Friday, August 25, 2017

How will India grow ?



Its a puzzle how India will grow.

Sadly, Jaitley and Modi are extremely stupid and dont realise how much they are screwing the country.


Whatever harm they could do they have done.


Thats why our agriculture is static, our manufacturing is static or contracting, our services are static, our small enterprises have been rogered by the twin whammy of demonetization and GST.


If these two terrible twins had done their job properly, Sensex would have been already at 60,000.


But India's situation is such that even after all this harm, one can still look forward to some 6% growth at least for next two years. That is 13% (compounded) growth after two years. That is India going from 2.25 trillion GDP currently to 2.6 trillion GDP.


That is 350 billion dollars in growth. 
The situation is such that corporate earnings are bound to grow much more that 13% - more like 50% growth (that too on a lousy base) after 2 years in selected companies.


Modi had two years of bad monsoon, converted third monsoon into a drought of money by demonetization - which hurt small companies disproportionately and now GST which is again making life very difficult for small companies.


Question comes - what will grow?


Not services because IT is matured.


Not exports because Pharma is in trouble - not because of FDA but because of pricing pressure from increasing competition as countries shift to generics. So margins will get squeezed. Leather is in doldrums because of cow politics. Diamonds and gold is in trouble because of the GST and black money crackdown and as dollar rises gold will fall. Not textiles export because of GST.


Not manufacturing because we just cannot compete with China which is a 11 trillion dollar behemoth - and while so far wages have been rising in China, as situation becomes more competitive, Chinese will be happy to drop their wage expectations. And their capacity is enough for the world - adding more capacity in India will only crash the prices of end products.


Agriculture is possible. So far, the policies of this devlish duo have hurt 50,000 crores worth of cow based economy. Milk, leather and beef industry has been eviscerated. In the short run the small time money lenders have also been put out of business because of demonetisation and black money crack down - and agriculture majorly runs on small time money lenders.


But in future there is hope for the sector. The GST, reforms of APMC and improved availability of organised credit as well as insurance to the agri sector seems to be a big focus. It is also a vote generating process and it seems like govt has some focus on this.


Investment led growth is still waiting for the govt to deliver a major spending thrust. When it comes, that will be a major boom.


Real estate has been majorly destroyed by the govt, as regards the black money, demonetisation AADHAAR and other measures. However another major push is needed in affordable housing - although in the absence of job creation, consumption of affordable real estate is difficult.
Where is this 350 billion of GDP going to come from?


Has to be agri 30% = 100 billion dollars, housing 30% = 100 billion dollars and infra 40% i.e. 150 billion dollars approx.


Current India agriculture GDP is 500 billion from some sources, though 17% of 2.2 trillion is 370 billion. Regardless, going to 600 billion is possible and likely - as efficiency of markets increases the possibility of more money going to farmers instead of middle men increases. It is however unprecedented in India's history - almost 25% growth in 2 years. Seems almost impossible and yet it is possible. A majority of this growth however might be related to better farmer realization and consumption led growth by the Indian farmer.


Currently Indian real estate contributes 9% of the GDP so about 200 billion. A hundred billion increase in two years represents a 50% growth in two years. The stage is set for it in the form of lowering of interest rates. But whether the fish will bite is a different question - will people buy? Will they take loans to build more new constructions when every day the insolvency of builders is making headline news is a big question. The traditional route of black money has been closed off. Will people take loans to buy a house ?


To me the more likely possibility is that farmers will take more loan to build pucca villlage houses - and buildings of pucca houses in small towns - that seems possible. Whether they will repay the loan after their habits are spoilt by recent loan waivers is another issue - but for now, that is a big hope. To have 100 billion in housing in two years, assuming a house takes two years to build - will take exactly 100 billion in capital i.e. 6 lakh crores of Rupees. Mostly from HFC and private banks.


That equals the 4.8 plus 1,3 lakh crore loan book size of HDFC and LICHF combined and probably represents a 25-50% jump in loan book size for real estate of all banks put together.
That leaves us with 150 billion i.e. 10 lakh crore worth of GDP from infra push = 5 lakh crores worth of expenditure each year by the govt.


Will we see that? So far it has not done. But if it is done, we are through.


The implications for the economy is massive. What needs to be done is simple - but so far govt has not done. It has destroyed instead.


It is not too late.

The companies benefitting from this are very concentrated and few. Housing finance. Private banks. Cement. Construction material. Farm consumption i.e. FMCG, construction, consumer durables like fridge TV. Motor cycles, cars, low end SUV.

IT companies are a changed business model. Pharma will face pricing pressure after the FDA headwinds. PSU banks are now dead, govt doesnt have capital to give them and in anyway needs 5 lakh crore per annum of excess expenditure. It seems likely that the future growth will be entirely by private banks expanding to double and triple their current size - PSUI firms might go the way of MTNL. Big realty firms also seem to have run out of wind, since affordable is small ticket and likely to be spread this and distributed in villages rather than big projects - which have already been created for next 5 years of consumption anyway as the stalled projects complete. Metals also seem rangebound. 

That leaves private banks, housing finance companies, motorcycles and cars, cement and construction. Thats it. Very small list of companies

Govt led construction seems focussed on multiple small contracts to small unlisted forms rather than large listed firms - the subcontractors seem to be directly employed by govt.

FMCG seeing major onslaught by traditional products - which might increase if the majority of consumers are rural. So FMCG also out.

So large construction firms like L and T might also not grow enough over large base already. Smaller construction firms like J Kumar and GMR etc are all linked to congress and are in debt trap - govt might bypass them. Construction materials seems safer play.

So a focussed portfolio of less than 10 stocks should cover these. So the six private banks (ICICI, HDFC, Kotak, Axis, Yes, Indus) six cement companies, six of the largest of the housing finance lenders, auto( maruti, hero, TVS Bajaj) and other materials (tiles, sanitary ware, paint, adhesives, plywood). 

