Linkfest – 99

Friday, February 1st, 2019

Some articles from across the web in the last few weeks:

Are Market Moves Happening Faster? – A Wealth Of Common Sense

Blockchain Can Wrest the Internet From Corporations’ Grasp – Wired

Macro overview of the Indian economy over the last 5 year – Livemint

Stress and Investing – Safal Niveshak

The past, present and future of farm loan waivers in India – CNBC TV18

How Japan is overcoming the demographic challenge – Urbanomics

Every choice has an opportunity cost – Seth’s Blog

Real estate under pressure – Youtube


Narrative vs. Data

Wednesday, January 30th, 2019

I came across this interesting post by Barry Ritholtz which talks about portfolio construction and how it has evolved in the US markets over the years.

To paraphrase; earlier portfolios were built based on narratives. Fund managers regularly used stories to identify good companies. For example: “The firm is gaining market share at the expense of the competition” or “The quality of the company’s management is top notch”.

These story-driven portfolios were then marketed via data: rankings of fund performance, ratings from companies like Morningstar and net return data.

I found this to be very amusing because it is how the Indian fund management operates TODAY. We also have funds that are constructed based on stories of quality of management or longevity of the business or based on themes such as infrastructure or consumption. It is very common for fund managers, in private, to talk up narratives of the companies they invest in. We also have numerous publications from ValueResearch and others that rank mutual funds and tell you, based on past performance, what you should buy this year.

Barry mentions how this style of investing would appear “quaint” to his younger readers. In the US today, portfolios are cheaply constructed using computer driven mathematics and are marketed with narratives such as indexing, factor based investing, ESG, smart beta etc.

For me the question isn’t about “if” this story will play out in the Indian financial markets, but more about “when”. There are a number of misaligned incentives the perpetuate the current system, but we are already seeing the start of change driven both the competition and by regulation. Today active fund managers in the large cap space already find it difficult to beat the index and we have already started seeing a number of fund houses launch smart beta ETFs. This story took about two or three decades to play out in the US. I would bet that things would change much faster here in India.


Quarterly Equity Valuations: January 2019

Monday, January 28th, 2019

We take a look at equity valuations and find that they have moved into even more expensive territory.

We use data from the NSE website starting from when it is available in January 1999 to look at the P/E Ratio, P/B ratio and the dividend yield of the index and compare it to past history.

 

Price to Earnings (P/E)

Equity Valuations

 

In the chart above, the red areas highlight when the PE ratio is significantly higher than normal implying that markets are expensive and future returns are likely to be lower than in the past. On the other hand, green areas show when the PE ratio is significantly lower than normal implying that markets are cheap and returns from equities should be higher than average.

On 25th January 2019, the Nifty PE Ratio was at 26.1 which is more than one standard deviation from the historical average of approximately 19. Market valuations have corrected from the value of 28.1 seen in August, but continue to remain expensive territory from an earnings point of view.

 

Price to Book (P/B)

Similar to the PE chart above, red areas in the PB chart denote times when markets are expensive whereas green areas show when markets are cheap relative to history.

The price to book ratio of the Nifty has stayed 3.3 and is just below the long term average of 3.5. On the basis of book value, markets are trading in the normal range. The difference between valuation indicators in the PE and PB could be due to cyclically suppressed earnings. Part of this could be due to low capacity utilisation and part of this could be attributed to structural NPA issues with public sector banks that are depressing earnings. Therefore, even though the price is expensive on the basis of current earnings, it could be that an increase in utilisation levels or a normalisation of the NPA situation could give a bump to earnings in the future and normalise the PE.

 

Dividend Yield

 

The dividend yield chart denotes value in a manner that is opposite to the PE and PB charts above. When the dividend yield is higher than normal, it means that markets are cheap. Similarly when the dividend yield is lower than normal, it is a sign that markets are expensive. The dividend yield is around the same levels in the last quarter, at 1.3 per cent. This is still close to the long term average of 1.5 per cent.


Linkfest – 98

Friday, January 11th, 2019

Some articles from across the web in the last few weeks:

E-commerce: The battle for India’s giant retail market – Economic Times

New investments in India plunge – Livemint

Cronyism in financial policy – Debashis Basu

E-Commerce FDI Policy: Bored Game – Bloomberg Quint

10 Things Investors Can Expect in 2019 – A Wealth of Common Sense

A bond market update – Aswath Damodaran

Seven Big Ideas from Fooled by Randomness – Safal Niveshak

The Bull Case for commodities – Visual Capitalist


Aswath Damodaran – Laws of Valuation

Wednesday, January 9th, 2019

Great talk by Aswath Damodaran on the corporate life cycle and how companies evolve over time. Here is the video and some key takeaways:


Key Takeaways:

  • Companies don’t like to get old: fighting it can be one of the most dangerous things a business can do
  • Most value is destroyed by companies not acting their age
  • What makes for a great CEO of a company changes over the course of the life cycle
  • The progression of a company through this life-cycle:
  • The life cycle of a company is getting compressed: a 20-year old tech company is an old company
  • There are three main ways to make corporate finance decisions that maximise the value of a business:
    • The investment decision: Invest to earn a return greater than a hurdle rate
    • The financing decision: ensure the optimal mix of debt to minimise the hurdle rate
    • The dividend decision: if you cannot find investments that meet the minimum hurdle rate, then return cash back to shareholders
  • These decisions are heavily influenced by the life cycle: a start up would mainly be taking equity because it doesn’t have predictable cash flows, mature companies should think about financing mix as the cash balance start to build up and declining companies should be focusing on returning cash to shareholders
  • On Amazon as a disruption platform: it is unclear if Amazon will ever make money on any new business it enters but it is guaranteed that the existing players will lose money. 
  • Valuation is never just about the numbers; there is always a story that drives the numerical projections, especially for young companies. for mature companies, the numbers would drive the valuation more because you are at chapter 34 of a 35 chapter book and cash flows are predictable


a16z Annual Summit

Tuesday, January 8th, 2019

Andreessen Horowitz recently put up a number of talks from their a16z annual summit which cover many areas related to the ongoing disruption across various industries due to technology. Here are few of the videos that I found particularly interesting:

Moving Beyond Advertising only business models

The Evolution of Brands

How the US government used Crypto to catch fraud

The software disruption coming to real estate


Monthly Market Summary: December 2018

Monday, January 7th, 2019

We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.

