises like brisk walking, which have minimal potential for injury, while improving the overall effort tolerance, blood pressure and sugar. This is a recurring column published every Sunday under the title: A Guide to Exercise. Next week, we shall focus on some of these exercises specifically for achieving the best enhancement of Fitness, while improving Health as well. 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Editor's Comment: This is the first of a two part series discussing the scope of India's drone market, in light of recent regulations directing their commercial and personal use. The new protocol aims to tap the myriad opportunities out there, aside from ones such as surveillance and area mapping; only restricting its use in locations like airports, around international borders and coastlines and most importantly in areas of strategic importance to the country’s military. Over the last few years, India has been witnessing an exponential growth in the demand for commercial use of Unmanned Aerial Vehicles (UAVs), commonly called drones. A FICCI report estimates the market to grow to around $886 million by 2021. Steering the narrative is the Directorate General of Civil Aviation (DGCA), the nation’s aviation regulator. No wonder drone manufacturers and operators are paying attention, especially after the regulator has released its latest set of rules and requirements, effective from December 2018. Drones’ relative nascency in terms of mass adoption aside, they have already become quite central to the activities of certain government organizations and PSUs in India. Presently the private sector is not permitted to operate a UAV. But that would change from December thus opening an opportunity in a massively untapped market. Experts like Rahul Papney, Lead Analyst of global market intelligence and advisory firm BIS Research, claim the market for commercial end-users in India will supersede the military market one by 2021. Bird's Eye View Of Drone Usage In India & Oppurtunities In The Private Sector Drones are currently being used by the army, government agencies and PSUs. In addition, centres of pilgrimage such as the Tirumala Tirupati Devasthanams (TTD) also deploy UAVs as part of their security arrangement. Application universe is diverse, ranging from Police departments utilizing them for surveillance in crowded situations (e.g. at Kumbh Mela ghats in 2019) to geo-locating natural disaster victims by specialist teams of the National Disaster Management Authority (NDMA). By Lokankara (Allahabad, Kumbh Mela - Pauspurnima 2013 CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons Drones can proficiently fulfil various inspection and project management tasks. Case-in-point is Indian Railways, benefiting from UAV-assisted 3D video-mapping on certain stretches, including part of the ambitious 3,360 km Dedicated Freight Corridors (DFC) project. By Adityamadhav83 CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0), from Wikimedia Commons Similarly, National Highways Authority of India (NHAI) has deployed drones for 3D digital mapping of the Raebareli-Allahabad highway widening project. UAVs collected data to calculate compensation for people who had properties along the highway. A state-run electric utilities company, PowerGrid Corporation of India, find drones useful for monitoring projects in hilly and inaccessible areas. Similarly, NTPC, the state-owned energy conglomerate is experimenting on use-cases for their application in solar power facilities, including inspection, intrusion detection and surveillance. Such specific frameworks aside, private sector drone usage is expected to be even more creative, ranging from transporting products for e-commerce firms to private security companies conducting person-level surveillance using AI. They can assist in spraying pesticides, monitoring crops and identifying agricultural diseases. Infrastructure and real estate sector would conduct 3D mapping and GIS surveillance. Aerial photography market will boom and the odd enthusiast can ‘hobby fly’. Having set the scene for this exciting new opportunity, I will next do a deep dive into DGCA's latest rules to understand where they got things right and areas where more clarity would be wanting. Stay tuned. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
On Sep 23 2018, India awoke to another milestone in social welfare - the Ayushman Bharat Scheme cited by the government as a universal health coverage scheme. The scheme has two components - an infrastructure focused one which aims to build ‘Health and Wellness Centers’ and an insurance component which plans to provide insurance up to INR5 lakh to 10 crore households or 50 crore individuals. By all accounts this is a long overdue step, and it is useful to get into details of why this kind of scheme is important and what exactly it entails. Let’s start off with macro statistics on healthcare in India. What Is The Status Of Healthcare In India Today? The government spends around 1.3% of its GDP on healthcare. Sweden spends 9.9%, Singapore spends 2.2%. According to a report by the