With careful choice, should double in two years 

(already done wel since Jan2015 btw when I first gave my model portfolio of shares and funds)

This is what I wrote in Jan 2015

Portfolio recommendations for 2015 to 2018 (4 year recommendation and 4 year hold)

Size of portfolio 100
1. PPF 10 (NAV on 1.1.15 = 10) Currently 12.5

 2. FMP 10 (NAV on 1.1.15 = 10) Currently 12.5
 3. Direct equity 25
 a. Pidilite industries 5 (price on 1.1.15 = 552) Currently 830 = 7.5
 b. HDFC bank 5 (price on 1.1.15 =947)  Currently 1761 = 9.3 
c. Asian paints 5 (price on 1.1.15 =747) Currently 1135 = 7.5 
d. Ramco cement 5 (price on 1.1.15 =342) Currently 660 = 9.6 
e. LIC housing finance 5 (price on 1.1.15 =437) Currently 650  = 7.4
 4. Funds 50a. Franklin bluechip 10 (NAV on 1.1.15 = 338) Currently 450 = 13.3
 b. UTI opportunities 10 (NAV on 1.1.15 = 48) Currently 54 - switched when its NAV was 48 to Axis long term @NAV 30@1.1.17  Currently 38 = 12.6
c. BNP midcap 10 (NAV on 1.1.15 = 22.33) Currently33 = 14.7
 d. Franklin smaller companies 10 (NAV on 1.1.15 = 36.69) Currently 54.5 = 14.8
 e. Reliance pharma 5 (NAV on 1.1.15 = 126.6) Currently 124 - switched when its NAV was 127 or so hence equal weight to direct equity - Hero@3000@1.1.17 Currently 3870 = 6.45
 f. Franklin infotech fund 5 (NAV on 1.1.15 = 110)  Currently 117 - switched when its NAV was 110 so equal weight to direct equity - Maruti @4700@1.1.17 Currently 7600 = 8.1
 5. Birla global real estate fund 5 (NAV on 1.1.15 = 17.53) Currently 117 - switched when its NAV was 17.5 so equal weight to direct equity - Kotak@690 @1.1.17 Currently 977 = 7.1


 
Rationale

This is a selected stock+ sector fund + fund type of portfolio (not a stock only or high risk stock with fund or fund only portfolio). It is meant for safe, non monitored and risk free investment. There are 2 semi FMCG vs construction related stocks i.e. Asian paints and Pidilite. There are 2 banks (HDFC and LICHF) and one cement. The aim is concentrated risk on high growth. Only 3 best sectors selected (2 players from 2 sectors meant to minimize company specific risk). IT and Pharma sectors are covered by sector funds instead of specific stocks to minimize risk. There are 2 small and midcap funds to maximize gain and one multicap and one large cap fund to capture overall economic performance. Birla REIT can be replaced by a fund (Value discovery) if don’t want dollar denominated hedge. I have posted the NAV on 1.1.15 and we can compare this with levels on 31.12.15 and in each subsequent year with yearly course corrections if needed (stocks selected do not need course correction, being safe bluechips and funds selected are anyway a 4 year hold). I re-emphasize – this is a risk averse portfolio for prudent investment and not meant for higher risk appetite.


These are also meant to be used for SIP (into funds) and systematic equity plans for a drip into the stocks, to gain from price falls which might come. However I will not be analyzing the SIP and SEP performances since not worth the effort.


So the direct equity vastly outperformed the funds selected - I sold the funds about a year ago and bought a number of shares but writing only the ones kept as part of model portfolio for yearly comparison. 

So this concentrated portfolio of stocks and funds should deliver good returns is my opinion (I personally have many other stocks and funds, including all of these but bought at varying points of time and at varying prices, just putting down the model portfolio for yearly comparisons only - these are also not the portfolio weightage in my personal portfolio, this is just model portfolio)



Portfolio value after 2 and seven months = 143 (using 10% for PPF and FMP for ease of calculation)

Compounding return =  14.8 % 

Sensex on 1.1.15 was 27900 and is currently 31596 giving a compounding return of 5% 

LETS ANALYSE THE FUND PERFORMANCE ALSO. 10 Rupees INVESTED IN 1.1.15 HAS BECOME BY 24.8.17

1. Franklin Bluechip 12.81 LARGE keep
2. BNP Mid Cap 14.54 MIDCAP keep
3. Franklin Smaller Companies 14.8 MID AND SMALL keep
4. Axis Long Term 13.34 LARGE tax discard
5. HDFC Mid Cap Opportunity 14.49 MIDCAP keep
6. ICICI Pru Value Discovery 12.46 DIVERSIFIED discard
7. BSL Pure value 14.77 MID AND SMALL keep
8. Franklin Prima 14.14 MID AND SMALL discard
9. Franklin Prima Plus 13.15 LARGE keep
10. HDFC Equity 12.46 LARGE discard
11. ICICI Pru Long Term 12.17 LARGE tax discard
12. HDFC Prucence 12.9 LARGE bal discard
13.  HDFC Balanced 13.41 LARGE bal discard
14. Kotak Select focus 14.19 LARGE keep
15. SBI Bluechip 13.72 LARGE discard
16. Most focussed multicap  17.19 MULTICAP keep
17. ABSL Top 100 13.1 LARGE keep
18. BSL Equity 14.7 DIVERSIFIED keep
19. Mirae asset emerging bluechip 16.5 MID AND SMALL keep
20. Mirae india opportunity 14.16 DIVERSIFIED keep
21. ICICI Pru bluechip 13.09 LARGE discard
22. Franklin high growth companies 12.9 DIVERSIFIED discard

In view of lower interest rates in FMP maturing and more aggressive risk seeming justified currently, I am switching out from PPF and FMP at present prices to direct equity - maintaining total value of portfolio at 143 as attained from previous allocations. So current allocations are as follows

24.8.17 Nifty 9857 Value of portfolio = 143

Stocks ~ 60% 

Pidilite industries 20@ 830
HDFC bank 9.3@1761
Asian paints 7.5 @ 1135 
Ramco cement 22.1@660
LIC housing finance 7.4@650

Hero motors 6.45@3870
Maruti 8.1@7600
Kotak bank 7.1@ 977

Equity Funds ~ 40%

Kotak Select Focus LARGE 13.3@31.49
Most focussed Multicap MULTICAP 12.6@26.61 

BNP midcap MIDCAP 14.7@33
Mirae Asset Emerging Bluechip MID AND SMALL 14.8@46.26


Saturday, August 19, 2017

ANALYSIS OF LAST YEARS PREDICTIONS



ANALYSIS OF LAST YEAR’S PREDICTIONS


Broad predictions for world wide changes

Science:


My predictions for 2013 seem to have been ahead of their time, because while nothing much happened by Dec 2013, by Dec 2014 a lot of these anticipated technologies have in fact come true. So its worth looking in some detail.


My prediction for no fresh changes in physics for next 50 years, made after discovery of Higgs boson, has fortunately been overturned by the radical new mathematics in multidimensional symmetries, further work on dark matter and dark energy and the possibility that the Higgs boson might have been an artifact after all. Significant work on new possibilities have emerged in 2013 and 2014, making it likely (25% chance) that by 2025 i.e. just 10 years and much before 2050 which I had earlier predicted, we will have completely new understanding of physics and cosmology which will change life forever. The number of planets detected by Kepler has exponentially increased the chances of contact with extraterrestrial life within next 50 years, initiated by human exploration rather than the other way round. Which might be within the lifetime of some people here (though not me!)