We use data for these charts from Investing.com

Global Equities

The Sensex was flat for the month and has outperformed its peers in both emerging and developed markets. Broader markets fell sharply led by the fall in the S&P500 of around nine per cent. Barring the Sensex, most equity markets have given negative returns in the last year.

Fixed Income

Indian bond yields continued to correct in December, falling from 7.65 to 7.43. The collapse in crude oil prices and an easing of the liquidity situation has led to some relief in the bond markets.

Gold

Gold moved higher, but still was within range during the month. If the commodity moves strongly away from 1200-1400 dollars per barrel, it would give a better indication of the long term trend.

Oil

Oil continued to fall in December. From a value of 86 in early October, it closed at just above 54 dollars per barrel at the end of last month. This is a very sharp correction and is a positive development for the Indian economy because of our large dependance on oil imports. It is important to keep an eye on this figure as it can have a destabilising effect on our macros.

Indian Rupee

The Rupee was range bound in December, reflecting global currency movements.


Linkfest – 97

Monday, December 31st, 2018

Some articles from across the web in the last few weeks:

There’s No Such Thing As A Part-Time Watchdog – Bloomberg Quint

Smaller FMCG firms race ahead, put bigger rivals on notice – Livemint

India is missing the wake-up call from its shadow-bank bust – Bloomberg

Are consumption stocks invincible? – Business Line

Weaker growth ahead – Neelkanth Mishra

Urbanization – Our World in Data

What’s Not Going to Change in Financial Services? – A Wealth of Common Sense

Millennials Didn’t Kill the Economy – The Atlantic

Which matters more for building wealth – Get Rich Slowly

Rational vs. Reasonable – Morgan Housel

The shape of all things digital in 2019 – Founding Fuel

24 Cognitive Biases – Visual Capitalist

Changing the Indian state from bully to ally – Livemint

Overview Of Global Shale Oil Developments – Alpha Invesco

Capital infusion won’t fix PSBs – Debashis Basu

GST: The Many Course Corrections – Bloomberg Quint

10 learnings from 2018 – Bloomberg Quint

Zero-fee funds – Quartz

A macro update on bonds – IDFC MF

Factor investing and index funds – Bloomberg

99 Good News Stories You Probably Didn’t Hear About in 2018 – Medium

51 Ideas from 2018 – Safal Niveshak


Monthly Market Summary: November 2018

Monday, December 3rd, 2018

We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.

 

We use data for these charts from Investing.com

 

Global Equities

Monthly Market Summary

The Sensex and the S&P500 both outperformed their broader emerging and developed market peers respectively. The Indian market in particular bounced back strongly after a few months of correction. Meanwhile the broader emerging markets and developed markets have fallen sharply in the last year.

 

Fixed Income

Indian bond yields corrected in November from 7.88 to 7.65. The collapse in crude oil prices and an easing of the liquidity situation has led to some relief in the bond markets.

 

Gold

Gold stayed in range during the month. If the commodity moves strongly away from 1200-1400 dollars per barrel, it would give a better indication of the long term trend.

 

Oil

Oil continued to fall in November. From a value of 86 in early October, it fell to to just under 62 dollars per barrel at the end of last month. This is a positive development because of our large dependance on oil imports. It is important to keep an eye on this figure as it can have a destabilising effect on our macros.

 

Indian Rupee


The Rupee appreciated sharply against all major currencies in the last month, to the tune of roughly 5 per cent. This is probably linked to falling oil prices and a return to normalcy in the market from the earlier panic situation.

 

 


Linkfest – 96

Friday, November 23rd, 2018

Interesting commentary from across the web in the last few weeks:

 

Over dependence on cab aggregators is hurting auto profits – Scroll.in

No One is Crazy – Morgan Housel

Thriving With Systematic & Discretionary Investing – The Integrating Investor

How the contracting PE multiple stole 2018 – The Reformed Broker

Coffee Can Investing: Rajeev Thakkar – Money Control

Japan’s stockmarket is poised for a comeback – The Economist

Tiny Improvements, Big Results – A Wealth of Common Sense

The Surprising Power of The Long Game – Farnam Street

How Athleisure Conquered Modern Fashion – The Atlantic

The shopping revolution: Barbara Kahn – The Big Picture

The Wall Street Math Hustle – Institutional Investor

Trends & Time Lapses – A Wealth of Common Sense

Lending slowdown is affecting consumption – Bloomberg Quint

Zoom Out – Safal Niveshak

How the American Consumer Got Addicted to Choice – A Wealth of Common Sense

Life Insurance – Know What you are sold – Bala’s Blog

Fees continue to fall in US funds – Morningstar

Four Things Leonardo da Vinci Can Teach Us About Investing – Of Dollars And Data

 

The Myth of Private Equity – YouTube

 

 

How these penny pinchers retired in their 30s – YouTube

 

 

Aswath Damodaran: Making sense of market mayhem – YouTube

 


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