World Health Organisation (WHO), India is far below. Around 70% of the total health expenditure in India is out-of-pocket i.e. consumers spend it from their earnings at point of services without coverage from financial protection schemes. In 2015, an estimated 8% of the Indian population had been pushed below the poverty line by high out-of-pocket payments for health care, according to WHO. India has only 0.5 hospital beds per 1000 of population, reveals a World Bank Dataset. The World Health Organization recommendation is 5 beds per 1000 of population. India has 1 million doctors of modern medicine (allopathic) to treat its 1.3 billion population. Of them, reportedly only 0.1 million work in the public health sector, to which India’s 900 million rural population turns for treatment. Things are pretty bad if you’re poor and get sick. For most, it is a descent into a vicious circle - they can’t work because they are sick and whatever earnings have been saved up, are spent on healthcare. Universal Health Coverage is thus an urgent necessity, and something, which has been pushed for repeatedly. So when it was finally announced in the budget this year, it created quite a flutter. The British medical journal, Lancet, also praised the government’s courage to go ahead with such an ambitious scheme. What Is The Ayushman Bharat/National Health Protection Scheme? The scheme offers medical insurance of up to INR5 lakh per household to 10 crore households (~50 crore individuals). Who Are The Beneficiaries? The beneficiaries are selected on the basis of the Socio-Economic Caste Census, and the primary criterion is economic deprivation - which is defined differently for rural and urban areas. Most people in the unorganized sector are expected as beneficiaries (e.g.: people with kuccha houses in rural areas, domestic workers and rag pickers in urban areas). Can They Go To Any Hospital? The government has rolled out tenders to empanelled hospitals and around 10,000 hospitals are onboard as of now, both public and private. What Procedures Are Covered? This is a sticking point for anyone who has ever tried to claim from a private medical insurance scheme only to discover that the procedure is not covered at the last moment. Theoretically, there is a large list of allowed procedures in the Ayushman Bharat Scheme but I haven’t been able to find a solid list anywhere. The website says ‘All pre existing diseases’ are covered from Day 1, which is a big difference from private health insurance providers and also extremely relevant for the audience of this scheme. 1,350 medical packages covering surgery, medical and day care treatments, cost of medicines and diagnostics. Is The Treatment Cashless? Yes, in theory, beneficiaries need to get to an empanelled hospital, show an ID, at which point membership in the scheme will be confirmed via online authentication with the Socio Economic Caste Census database and treatment can begin. Where Will The Money Come From? The program is modeled as a Centrally Sponsored Scheme where 60% of the cost is borne by the Center and 40% by the states (the split is 90-10 for North Eastern states). This is cited to be the largest universal health coverage plan anywhere in the world, and the associated costs are also going to be huge. Budget 2018-19 however did not provide any concrete details about how/where/when the money will be made available. Estimates range from INR10,000 crore to INR30,000 crore (yearly) with more being committed under the PM’s authority. Part of this will be funded by the increased 4% health and education cess announced under the current budget - so via taxpayers. Is That Enough? This is a very important question, which doesn’t seem to have any clear answers at this point. It’s important because without adequate funds, a program at this scale runs the risk of receding into oblivion. Concerns have been raised in Lancet about the government set rates for procedures being far below what is viable for hospitals, forcing them to withdraw from the scheme. Further questions remain on the premium - will private providers handle the insurance? Or will the government run it on its own? What safeguards will be provided to ensure private providers will do what is best for beneficiaries? What About Infrastructure? This is another key point. With the increased demand for healthcare spurred by the insurance scheme, are there enough hospitals, doctors, nurses, and other tertiary healthcare professionals to match it? Anecdotally, the answer seems to be no. Building healthcare infrastructure in the public sector is a long process, and then ensuring quality care is another bottleneck. Today 70% of healthcare services are provided by the private sector in India, so getting private hospitals onboard is crucial for the success of this scheme. The hospitals then need to be verified, accredited for quality care, and audited to ensure that corruption in the form of ghost beneficiaries, unnecessary procedures, charging of cash upfront etc. does not derail the scheme. Conclusion There are no two ways about it - the Ayushman Bharat Scheme