On computer technology, the role of increasing automation of processes reducing the need for human interface to make software work is increasingly removing mid level jobs. So we are going to have well paid innovators and low level tech support jobs with fewer jobs in between – killing a lot of business models. It will again increase the distance between rich and poor.

ANALYSIS: These changes are now well recognized as a major job killer

2014 saw major work on virtual reality with many products reaching the developer market and I am reiterating my prediction for a change of gaming to immersive virtual reality by 2020 – and possible shift of movies into virtual reality mode by 2025.

ANALYSIS:  Lots of progress here especially in military training scenarios where virtual reality has come into its own

2014 finally saw a lot of alternative energy sources coming with reducing costs. The oil at 100+ prices scenario gave an impetus to not only fracking (a most destructive and horrible oil binge on looting the environment) but also in solar and other accumulator technology. Paradoxically it is battery technology which has benefitted the most. Methods of increasing the storage capacity of batteries are progressing (finally!) the way processing speeds of chips progressed before. The imbalance in technology focus has been corrected. Battery size reduction and charging speed increases are phenomenal and in near future i.e. before 2020 will affect the personal transport equations. Battery operated vehicles will increase in the richer parts of the world exponentially – despite the recent fall in oil prices threatening to cause a resurgence in fuel guzzling cars. I reiterate my prediction of no change in combustion cars but change my prediction to battery operated and hybrid cars – these are falling in price and along with solar technology which fell a lot in cost over last 2 years – will be the future.

ANALYSIS:  Broadly world has moved on these technologies and Tesla’s success is now legion with even Modi visiting the factory.

Will fall in oil prices, these technologies will now not progress much and will go into slow motion. Battery technology will progress but Solar will now stall



But it is 3D printing which will change life forever. As I predicted in 2013 Jan, manufacturing will change forever but the speed of change has been mindblowing this year. Printing of organs using cell cultures is already moving into mainstream for lab investigation and so is printing of tools for outerspace usage – they already exist in 2014. Traditional manufacturing will no longer give an edge to the countries adopting it – including the make in India campaign.

ANALYSIS: Make in India is now for labour and currency arbitrage only

The brave new world which is emerging is even more seriously threatening a split of the “haves” and the “have nots” with serious economic consequences. The threat of antoglobalization looms – creation of urban technological hubs where the rich and brilliant people live and the rural hinterland where the poor live. Singapore, Beijing, Tokyo, Shanghai, Seoul, London and New York along with other similar cities will become the city of the haves. Rest of the urban slums will become even worse slums. These tendencies are a serious threat to India – since our country doesn’t have even one city with potential. The initial promise of Bangalore and Pune are deteriorating by the day. Modi has to deliver on his cyber smart cities – because if India fails to have even one smart city by 2025, the smart people of India would have moved on to become expats in those cities abroad which deliver a technological edge that is essential for survival as a “have”. A political class which fails to recognize these trends – Modi is balanced on a knife edge – is ensuring the demise of Indian potential. Our smart people who traditionally emigrated but in the noughties came back or stayed back, will leave for ever. Whole of India can turn into a have not area – a wasteland from which every smart person will flee – widening the gulf between the technological super cities and the backward slum cities. And as the middle class with potential starts fleeing, those left behind will be further and further removed from the outperforming population of super cities. Already Singapore and its experiments with eugenics, educational brilliance, encouragement of talent, investment in brains and state directed capitalism are a good example of times to come.
ANALYSIS: The split of haves and have nots will accelerate now exponentially. The possibility of urban renewal, smart cities and a big bang change brought about by Modi have now collapsed into impossibilities. India has now failed to find even a single seat in the table of the haves. Now as soon as someone reaches about 20,000$ per annum productivity, he will move out of India – some 50 to 70% of all young professionals will be forced to move out of the country for anything over 20,000$ which will become a ceiling.

It is a disaster and given the slow pace of reforms, even 10 years from now this trend is likely to persist.

Singapore, Australia, Europe, Dubai will be the main magnets for emigration. Because of this human resources disaster, the limits of growth and development will be at much lower level in India since other countries will reap the rewards of our countries talent.


Indians need to observe the progress in the next 3 years very closely because it will determine the future direction of events which will become inexorable. This is India’s last chance.

ANALYSIS: India has already missed its last chance. There is no hope.

Oil economy

This deserves a small section in itself. Oil price has fallen to 50$. I didn’t see it coming. In the immediate term it indicates a recession to come.

ANALYSIS: Recession came

But the linkage of productivity increase to oil price is a more important indicator. West has stagnated at 40 to 50000$ productivity from 2000 to 2014 despite technological advance, mainly because the price of oil has been high. After the world war, almost entire increase in productivity has been fuelled by oil energy and oil as raw material for petrochemicals. From a high of 140 plus for oil in 2008, despite a fall to sub 50, most of the decade has seen oil around 100$. At this energy price, possibility of productivity increase is minimal to non existent. And so it has proved – productivity has not increased in the West in 10 years.



The fall in energy price has however raised the possibility that the West will increase its productivity. Presence of solar energy in this mix, at energy price levels compatible with commercial exploitation i.e. grid electricity prices on par with coal and natural gas – means for the first time in history, productivity increase without riding on the back of cheap oil has become possible. Oil economy will be revolutionized. From here on, the price of oil can only fall – because each year, solar energy and battery storage technology is pushing the parity with oil towards a lower and lower price for oil. Same is true for coal as well. While the world has been looking at fracking – which is an environmentally destructive technology, solar energy has reached a point where it can solve the problem of electricity generation as well as personal transportation through battery operated cars.



In 2013, I had not considered that this would be possible so soon and yet – here we are – it is obvious for all to see – although world will recognize this only after a year or two because people’s eyes are closed.


The real reason for oil prices to fall is not the speculative shorting by hedge funds due to the recession in China and the temporary oversupply – that is only the immediate cause. The long term reason for secular fall in oil is because the cost of energy from solar is now on par with fossil fuels – and will soon push down oil prices even more. So over the next 5 years, we will reach oil prices of sub 30$ to the barrel even if it yoyos a lot in the process. After oil finishes falling, it will never rise again.

ANALYSIS: Lots of people have been saying this nowadays – but the sharpness of the fall has been surprising and has changed the equation. Oil prices are now so low that solar will now slow down a lot.


We have seen the last hurrah of Gold and of Oil. Both are now dead.

ANALYSIS: This year both died.


