September 11, 2017

The Classic GCC “Expat” debate

This Article was written for the CFA Institute and was published in 

Expats presently constitute about half of the total population in the GCC (52%), with a low of 37% for Saudi Arabia and a high of approximately 88% for UAE and Qatar. The increasing and large proportion of the expatriate population is a matter of concern for many GCC countries, as it slows down nationalisation goals. It also imposes costs, such as growing remittances, places a burden on public services, such as healthcare and infrastructure, and can result in illegal stay.

How will this evolve and impact certain sectors?

The GCC economic model is unique, as a large number of expats are involved in nation building. While the government tries to contain or reduce this number, in order to provide employment opportunities to nationals, it has economic costs and impacts key sectors. Before assessing costs, let us look at the benefits. A decreasing number of expats will lead to lower remittance. Nearly $100 billion leaves the GCC every year through remittance and hence is a burden on the current account. However, this argument only stands if there is no “qualitative” change in the profile of expats that are working in the GCC. 

Presently, a large majority of expats are blue collar workers (i.e. construction workers or domestic household helpers) whose per capita remittance is always lower than white collar workers. However, considering the weight given to economic diversification and the knowledge economy thrust by many GCC governments, it is reasonable to expect the expat profile to undergo a qualitative change from blue collar to white collar. This push is also likely to come from technological advancements in the construction industry, which will reduce the need for blue collar workers.

If this is indeed the case, remittances may increase, rather than decrease, due to the per capita effect. Recent research, published by Marmore, showed the average per capita remittance for a male expat in Saudi Arabia increased from $2,755 between 1994-1999 to $5,618 between 2011-2015; due to the significant increase in blue collar expats. A qualitative change in favour of white collar workers will also encourage GCC governments to work on labour market flexibility, immigration options and partial opening of markets to real estate investment by white collar expats. A lower expat population will reduce the pressure on public services like healthcare, transportation, infrastructure, water and electricity. Given that most of the public services are highly subsidised, this should be a welcome factor. On the back of lower usage, the need for spending on infrastructure also comes down.

The debate about public versus private sector is also relevant here. In the GCC’s public sector, around 9.6% of the workforce is comprised of expats, while in the private sector, 88% of the workforce is comprised of expats. Given this, displacing expats in the private sector can lead to efficiency loss and an increase in operational costs, as well as reduced margins. Industry associations and chambers will obviously resist more pressure coming from this factor. The private sector is already facing a slew of new taxes to disincentivize expat employment. However, the reduction in expat employment can happen in the public sector, which is currently dominated by local employment.

Sectors that will be impacted by this demographic shift include banking, financial services, real estate, retail, transportation, hospitality, food and beverages and tourism. In the case of banking, the impact will be more positive given the fact that on the retail banking side, GCC nationals are the major consumers of retail products, except for credit cards and personal loans. On the other hand, a qualitative shift in the expat demography will help banks expand their reach. Real estate will be impacted in terms of falling rental yields due to demand contraction. The impact on the retail industry will be mixed, as some aspects of retail catering to essential goods shopping by blue collar workers can suffer due to volume contraction. However, the wealthier segment of the expat population can create new demand for goods higher on the value chain and even open up new business opportunities for the food and beverage sector. The transportation industry, especially low cost airlines, may be impacted due to lower passenger growth and so will the generic food and beverages sector; which is dependent on population growth. Except for Dubai, other places in the GCC are still evolving as tourist destinations and hence the impact should be subdued.

In summary, it is likely that expats will continue to be a binding agent for GCC economic development but there will be a shift towards a more qualified and educated workforce that will not only focus on remittance but can also contribute to local economies as major consumers.

August 14, 2017

Holiday with Thomas Cook (India)-Tighten your Seatbelt!

Before I narrate my harrowing experience, here is the takeaway (if you don’t have time to read through).

     1.       Don’t book a holiday online with Thomas Cook (TC). It is better to walk to their  local office and put a face to the name that you are dealing with.
     2.       Don’t get fooled by the “personalized” tag of the holiday by TC. They will give only what they have and nothing more.

Now hear the story:

We are a family of 4 that was planning for a north eastern holiday. For some reason, TC name came to my mind and I browsed their website and sent in my inquiry through their online form. So far so good. Here is a summary of how this evolved till we boarded our flight to Guwahati.

