Adjusting to the new phase in the business cycle.

Dated: 01st May, 2018

 Say you are driving  down the freeway/ highway/ motorway at a constant and comfortable speed  which does not bother you much when suddenly you realise that you are  running late to your destination. At this point you decide to speed up  beyond your comfort pace, although totally in the safe zone, but still  uncomfortable. While at this rather uncomfortable speed, you come across  an obstacle, a risk ahead, the usual reaction also would be to break a  much faster (frantically) rate rather than your cool comfort slowdown.  What is also interesting to note is that after a while that  uncomfortable speed would begin to feel more comfortable and would  become the 'new normal'.

Being a patsy again has become a second  nature to me, a testament to my inherent momentary stupidities. Mind  you, this stupidity is not just contained to my capital market decisions  (even my children call me stupid sometimes, my wife, all the time).  Although I am happy that I do not possess the ego to accept that I am/  maybe wrong.

What I described above is what I believe happened in  the month of January, February and March. As equity markets zoomed at  the prospect of 'synchronized global growth' (nice terminology) in  January, the upward acceleration trying to price in favorable earnings  globally was probably too much for market participants to consume. Of  course, at such times, awareness of hurdles or risk disproportionately  rises and suddenly this absurd 3% mark on the 10Y Treasuries became a  perceived risk (throw in some trade war fear as well).

If we look  into the real fundamental data, the fed rate still remains low and even  after two or three more hikes would be relatively low compared to past  history. Considering wage increases have not really materialized as  feared probably owing to increase in the labor force participation rate,  which in my view can still increase to ~65%, we may be looking at lower  rates for longer. I am not in the camp that the Fed will err on the  side of caution on interest rates as the risks are too great for Mr.  Powell. 

All in all, the patsy (with a  sticker) in me saw the technical correction (over reacting to normal  risks) as a fundamental one. The downside to equity markets may not be  over but I do feel that it is probably limited as all it would take for  the Fed to suggest that it will be 'lower for longer' to prop markets  again. It is difficult, in my wisdom now, to see this bull market ending  without an overheated economy, which we currently don't have on the  plate. 

In short, I am on the camp, given the current context, that we still have some room to run on the upside.

Back  in India, we are looking at general elections late this year or early  next year. It is highly likely that the BJP gets the second term just  due to the 'Modi' effect. It is interesting and somewhat disappointing  to find that there is not even a close suitable alternative at present.  Democracy always functions best when checks and balances are in place. 

This  earnings season so far has not been very bad for corporate India,  although that could be said for most of global stocks. TCS became the  first $100 Bn market cap company from India's shores. Private banks are  slowly eating market cap (and share) away from public sector banks and  that trend is likely to continue. Wage growth has been anemic in India  this year but that has not deterred the consumption story. Who needs  income now when you can borrow?

Regarding the recent saga of  frauds in the public sector banking industry in India, 'surprise' is not  the word but 'of-course' is the word to describe it. Anyone who has  dealt with public sector banks in India knows how incompetent and rather  corrupt lending managers are in these institutions (honesty and  integrity is an exception). Looking to the future, the most probable  course of action is for the public banking industry to dwindle in  liabilities while the private sector banks consume market share.

To  end this months' commentary, while it may seem that I have a very good  hold of how things are panning out, it is but just one of the many  possible paths that the future may take shape on. As Mr. Dalio explains  in his book 'Principles', what kills is not to accept an alternative  path and recognize it.