Food

What many people fail to account for is that Oil is not just energy for electricity and transport – it is also needed for food. All fertilizers are oil based and high oil prices were a big component of food inflation. Falling prices of oil and its secular downtrend means that food inflation will no longer be a problem. Oil will change its nature – from being a fossil fuel, it will change into food resource. And this implies that food prices from here on will remain low. Current food production is enough for 30 billion people on earth, although it is mostly feeding a billion cows and another billion pigs currently. The use of sugarcane for fuel caused serious stress on food prices some few years ago. Those days are now gone. With electrification of all developed economies, sugarcane will be useless as fuel and the Brazilian rainforests already cut down will shift to food crops, further lowering food prices.

ANALYSIS: Food prices collapsed in 2015


Changing trends with recognition of health problems with high beef and pork will see a global decrease in consumption because the USA and China – both top consumers of these products – will reduce consumption. Initially this will be balanced with increase in consumption by India and Africa. But given the current levels of poverty in both and even allowing for phenomenal growth, they will not be able to counterbalance decrease in beef consumption in USA and Europe. Pork in China will likely continue. Trend for meat consumption has been exponentially increasing from 1960 to 2000. In the last decade it has plateaued. My prediction is a continuing plateau with slow fall starting in about the time the present generation of teens turn about 20 i.e. in about 5 years. By 2020, the global levels would have declined 5% from existing levels. Part of this prediction is a bet that average Indians and Africans will not increase their productivity sufficiently to start increasing meat consumption i.e. asymmetric growth in population distribution of income, despite great increase in total GDP of these countries.

ANALYSIS: These changes are yet to happen


All of this means that global hunger will be linked only to administration (or lack of it) because there will be sufficient acreage under farming to comfortably feed everyone.

ANALYSIS: Indian food problem is only one of administration e.g. failure to have pulses minimum support price caused the pulse prices to zoom.


USA

Politics – I am unable to see anything much happening in USA. Democratic local policies will continue to the best of Obama’s ability.



Economics: Falling oil is the main indicator for recession along with short term rates higher than long term rates. Current short term rates are 0 and long term rates about 2.2 %. So as long as US Fed raises rates below the long term rates, i.e. upto 1%, we are OK, despite oil signaling recession. I expect the Fed to try and raise rates very very slowly. The last 6 years have had a very deleterious effect on the consumption habits of the Americans.

While the rich 25% are wealthier, the bottom 75% now has less money, less credit worthiness, less technical abilities and less earning potential. Globalization is a reality and the lost jobs to China, India, Eastern Europe Philipines and other countries are now gone for good. Retraining has been a big effect in these Fed bail out years and has been broadly effective, but only some 20 to 30% of the population needing to be retrained succeeded in getting adequate levels of retraining. The 90s and noughties have had a debilitating effect on children, they have lost a lot of hard work capabilities which they have only slowly and partially regained. Those in their 20s, who grew up earlier, despite retraining, have moved into a poorer earning potential. Added to the noughties generation, this is a big pool of around a few tens of millions stuck in permanent poor paying jobs. So retraining worked but not well enough.


In Jan 2013, I had spoken a lot about this – but in Jan 2014, I had downgraded the effects because it seemed as if US growth had bumbled through. By Jan 2015, my 2013 predictions seem to be coming true more than 2014 prediction of USA pulling through. I seem to have jumped the gun in 2013. I am shifting back to my 2013 outlook i.e. rich get richer, poor get poorer, a lot of work gets automated and destroys jobs, there is insufficient job generation and more and more of altruism makes it difficult for people to get paid for jobs which others are doing for free. The quality of Wikepedia keeps improving and will soon make text books redundant within 5 years. All those publishing and selling jobs gone, all those professors writing books will earn less well, as online resources eat into their livelihood. Just like all the rock bands shifted from record sales to live performance, all the professors will depend on teaching rather than writing.

ANALYSIS: All these are well recognized now.


The slow rise of inflation in USA has gone unnoticed, except by bloggers. Real estate prices have firmed, despite the low mortgage rates, and the soft period is probably over, although not much real estate price inflation so far. But rental inflation has soared – noticed only in micromarkets where it has happened. The big new trend in US real estate is likely to be lower cost housing in the 100,000 to 150,000$ bracket.

ANALYSIS: Not yet happened

Consequently, the actual inflation in real estate will go un-noticed, as people adjust to poorer quality housing and the big middle class houses of the last decade will slowly start getting luxury tag.

ANALYSIS: Slowly happening

Food inflation for specific items – not the tracked item – has also increased. So generic milk might have maintained prices, but the brands have raised prices. Overall people are increasingly shifting down because the premium for brand is becoming unaffordable. This might be a permanent split in the society of the haves and have nots and hence business performance of the brands will reflect in stock performance. The middle class of USA will split into the generic and the brand able – and business strategies will need to be tailored.

ANALYSIS: Happening slowly

Not much can be expected from Obama visit to India. Democrats are anti India while Republicans are more pragmatic – both in love and hate. I expect USA to adopt a wait and watch mode in view of the Hindu lunatic behavior exhibited by RSS types in Modi govt.

ANALYSIS: Came true

Specific predictions USA

Stocks slightly higher in the year. Maybe 18000 to 19000 Dow.

ANALYSIS: They are slightly lower to flat

Stock specific out and underperformances very likely within the broad index ranges. It is a stock pickers market (unlike the fed fuelled index fund market of 2008 to 2014

ANALYSIS: Lots of people made money from picking the right stock


Oil. 50$. I think it might be volatile but will settle around 50

ANALYSIS: Fell 20% more than my anticipation


Gold. 1050 to 1200 range with a downleg when Fed raises rates.

ANALYSIS: Came true


Bonds. 2-2.5%. Any rise would be good news, but I doubt it.

ANALYSIS: Came true

Real estate: Firm

ANALYSIS: Came true

Where to invest in USA: REITS 25%. Selected stocks 25%. Emerging market (India, China, Indonesia) 50%.

ANALYSIS: Proved to be good advice. China early exit was needed after prices doubled in 6 months


This is a good time to buy real estate using local mortgage if living in USA, both for self use and for rental income – if for the latter, Lower priced (affordable) properties in the 100,000 dollar range would give better rental yield and easier to find tenants.


For Indians living in India I would recommend a 5% weight to US markets with exposure to REITs only (Birla Sun Life Global Real estate fund or if portfolio size is very large HNI type i.e. 20 crore plus, direct exposure to US REITS)

ANALYSIS: BSL Real estate fund remained flat. Proved false.


Europe.


Recession will continue. UK will outperform, Germany will be OK. Spain and Italy will be in recession. UK I predict a likely scrape through for Cameron and return of Conservative party.

ANALYSIS: Happened.

Spain likely to see a fractured mandate and solid political disruption causing flight of capital.

ANALYSIS: Fractured mandate came true. Flight of capital already happened before but likely to continue

 Currencies will be slowly depreciating against dollar.