is a much-needed step forward. Universal healthcare is now closer to being recognized as a right, enabling people to fulfill their full potential, and something that the state should actively encourage. This is going to be the largest coverage program in the world, and the onus is on the state to make sure it delivers all that it has promised. The onus is on us, in the meanwhile, to keep asking questions, and making sure loud proclamations do not override actual implementation. Also, if you have domestic help, or are in contact with unorganized labor, wherever you are, do make sure to tell them about the scheme. There is an online OTP process for people to check if their name is on the beneficiary list. Until next time! You can subscribe to my weekly letter series titled "Policy & Governance for Dummies" by clicking here. View the letter archive by clicking here. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Last week, in an attempt to rein in the country’s widening current account deficit (CAD) and shore up the depreciating Rupee, the government increased custom duties on telecom equipment including components for mobile devices. The move comes shortly after the Centre hiked import duties on 19 non-essential goods last month, including air conditioners, washing machines, refrigerators and aviation turbine fuel (ATF). Here’s discussing how the imposition of these import duties may or may not be able to achieve their said objective, that is, bridge the widening CAD. Let’s begin with some background. For the first time in over six quarters, the balance of payments turned negative in the April-June quarter – reporting a deficit of $11.3bn, compared to a surplus of $11.4bn last year. The Rupee has lost more than 13% since the beginning of this year. On back of escalating crude oil prices, higher interest rate environment in the US, and instability in the global economic order (IMF lowered global growth estimates for 2018-19 to 3.7% as opposed to a previous estimate of 3.9% in April, citing “rising trade protectionism” and the effects of US-China trade war), the Indian Rupee has lost more than 13% since the beginning of this year, hitting an all-time low of 74.45 against the US Dollar last week. In an attempt to rein in the widening CAD and curb the outflow of foreign exchange from India, the Government recently announced an increase in custom duties on 19 non-essential goods. This included air conditioners, washing machines, refrigerators, ATF and even footwear. These items accounted for an import bill of over INR86,000cr ($11.8bn) in FY2017-18. With an increase in the import duty, the prices of these goods are expected to rise, dampening demand, thereby lowering imports. Considering the average spike in proposed new custom duties amounts to 5-6% on a potential import bill above INR86,000cr (assuming FY2018-2019 to bring in atleast as many imports as FY2017-2018), the relief would amount to $600-700mn, fairly marginal vs. the total. Shortly after, the government announced a 10% increase in import duty on 15 items on telecom equipment including components used in mobile phones. Interestingly, mobile phones and their components make up the third-biggest chunk of import bill after crude oil and gold. However, it remains to be seen as to how effective the second spike would be. Many items included in both the lists are price inelastic. For instance, the list of 19 non-essential items included a 5% import duty on ATF. Integral to the aviation industry, it is unlikely that its import can be slashed. No wonder in retrospection, the government reduced excise duty on ATF to 11% from 14%, resulting in an effective increase of 2% in price. Some other items like parts of precious metal, cut and polished diamonds are eventually used for exports. To that extent, a hike in import duty may end up exerting inflationary pressures on the affected industries. Furthermore, with the festive season in the offing, it is likely that consumers will buy more of the “non-essential” goods such as air conditioners, washing machines, refrigerators and footwear. Moreover, CAD is not just reflective of the imbalance in import and export. It should be viewed as an imbalance in the savings and investment of the country. Any attempt to bridge the gap should see efforts across all three fronts – monetary policy, fiscal policy and exchange rate. While some steps have already been taken to this effect such as removal of 20% exposure limit of FPI's corporate bond portfolio to a single corporate group, exemption from withholding tax for Masala bond issuance for the current fiscal year and introduction of an NRI bond, they appear mere band-aid solutions in the grand scheme of things. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