ANALYSIS: Happened


Europeans should invest in emerging markets (same as above) and US Treasuries. Real estate avoid in all including UK and London. Indians can ignore investment in Europe including in UK real estate.

ANALYSIS: Right advice.

ASIA

Political situation has changed a lot in Asia. China will be a 10 trillion economy by 2015 December. That is massive and a 700 billion dollar growth in one year is unprecedented. Approximately double of Japan and five times of India. Now that China, Japan and India have stable governments, we can analyse next 4 years.


China will continue to pressure Japan and India militarily with bases in Sri Lanka, Chittagong, Gawadar, Maldives, Nepal and Burma. India will be hard pressed by their efforts. The recent Bangladeshi terror outfits of Burdwan got support from Indian communists of Bengal who are traitors. An increasing support of infiltration by Muslim terror from Burma and Bangladesh will continue.

ANALYSIS: Modi has made good progress in Bangladesh. Burmah problems happened as anticipated

Maoists will also set up camps in the cross border areas of Nepal under Nepali Maoist/Chinese patronage for drug and arms smuggling, to pressure India. A red corridor has been set up from Nepal to West Bengal to Maoist infested regions into Bangladesh, North Eastern states and Burma and this will continue. China will also set up port infrastructure in Srilanka for their shipping lanes as well as submarine bases which will link with the bases in Chittagong harbor.

ANALYSIS: All of these developed further. Modi has done well in countering these


India will be forced to expend a lot of money on its Navy.

ANALYSIS: Happening

Major border events by terrorists will tie up our administration. Our relations with the above Chinese satellite states in South Asia will deteriorate despite Modi efforts to engage them.

ANALYSIS: Happened.

Ideally Modi should keep quiet and only expand business and shipping with these states. More aggressive posturing should come after 2-3 years.


China will continue its policy of matching Pakistan’s capability to exeed India’s military developments. Pakistan will be given missiles and technology to counter every Indian military advancement. If we make 300 Km Brahmos, Pakistan gets 700 Km Babur from China. If we make a Agni 6 (an empty boast for now), soon Pakistan will get extended range ballistic missiles with MITR (Taimur). If we make Nirbhay, already Pak has Babur and RAAD but might get another counter from China. Pakistan is already out of its league economically as far as GDP is concerned. With 250 billion in total output, Pakistan is 1/7th of Indian GDP of 1750 billion. But China grows 3 Pakistans every year and can afford to give almost any weapons Pakistan needs.


The real question now is not which side Pakistan will chose – it has already chosen China and rejected USA. This was largely imperceptible but more or less, USA has slowly lost influence within Pakistan for the last 3 years. But Chinese have made up for the US loss and might also make up in terms of investments and money in future. China Pakistan Axis is now a major thing.


The real question now is which side will Iran choose? Earlier it was a foregone conclusion that Iran will be with China but now the possibility of Iran choosing USA is increasing. The opening of the Chabahar port by India and building of the Turkmenistan to Chabahar pipe and road has become less relevant for Indian economy with the softening of global fossil fuel prices. But politically, it is very relevant – it represents the last chance for Iran coming to the side of the US. If this initiative fails – with falling oil prices, Iran will find no market for its oil except Pakistan and China. It will be forced to sell below market prices and a pipeline from Iran and even Azerbaijan and Turkmenistan to China via the Tibetan/Tarim basin routes might be the only respite for Iran because falling oil will impoverish and diminish Iran. With GDP of 350 billion and 25% coming from oil, the falling oil prices means that Iran GDP will contract by 5 to 10% next year. The only option is to export more and since it has only 2 customers i.e. India and China, it will probably opt for a Chinese pipeline long term export plan unless India counters this with another pipeline to counterbalance and keep it out of permanent Chinese satellite status – possible only if USA stops wearing blinkers and supports these initiatives. Support to Assad from Iran will now reduce. But it depends on China – the future of Syria will be decided by China. Hezbollah funding from Iran will also dry up and Iranian influence in Iraq will reduce.

ANALYSIS: The Russia China Iran axis is now shaping up more than China Pakistan Axis, since Pakistan is Sunni. They gave more support to Assad than expected and the US has been majorly stymied

Saudi GDP of 750 billion has 45% from oil export. So fall in oil means GDP contracts 15 to 20%. This is a serious problem – although cost of production is about 5$ per barrel, the cost including social responsibility becomes much higher at about 50$ per barrel. Saudi will have reduced influence on Sunni extremists because of their loss of revenue surplus – at 50$ cost plus social service breakeven there is no margin left even for Saudi - and their need to expend money on local population increases by the day. Per capita GDP will fall from 25000 to 20000$ this year – a serious contraction.

ANALYSIS: Happened. But Saudi reserves are sustaining their campaigns.

UAE will perform much better than Saudi since only 30% of GDP is from oil exports. Still, from 420 billion it should fall to 400 billion or less in 2015. This means that there will be a real estate recession in Dubai and Abu Dhabi worse than the one already seen in 2014.

ANALYSIS: Happened.

Already there are ads in India for UAE property but UAE high handed behavior of troubling people for permanent resident status has meant that fewer Indians will risk it.

ANALYSIS: Happened.

Syria is poised on a knife edge. I predict that Assad will be bailed out by Iran and China despite US hopes that reduced Russian and Iranian oil revenue will debilitate Assad.

Happened.

Since Chinese action in geopolitics is predictable (unlike India), I see China seeking to increase influence in both Syria and other middle eastern states by rescuing Syria. I see active military equipment transfers including planes, missiles and drones to Assad regime from China – with the desperate Russia providing arms and China bankrolling it.

ANALYSIS: Happened

This muscular response will be the first major flexing of muscles against USA by China and we need to watch and wait for it.

ANALYSIS: It was well disguised under Russian cover.

For the first few months of 2015, I anticipate wait and watch by China as ISIS exterminates all moderate Sunni factions.

ANALYSIS: Happened.

Then when the ISIS threat becomes simply unbearable, weapons transfer will be done – and possibility of Iranian and Pakistani troops on the ground cannot be ruled out at some point.

ANALYSIS: Happened except it was Russian troops.

If the Russia China Iran Pakistan axis does fructify, then getting Syria on its side would be an enormous achievement for China and is worth bankrolling (since the rest of the Axis are all bankrupt). An Iraqi influence will also get generated by this because of the Shias siding with Iran. This is a solid wedge into the middle east with the Hezbollah of Lebanon also linking up with the Shia faction.

ANALYSIS: Pakistan is out of it but the Shia wedge continues to strengthen as expected


For the Saudi Sunni faction this is a double whammy. Loss of oil money and loss of wide swathes of the middle eastern territory. This will be a make or break year for the Sunnis.

ANALYSIS: They are still very much in the game. Saudis have played a good game


Specific predictions for Asian politics in 2015.

1. India Pakistan war – unlikely because Pakistan is not gaining anything – it will keep tensions alive by repeated border incidents, firing and terrorism, since it is working so well. One major border incident and one major terrorist intrusion is likely for 2015.

ANALYSIS: Happened


2. India China war - is not going to happen. Instead, repeated pressure will be exerted by China forcing India to spend on arms both missiles and ships. Each will be matched by transfers to Pakistan to keep India under permanent pressure from a Pakistani military in addition to China. It’s a beautiful straightforward strategy on China’s part and I predict one major border incident and one ship based stand off between India and China, instigated by China, in 2015

ANALYSIS: Did not happen – but Japanese India collaboration increased


3. China Japan standoff – at least one naval standoff is likely in 2015 as China tries to keep its restive population happy with slowing growth – by evoking nationalism.

ANALYSIS: Happened but instigated by Japan and USA rather than by China


4. Syria: Assad will eliminate 90% of Sunni opposition in late 2014 with Russian, Chinese and Iranian help,after the Syrian Sunnis have been debilitated by the crudities of the ISIS. Syria might opt to keep ISIS alive in some corner of the country just to trouble the Sunnis of Syria some more (just like in 2014) and to mobilize world opinion against Sunni terror

ANALYSIS: Happened exactly as expected


5. Iraq: The Shias will continue their wait and watch mode as ISIS rrides roughshod over the Sunni population. Under Iranian Shia influence, they will leave the anti ISIS fight to the Americans and the Kurds for now although might join the hunt with Syria later in the year.

ANALYSIS: Happened exactly as expected

6. Turkey will continue its wait and watch mode as ISIS destroys more of the Kurds.

ANALYSIS: Happened

7. Russia will increase arms sale to the Iranians, Chinese Syrians and whoever else as their oil revenue reduces, including weapon sales to India

ANALYSIS: Happened


8. Global Sunni terror: Funds from Saudi clerics will reduce. Overall terror will reduce as the global horror over ISIS crudities cracks down on the hawala funding. I don’t predict any major terror outrage anywhere in the world except India – which will be the major target in future.
ANALYSIS: Paris proved me totally wrong – as the IS is pressured and its voice increases, terror outrages are increasing.


Economic predictions

China: Recession or reduced growth to 5% or less .

ANALYSIS: Happened

At least one major bank failure in 2015.

Only brokerages collapsed.

Stocks should fall but since China will cut rates and depreciate its currency, in Yuan terms, Shanghai composite might keep its 3000+ levels and might even increase as funds become cheaper and fuel a central bank fuelled binge.

ANALYSIS: Happened in a different way – rose more and fell but still above the 3000 levels as predicted. Stimulus was mostly missing as China reduced its reserves instead.

Export of cell phones and other gadgets will reach saturation point and as the rich poor divide widens, the markets for cheap Chinese manufacture will reduce in value terms since people will be reluctant to replace gadgets they already have. After the smart phone explosion of 2012 to 2014, all smart phone manufacturers will bleed including Samsung and Chinese phone makers. A similar reluctance to replace perfectly good clothes, shoes, gadgets, electronics etc will be a major wave and will affect Chinese manufactured goods. As Indonesia and India (large underexposed markets) develop to higher growth and more income, they will seek to do local manufacture rather than import from China. Biggest export from China might be old poor quality polluting factories, second hand equipment, dies and old technologies to India Vietnam and Indonesia. Increasingly Chinese will learn Hindi and Indonesian as well as English as they try to export training in manufacture and upgrade skill levels. There may be demand for Hindi teachers in China in next couple of years.

ANALYSIS: Yet to happen – but likely

Japan. Slow death of Abenomics. Political actions will direct flow of Japanese capital into Taiwan/China/India based on political risks taken by these countries. Nikkei 15000 at end of 2015.

ANALYSIS: Nikkei did much better. But economy underperformed. Abenomics still alive and kicking.


Indonesia: Outperform in stocks

ANALYSIS: Wrong. Fell 10%

Vietnam: Outperform in stocks

ANALYSIS: Wrong. Flat Hanoi

Thailand: Underperform in stocks

ANALYSIS: Happened. Fell 15%


Korea: Underperform in stocks. Kospi 1750.

ANALYSIS: Did a bit better but not much

Hong Kong: Underperform in stocks. Hang Sheng 20000

ANALYSIS: Did a bit better but not much

Dubai: Underperform in stocks and real estate. Avoid real estate.

ANALYSIS: Happened. Fell 15%

Singapore: Good performance. STI 3500 by 2015 end

ANALYSIS: Wrong. Fell 10%

Australia: Underperform in stocks

ANALYSIS: Happened. Flat to down for the year

India:

Modi govt is faltering and has underperformed expectations by 90%. 2015 budget will be make or break for Modi.

ANALYSIS: It broke. Budget was very bad with tax hikes instead of tax cuts.

Current RSS type nonsense has to stop and solid focus on economics is essential.

ANALYSIS: Did not stop. RSS nonsense cost them Bihar election

Otherwise I anticipate a currency collapse and flight of capital, especially the virulent anti Christian tirades of the RSS types, which is downright suicidal regarding FDI and FII.

ANALYSIS: There was flight of capital and RSS contributed.

On the other hand, solid performance will be handsomely rewarded by Rajan with a 1% rate cut and by FII with inflows.

ANALYSIS: Poor performance delayed rate cuts and caused flight of capital and loss of confidence.



I expect Modi to rise to the occasion.

ANALYSIS: He failed. Jaitley failed.

Enough consternation has been caused by the RSS types and Modi is likely to have adjusted to his new situation and media equation. I expect a slew of measures from him which will be well received by the markets, as he realizes the futility of changing Indian external affairs after 6 decades of stupidity – it is like changing the direction of a supertanker – very difficult. Already the smart cities for Delhi, GST, Coal and land bills are starting to send the right signals. More and an increasing tempo are needed and is likely

ANALYSIS: Did not happen. Modi failed.


Politics:

I expect a reduction in RSS type noise as Modi cracks the whip – possibly after a poorer than expected performance in Delhi election.

ANALYSIS: Did not happen. Modi unable to crack any whip.

A quieter year will start from March and should be the way to go.

ANALYSIS: Hotheads ruined it.

 Delhi elections are difficult to call. I expect a stronger performance from AAP than most people expect and if the RSS type nonsense doesn’t stop soon, AAP might even win.

Happened.

Otherwise win for BJP is my prediction.

ANALYSIS: Prediction failed since RSS nonsense continued.