In spite of the recent liquidity crunch, lofty fuel prices, Rupee woes, and volatile markets - consumption drives our Festive narrative. A recent initiative of the government seems to agree. For our gold-obsessed nation, a Sovereign Gold Bond (SGB) Scheme has been launched - open for subscriptions from October 15th. These bonds are largely positioned as a substitute for investing in physical gold and comes across as an effort to reduce gold imports, limit current account deficit, and deter a Rupee sell-off while the masses chase the bullion, at least metaphorically. Here's a summary of key things you need to know on SGB. Sovereign Gold Bonds are RBI issued financial instruments which are denominated in grams of gold and its returns are linked with the price of gold. Sovereign gold bonds are financial debt instruments which are positioned as a proxy for investing in physical gold. Investors pay the issue price in cash and the bonds will be redeemed in cash on maturity. The bonds are structured such that the returns are inextricably linked with gold price. These bonds can also be used as collateral for loans and carry sovereign guarantee on account of them being issued by the government. Sovereign Gold Bond scheme was first launched in November 2015; Heightened attractiveness due to lower risk and cost of storage. The bonds are aimed to orchestrate a partial switch in domestic savings used to purchase physical gold to financial savings while preserving the underlying exposure to gold. As outlined above, the return on these bonds are linked with the fluctuating gold price, but given the financial nature of investment, they carry lower risk and cost of storage. In-line with ongoing efforts to lower gold imports and reduce current account deficit, government launched the Sovereign Gold Bond Scheme FY19. The bonds carry 2.5% interest rate alongside a capital gains tax exemption on redemption. These bonds will be sold every month from October 2018 to February 2019 through banks, stock exchanges, post offices etc. The term of the bond will be eight years with exit option(s) in the fifth, sixth and seventh year. The bonds are eligible for conversion into demat and can be used as collateral for loans with loan-to-value (LTV) ratio in-line with physical gold loan as mandated by RBI (maximum LTV of 75%). The interest on gold bonds will be taxable as per the provision of Income Tax Act, 1961. Gold was left out from the list of 'non-essential imports' which were subject to an increase in import duty; Sovereign Gold Bond Scheme FY19 partially addresses it. Gold and crude oil have played a pivotal role in India’s widening current account deficit, considering both are primarily traded in the International markets in USD. However, the government chose not to increase import duty on gold when it raised duty on non-essential imports last month to narrow the current account deficit. In that context, Sovereign Gold Bond Scheme FY19, is structured to broadly achieve the same goal - disincentivize import of physical gold. It offers a meaningful alternative to investors seeking gold exposure without actually importing it while allowing it to be freely traded in public markets. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
We all paid attention when RBI concluded its Monetary Policy Review last Friday, where it went against market sentiment to keep the repo rate flat. While minutes of the meeting are due to publish on Oct 19, another interesting document was released that day - the Central Bank's half yearly Monetary Policy Report. We present a short summary of the 84 page document throwing light on RBI's thinking with respect to the Indian Economy (using the report's headers and select excerpts): Macroeconomic Outlook: External environment remains challenging, adding to downside risk to India's growth. Food inflation muted to-date. Next 12m inflation expected to rise 'modestly' due to global volatility and rising crude oil. Retaliatory trade protectionism, market volatility, rising crude oil prices ($15/bbl up between Apr-Aug), and tighter US rate environment are creating external headwinds on the Indian Economy. Weakness in other Emerging Markets adding to contagion. Domestic economic activity has demonstrated resilience. Inward FDI is strong. FPI outflows due to a depreciating Rupee (down 11.8% vs. USD since Mar). CPI inflation is projected to pick up from 3.7% in Aug to 3.9% in Q3:2018-19 and 4.5% in Q4:2018-19, with risks tilted to the upside. In the Sep round of the RBI survey, professional forecasters expected real GDP growth to decelerate from 8.2% in Q1:2018-19 to 6.9% in Q4 and then recover to 7.4% in Q2:2019-20. Prices and Costs: Inflation has eased in Q2 due to an unusual calming in the momentum of food prices. Input costs rose sharply in Q1 and remained firm in Q2 due to increase in fuel prices. Wage pressures remained contained. Actual inflation outcomes have tracked RBI projections directionally; however, in terms of magnitude, inflation undershot projections by a significant margin – 28 bps in Q1 and 74bps in Q2 till August - primarily due to a below expected increase in fruit and vegetable prices. Calming food inflation more than offset the impact of higher than projected crude oil prices in H1. Rural wage growth remain subdued since Aug, showing lagged impact of low inflation in the previous few months. Demand and Output: Private consumption and investment demand