It is possible that the anti German row will boomerang big time against BJP - with every middle class household having kids learning a foreign language, voting against BJP. AAP performance depends on smart positioning (so far lacking) and better candidates (so far very poor quality candidates announced). Overall tendency so far is for AAP to degenerate into a Samajwadi or Janata Party and for Kejriwal turning into a George Fernandes. If Kejriwal steps aside and becomes an attacker in chief without aspiring to become Chief Minister – he might pull it off. As such, he has shown unwillingness to attack Modi on the RSS fringe hijack, education and anti muslim riots and also to have given up anti corruption plank – and has clearly announced desire for CM seat – this will not go down well with middle class. With present disarray of AAP and open embrace of mainstream vote bank politics, he will come second again and lose Delhi.

ANALYSIS: Wrong predictions


In Bihar the BJP performance will be muted and again a 50-50% chance for BJP or JDU govt. In other words, the Modi wave is now dead.

ANALYSIS: Yes Modi wave was indeed dead.

Older equations will resurface. Bihar election is too close to predict. All this anti muslim and conversion rows will cause a solid consolidation against BJP and with less visibility of the Modi govt performance, there can be no wave.

ANALYSIS: We all know what happened.


Economy:

I expect good, better or best performance depending on Modi performance. Even if he underperforms, economy is poised to do well even in worst case scenario except for outright war. So investment in equities will do well.

ANALYSIS: Wrong. Will analyse this wrong prediction in detail in subsequent section


RBI:

Rajan is in wait and watch mode – and is planning to lower rates only if the govt performs well on reforms.

ANALYSIS: Govt failed to reform.

This will convert the expected economic performance into either poor or super brilliant – if govt does well on reforms, it will make the economy outperform. Then Rajan will cut rates by 1 to 1.5 % which will be a turbocharger for the already well performing economy. But if govt underperforms, then economy will be middling but Rajan will not cut and will make life miserable for everybody.

ANALYSIS: He did make life miserable for everyone and converted a below average performance into a disaster by his rigid stance. Too much rod can convery child into a juvenile delinquent.

This stand of RBI is “demanding” reforms – and I am sure there will be enough reforms to ensure a cut – and hence the stage is set for economic ourperformance. It is a good idea – like being strict with children for their own good, Rajan is being strict with govt for their own good.

ANALYSIS: He made bad into worse


RBI will accumulate reserves above 58 to prevent strengthening of Rupee. But if Rupee falls, RBI will let is fall temporarily to get a good 10% spread on its buying and selling price – but after the flight of Rupee, which will be at low prices of 63 or 64, again RBI will sell dollars to bring Rupee back on an even keel of around 60. It is a wonderful strategy and the arbitrage itself is worth many tens of billions – and as soon as people see this tendency, wild flights of dollar out of India will stop and currency will become stable. It is great management.

ANALYSIS: Despite good management, currency is down by 15%.


Equity:

Sensex target in worst case scenario is 60,000 in 4 years – which is a compelling argument for equity investments since investment will double in 4 years (17.5% compounded return) even in worst case scenario. Sensex target (mine) for best case scenario is 200,000 in 4 years – which is 7 times return i.e. 65% compounded return. The main reason for rerating is going to be increased earnings – a constant rise in earning over the next 4 years. Increase will be due to better business environment, newer investment avenues for corporate as well as cut in interest rates.

ANALYSIS: My predictions and targets stay as such. 2016 saw no increase in earnings due to Govt and RBI actions – which I had hoped for. But the long term targets and possibilities remain as such – and one should hold equity for 4 years at least.




Real Estate:

Real estate has bottomed but is going to be a L shaped bottom with extended stagnation. Since the returns from equity is going to be so good, it is a huge opportunity cost to be locking up big money into real estate – into a stagnating pond when equity is giving so much better returns.

ANALYSIS: Everybody saw this and piled into equity causing a boom and a bust within 2015.


End users can buy flat/house for self use since price falls are largely over and one will not gain much by waiting. For end users real estate is an expenditure and not investment – as such no need to time more carefully. Prices will not fall.

ANALYSIS: Yes, they did not fall after already falling in 2014

End users should defer purchase only if prices fall in future – one need not defer for stagnation. If buying, only ready to move and register flats should be purchased and not under construction booking.

ANALYSIS: Everybody believes this now.

 Even for end user, rental stay and investment in equity would work better in financial terms in view of huge opportunity cost.

ANALYSIS: Everybody believes this now.

I will cover real estate in a detailed write up later on. But basic message is – avoid.

ANALYSIS: Good advice.

Gold:

Gold will give negative returns. Dollar strengthening is a continuing theme for the foreseeable future and will kill gold price in dollars. On top of that, there will be net inflow of dollars into Indian economy and this will make the Rupee stable (stable because RBI has shown its readiness to accumulate reserves at 58 levels). Without RBI intervention Rupee should appreciate to 45 levels but with intervention it will remain at current levels or around the comfort level of 60. Which means that there will be no Rupee price inflation for Gold either – or if Rupee appreciates, Gold price in Rupee will have dual reason to fall and keep falling. The boom years in equity with stagnant price for gold will ensure a flight out of gold into equity and this will further reduce demand for gold.

ANALYSIS: Good advice

Bonds:

Bond prices will keep rising and yields falling as RBI cuts rates. Already rates fell from 9 to 7.8% in 2014. After the recent blip up to 8, again yields have fallen to 7.8 based only on govt banks cutting deposit rates. By year end, after the RBI has cut, I expect 6.5 to 7% range for the 10 year yield. But the opportunity cost of trying to ride this fall in rates is not worth it for retail investors when returns from equity will outperform the 15 to 20% returns available from bond investors. Existing bond funds can be sold after recent outperformance and having already got a good bulk of the available returns. Existing balanced funds can however be held for a few more months and shift to pure equity fund can be planned after the yield falls below 7.5% since the equity part of the balanced fund portfolio can outperform and the rate cuts can also be taken advantage of. For fund allocation to fixed income, this is the last chance to lock in about 8% return from FMP for next 3 years. So allocations should be completed ASAP in FMP.

ANALYSIS: Good advice on FMP. Long term yields held stable despite the rate cuts. Short term yields fell much more and gave good DBF returns.

Predictions for next decade


Note: “asset to own (year or decade) gives maximum risk adjusted returns. Asset to avoid is the one investment one should totally avoid because risk of it killing returns is too much – it is a mistake to hold this asset. Assets not specifically predicted to be avoided will give middling returns but will not sink your boat – it is not a real mistake to hold this asset.