strengthen. Robust increase in non-oil merchandise exports. Supply conditions improve with sharp acceleration in manufacturing, resilience in agriculture etc. Raising real investment activity consistently key. Rapid catch-up in sowing activity, ample reservoir storage improves outlook for agriculture and allied activities on top of record production in 2017-18. Industrial activity has strengthened driven by manufacturing. Services sector is resilient. Gross Fixed Capital Formation (GFCF) has decelerated due to the slowdown in investment in the private sector, weighed down by high leverage. However, the corporate sector has been deleveraging since H2, especially in manufacturing where interest coverage ratios have lately improved. Interest coverage ratios in Services are on their way down. Recent data on investment activity i.e. sales growth, capacity utilisation, inventory drawdown, and gradually returning pricing power suggest that the investment cycle has turned. Tax revenues for Apr-Aug have grown by 7.5%, driven by higher income tax collections. The overall indirect tax base has expanded. Financial Markets and Liquidity Conditions: Money markets are experiencing liquidity swings, G-secs and FX markets are affected by global factors. Stock markets gain considerable buying support from domestic mutual funds. Bank lending picking traction. Consequent to default by IL&FS on September 14, 2018, the weighted average discount rate on Commercial Paper increased in general, and that for non banking financial companies (NBFCs), in particular. The G-sec yield curve has undergone level shifts in H1 in response to global spillovers as well as domestic factors such as near-term inflation outlook and monetary policy measures. Overall NPA ratio of banks moderated in Jun vs. Mar end. NPAs in Personal loans and agricultural loans are deteriorating, where large credit flows have gone in recently. NPAs in Industry and Services loans have dipped in Jun vs. Mar. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
The US treasuries yield curve is 'flattening'. Is it the economy's canary in the coal mine? Bond yields in general reflect the amount of return an investor realizes on a bond investment and US treasury yields are usually directionally linked to interest rates. Given the 'yield curve's' significance as a key sentiment indicator for the economic outlook, it warrants a closer look as such. Yield curve is a graphical representation of bond yields of varying maturity dates. Typically, longer the maturity, higher the yield. The yield-curve represents the graphical shape of bond yields plotted against the maturity of these bonds. Typically, longer the maturity of a bonds, higher is the yield that it carries and is described as the 'normal yield-curve' (discussed below). The US treasuries yield curve (often simply referred to as the 'yield curve') is a closely tracked visual representation offering meaningful read-throughs. US treasury bonds are considered the safest investment in global financial markets and their yields are extensively used for wide-ranging economic inferences. Yields are often thought of as a proxy for bond investors appetite for risk. Higher the expected risk, higher the yield and so on. It is usually characterized by the following shapes i) Normal yield-curve ii) Flattening yield-curve and iii) Inverted yield-curve. Depending on the shape of the curve, there are some inferences that can be drawn on the economy, albeit not easy to individually isolate the key drivers. i) Normal yield-curve: Short-term bonds carry lower yields while long-term bonds carry higher yields (and the difference between these yields is the yield spread). This is fairly intuitive, hence 'normal', since the longer a bond investors capital is locked in, the higher the yield that an investor warrants. Therefore, normal curve takes the shape of a upward sloping curve with yields rising as maturity period increases. ii) Flattening of the curve: The 'flattening' of the yield curve is not technically a shape but simply means that the yield spread is decreasing. The term 'flattening' is again a graphical representation where in the steepness of the curve is somewhat flattening. It essentially means that the difference between the long-term and short-term treasury yields is narrowing. iii) Inverted Yield Curve: This happens when the short-term yield moves higher than long-term yield. While this appears counter-intuitive, what it signifies is that bond investors now see the current interest rate environment as more attractive to lock in prevailing rates under the expectation that future rates might actually be lower than what it is now. In effect, investors ask for a higher rate of return on short term lending relative to long term which is seen as red-flag for a possible period of economic slowdown. The current US treasury yield-curve is flattening i.e. current yield spread is narrowing. The yield-spread stands at c. 23bp and there are concerns of a yield-curve inversion. A flattening/inverting yield curve is often perceived to be indicative of an upcoming recession, with