Asset of the decade = equity (This is the asset in which one should be maximally invested)


Asset to avoid for the decade = gold (This asset should be avoided completely – most likely to kill returns)


(Fixed income will underperform – use only PPF
Real estate will give returns less than fixed income, unless timed well.
Dollar denominated investments will underperform fixed income)

Predictions for next 4 years

Asset to have = equity


Asset to avoid totally = Gold


(Fixed income will underperform – use only PPF
Real estate will give returns less than fixed income, unless timed well and in right location and segment and only if events transpire to make equity underperform like wars, Hindu muslim riots on major scale etc.
Dollar denominated investments will underperform fixed income)

Predictions for 2015:

Asset of the year = equity

ANALYSIS: Wrong. It was FD


Asset to avoid for the year = Gold and Real estate.

ANALYSIS:  Right

Portfolio adjustments for 2015

No fresh exposure to real estate, hold existing real estate for long term. Plan entry into real estate only if existing holdings fall below 20% of corpus (unlikely to happen for most middle class people for next few years)


Sell gold if still present in portfolio


Fresh equity and debt allocations 80: 20. Existing portfolio should also be tuned to reach this.



Overall asset allocation for 2015
Equity 55 (or 60)
Debt 20
Real estate 20
Gold 0
Dollar denominated 5 (or 0)


Portfolio recommendations for 2015 to 2018 (4 year recommendation and 4 year hold)

Size of portfolio 100


1. PPF 10 (NAV on 1.1.15 = 10)
2. FMP 10 (NAV on 1.1.15 = 10)
3. Direct equity 25
a. Pidilite industries 5 (price on 1.1.15 = 552)
b. HDFC bank 5 (price on 1.1.15 =947)
c. Asian paints 5 (price on 1.1.15 =747)
d. Ramco cement 5 (price on 1.1.15 =342)
e. LIC housing finance 5 (price on 1.1.15 =437)(alt: Shriram transport)
4. Funds 50
a. Franklin bluechip 10 (NAV on 1.1.15 = 338)
b. UTI opportunities 10 (NAV on 1.1.15 = 48) (alt: ICICI Tax saving)
c. BNP midcap 10 (NAV on 1.1.15 = 22.33)
d. Franklin small and midcap 10 (NAV on 1.1.15 = 36.69)
e. Reliance pharma 5 (NAV on 1.1.15 = 126.6)
f. Franklin infotech fund 5 (NAV on 1.1.15 = 110)
5. Birla global real estate fund 5 (NAV on 1.1.15 = 17.53)


Rationale


This is a selected stock+ sector fund + fund type of portfolio (not a stock only or high risk stock with fund or fund only portfolio). It is meant for safe, non monitored and risk free investment. There are 2 semi FMCG vs construction related stocks i.e. Asian paints and Pidilite. There are 2 banks (HDFC and LICHF) and one cement. The aim is concentrated risk on high growth. Only 3 best sectors selected (2 players from 2 sectors meant to minimize company specific risk). IT and Pharma sectors are covered by sector funds instead of specific stocks to minimize risk. There are 2 small and midcap funds to maximize gain and one multicap and one large cap fund to capture overall economic performance. Birla REIT can be replaced by a fund (Value discovery) if don’t want dollar denominated hedge. I have posted the NAV on 1.1.15 and we can compare this with levels on 31.12.15 and in each subsequent year with yearly course corrections if needed (stocks selected do not need course correction, being safe bluechips and funds selected are anyway a 4 year hold). I re-emphasize – this is a risk averse portfolio for prudent investment and not meant for higher risk appetite.


These are also meant to be used for SIP (into funds) and systematic equity plans for a drip into the stocks, to gain from price falls which might come. However I will not be analyzing the SIP and SEP performances since not worth the effort.


Summary of Predictions by end of 2015

1. Sensex 40-45000 Wrong
2. Gold stagnant Right
3. Real estate stagnant Right
4. Bond yield 7% Wrong

ANALYSIS: The main incorrect prediction was the stock market performance. I had made a major error in earnings growth because of errors in expectations for rate cut and for reforms. Both were not forthcoming.

There were two reasons why I went wrong. First was not realizing the extent of the dependence of indices on commodity prices. Any index target should be based on analysis of the individual components rather than on guesstimates based on economic growth and its effects on index. I will correct this mistake this year. I failed the see that earnings growth in some companies were more than countered by earnings reduction in metal and mining companies which are index heavy weights.

Second was not realizing that a substantial component of the index earnings were dependent on export performance. Thus companies like Asian Paints or Reliance or Vedanta had majority of earnings abroad and these contracted a lot. So earnings decreased rather than increased.

The external factors were first RBI action – I expected better performance from Rajan.

Raghuram Rajan has been the main culprit for converting a boom into a bust. He kept rates high and shifted to CPI tracking. Indian economy is a supply side constrained economy and higher rates actually boost inflation rather than reduce it – especially in inflation of essentials. This has been my contention for long and the RBI actions and their effects have confirmed this.

Two main errors of RBI were first in tracking CPI (which is not RBI rate sensitive) and not tracking the WPI (which is genuinely rate sensitive. Second error was waiting too long to cut rates and not realizing that all NPLs were in fact created due to central bank action rather than poor lending practice

All infrastructure company loans were taken in 2006 to 2008 period when rates were quite low. Reddy raised rates in 2007, making life very difficult – if you take a loan at 8% and now you have to pay 12%, then how can any company sustain? Subba Rao first raised rates, then lowered it a lot, and then raised it again – by 2013 rates were 14% for the corporate which are obviously not sustainable – what infrastructure can generate such high returns? Obviously companies were unable to complete projects.

Rajan should have cut rates aggressively. Long term govt bond rates are currently 7.7%. They should have been below 7% by March 2015 if the economy was to recover. Rajan delayed till May and still was tardy and target still remains unachieved. All infrastructure companies will be back in black only after rates are low. All the NPL problems are created by RBI by keeping rates high – same loan will start performing if rates are cut. Rajan has been too stupid to realize this. Because of him, now Indian recovery will be delayed by 5 years and some 50 million people will remain in poverty because of his failure.

His supposed inflation targeting is also a failure. He has chosen the wrong index to target and has failed to realize that money supply is the main bottle neck in fighting inflation. Cheaper money causes reduction in inflation in India unlike developed countries. Failure to recognize this has costed our country dear.

The second culprit is the govt. The budget was very bad. Instead of tax cuts, there were tax hikes on corporate from surcharge increase, service tax increase as well as excise increase on petro products. All of these converted boom into a bust.

Govt also failed to disinvest aggressively when the market was good. Now with burst of commodities, most of the companies will remain unsellable for many years. Very very bad performance from govt. They neither knew what to do, nor did they do anything good.
I was wrong to be optimistic on govt performance. It is a non performing govt. and subsequent predictions will require a more realistic assessment of its capabilities.