investors increasingly being hesistant to lend in the short term. This flattening yield-curve typically signifies cautiousness surrounding the US economic outlook. It stands at a tight 23bp at the time of writing. In case this spread further narrows to zero or worse goes negative, we will have the inverted yield curve. In the last 50 years, almost always has an 'inverted yield curve' given way to recession. In that context, the yield curve is being closely watched and has prompted a response from Fed Chairman, Jerome Powell who albeit played down concerns and said "there’s no reason to think that the probability of a recession in the next year or two is at all elevated." The short-term yields are a direct result of interest rate hikes by the federal reserve whereas the longer-term yields are indicative of growth and inflation expectations. There are other factors at play ranging from inflation expectations to general demand for US treasury bonds that impact their yields; Higher demand for US treasury bonds pressure their yields. Other factors are at play ranging from inflation expectations to a general demand for US treasury bonds. As touched on earlier, longer-term yields typically track growth and inflation expectations. This is again intuitive since bond coupons can see their value eroded via inflation. In that context, lower long-term yield also underlines lower expectations of inflation. However, if the demand for long-term bonds increases via asset managers or even foreign funds/governments buying US long-term debt, this could artificially pressure long-term bond yields. As outlined earlier, there are several moving pieces to the economy (click here to understand more on the nuances of inflation, interest rates, monetary policy etc) and the shape of the yield-curve is just one economic tool, albeit one that is closely watched by the financial markets and other industry participants. With US mid-term elections in November, rest be assured, the term yield curve will be thrown around extensively in conjunction with any commentary around the economic outlook of the US. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Global investment giant Blackstone and Bangalore-based real estate developer Embassy launched India’s first real estate investment trust (REIT) i.e. Embassy Office Parks REIT (or ‘Embassy REIT’ hereon). While this may appear too precise to care, REITs offer a unique 'financial markets' avenue to gain exposure to real estate rather than requiring investors to buy physical assets. The 'financial markets' avenue makes them very interesting, especially in a post Demonetization/RERA era where buying property in the conventional way is something investors have had to hold back on. REIT is a company (and an investment vehicle) that owns, operates, finances and manages 'income-generating real estate assets'. It is essentially a real estate company that offers common shares (called ‘units’) much like other listed companies, allowing investors to take an effective ownership in the business. That being said, REITs have two unique characteristics which make this investment vehicle somewhat different. First, REITs own and manage income-generating properties. Second, REITs are mandated to distribute most of the cash flow it generates back to unit-holders. The combined effect of these two characteristics mean investors gain exposure to real estate assets which generate income which in turn is distributed back to them. This is in addition to the upside potential of price appreciation. These advantages are heightened in the Indian context because of lack of meaningful alternatives. SEBI requires REITs to distribute 90% of income earned back to investors making REITs a liquid and income-generating investment vehicle. As per SEBI, 90% of Net Distributable Cash Flow (NDCF) is mandated to be returned to investors (or ‘unit-holders’) on a semi-annual basis. Also, in the case of an asset sale, 90% of sale proceeds are to be returned to investors. Consequently, REITs offer regular income while also being fairly liquid on account of it being publicly traded in the financial market. The minimum investment requirement is INR2 lakh, which as such underlines a significantly lower entry barrier for an investor to gain exposure to the aforementioned sector. Embassy REIT property portfolio consists of 33 million sq. ft making it the largest office portfolio in Asia. As per the red-herring prospectus filing, Embassy REIT will raise over INR5,000 cr with an option to increase the fundraising by 20-25%. The REIT itself is expected to be listed sometime early next year. Embassy REIT property portfolio consists of 33 million sq. ft across Mumbai, Pune, Bengaluru, and Noida in effect making it the largest office portfolio in Asia. The portfolio includes Blackstone’s own assets as well as those in partnership with Embassy Group and includes 11 assets: seven office parks and four commercial buildings. Of the 33 million sq. ft, 24 million sq. ft is completed and 95% leased. While Embassy REIT marks the first REIT in India, REITs as an asset class have fairly robust presence in advanced markets including US, Canada, UK, and Asian markets such as Singapore and Hong Kong among others. Real-estate is generally perceived to be a significant investment class in India however REITs have never made the cut. Somewhat lower yields and a real-estate market largely tainted with illiquidity and lofty levels of opaqueness have been key impeding factors. However, in more advanced markets, REITs are considered key investment vehicles on account of their earlier outlined benefits and also in injecting portfolio diversification. That being said, Embassy REIT now offers the first opportunity for Indian investors in this asset class and its multifarious advantages could possibly help it in gaining some sort of momentum. Embassy REIT marks the birth of a new asset class in India and such should be worth keeping a close eye on. Other international funds have been betting on Indian commercial real estate as well – timing is hardly surprising. While Embassy REIT is a clear bullish bet on Indian commercial real estate, it is not the only international player making such a bet. Singapore's sovereign wealth fund GIC invested Rs 9,000 crore in December 2017 in DLF – India’s largest realty firm. Notable global funds such as Canada Pension Plan Investment Board (CPPIB), Brookfield Asset Management, Ascendas and Qatar Investment Authority have all been making bets on the Indian commercial real estate segment, albeit without REIT offerings. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
SEBI's recent board meeting has brought an interesting set of rules, optimistically labelled as 'reforms'. Aside from recommendations around stock exchange rules, Foreign Portfolio Investors (FPIs), corporate Promoters, bond issuers, and commodity market participants, the most revealing suggestions have been on the Mutual Fund industry. Considering the obvious consumer interest, we thought it may be relevant to briefly walk through the core points and understand how they can potentially change the industry going forward. New rules from SEBI talk about two aspects concerning Mutual Funds. First is on the amount charged by the Asset Management Company (AMC) for its services, represented by the Total Expense Ratio (TER). Second is the commission paid directly/indirectly by investors to distributors. When you as an investor buy units of a Mutual Fund, you indirectly and directly pay two parties through the invested amount - the AMC managing the fund, and the distributor (i.e. your broker or financial advisor). The AMC charges a lumpsum, takes its cut and pays a commission to the distributor. You should understand these charges will negatively affect your investment return as they're deducted from your invested corpus. The AMC's cut is represented by something called the TER, which is nothing but the total fund costs (management fees, overheads etc.) as a proportion of the Total Fund Assets (AuM). The distributor's cut is represented by a commission, usually again expressed as a percentage of the invested amount. The Indian regulator is pushing for "trail" commissions to be paid to distributors rather than "upfront" commissions. Driving philosophy being that trail commissions mean distributors stay incentivized to ensure your portfolio performs well. Trail commissions are charged each year as a proportion of your invested amount and paid to the distributor i.e. till you remain invested. Upfront commissions in contrast is a one-off paid at the time of sale. SEBI's philosophy is that via a trail commission, the distributor stays incentivised and the scope of mis-selling and churn is reduced as in upfront commissions (where distributors are constantly switching funds to enjoy higher revenues). However, international precedents such as the Retail Distribution Review (RDR) in the United Kingdom has a different point of view, shunning away a commission based payout. RDR was a comprehensive review introduced by the UK Regulator Financial Conduct Authority (FCA) in 2012, which reviewed the revenue model of retail fund products in the UK. It banned the use of trail commissions or in fact any commission, arguing that they serve as a moral hazard biasing the view of the distributor or adviser and is primarily used by AMCs to push sales, irrespective of client interest. A "fee driven" model was proposed, where the distributor sets and charges a flat fees, instead of AMCs paying a commission driven by the size of the invested pool. Extensive focus has been laid on the need for transparency where the consumer has to be compulsorily informed about all charges upfront in a clear and understandable manner. SEBI also set updated TER caps, reducing the costs for the consumer. Until now, SEBI capped TERs through the rules it had set in 1996. The Mutual Fund industry has grown manifold since then hence the regulator felt the need to reduce these caps, thereby granting some economies of scale to the end-user. The full details of the new TER cap structure can be found on pg. 2-3 of the SEBI press release. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)