Time left to start holiday (days)
28th July
Online form filled. Receive a call back from TC. Broach various options within North East and finally suggesting Sikkim and Darjeeling. (4N,5D)
29th July
Receive a call from TC. We suggested a change from Sikkim to Meghalaya. Rough itinerary received by email. TC pushing us to do flight booking and advance payment for the holiday as we don’t have much time left. Accordingly flight booked and advance payment made.
30th July
My son suggesting them to exclude some destinations and include Balphakram National Park instead.
31st July
No communication from TC
1st August
TC says Balphakram not possible due to monsoon. We suggested an alternative (Pobitora national park). No response from TC
2nd August
With only 3 days left to board the flight, we panicked and escalated our compliant to level 1
3rd August
With only 2 days left, we escalated our compliant to level 2. TC sheepishly communicates by email asking us to take what they have. Final itinerary still to be done.
4th August
With only a day left we decided to visit the local office who connects us to someone called Mubeen who was indeed understanding and helpful. He provided us with a contact called Shabnam who promised to look into it. TC itinerary finally comes in the evening. Payment done online and final vouchers received.
5th August-9th August
Flight boarded from Chennai at 5.30 am
Holiday in Meghalaya.

So, what is really wrong here:

     1.       We obtained our final itinerary the evening before we were to board our flight next day early morning. That leaves hardly any room to reflect on pricing, hotel options, etc. Just pay so that you can go on a holiday.
     2.       The contact process with TC is one way. In other words, they will call you but you cannot call them. Our calls go to a call center person who checks and then gives a standard reply “our operations team will call you in 15 minutes”. In desperation, we would have made several calls while we received no call back.
     3.       Through this seven days of dealing with TC before the tour commenced, I had to interact/contact 6 people. (Jairaj Singh (our initial contact), Manish Thakur (presumably his boss), Prakash Thakur (service quality manager), Fatima Sheik (not sure who she is), Mubeen (Chennai person who was helpful) and Shabnam (some person in Mumbai who seem to know our case.). In other words, we had to run from one pillar to another post just to finalize the holiday. No initiative shown by TC to close the holiday plan.
     4.       The tour was never “personalized”. The two requests that we made for accommodating our places of interest were rejected due to monsoon. Essentially, they gave us what they had, not what we wanted.
     5.       Even after pushing the escalation to level 2, we received no phone calls, only an email saying that they tried to reach us and we were not contactable (!!!). In desperation, I provided 3 alternate numbers (by email) but no calls came through.
     6.       TC promised a driver cum guide that will take us around. What we got was more of a driver and less of a guide (with all due respects to him).
     7.       While the “personalized” tour promised stay in 4-star hotels (and accordingly priced), the stay in Chirapunjee was a lodge with not even a landline contact. As tourist we could see many more better resorts which could have qualified for our stay. In other words, you pay for a 4-star hotel stay and you get a lodge instead.
     8.       Finally, we received no calls from TC during the holiday to check if everything is ok.

We have done several holidays with various holiday planners. This by far will count as the most harrowing pre-tour experience. What saved the day was the enchanting beauty of Meghalaya!

May 14, 2017

Indian Rupee ( INR ) – Three questions ?

This Article was Published in Market Express and Indians in Kuwait

The Indian Rupee (INR) is surprisingly strong proving many analysts wrong. In a world where emerging market currencies experience decline, the INR has been appreciating steadily. From a low of Rs.68.77/USD in Feb 2016, the INR value is now Rs.64.54/USD. In 2017 alone so far, the INR has appreciated by 5%. Three questions emerge in this context:

      1.       Why is INR so strong?
      2.       What is the outlook (medium term and long term)? &
      3.       What should NRI’s do?

Why is INR so strong?

In my view, there are 4 reasons why the INR currency is so strong.

Firstly the Modi factor. A lot of things seem to be just going right for him so far. His government is mid-way into its first five year term and he seems to be having a positive rating until now. The biggest and boldest gamble in the form of demonetization actually won him many praise from the same people that stood in queue to withdraw money from ATM. His recent budget has been well received. The Goods and Services Tax (GST) harmonizing all indirect taxes is a huge step taken with lot of political will. Finally a string of major election successes especially in Uttar Pradesh and other small wins in Delhi civic polls. Low oil price is the cherry in the ice cream. Modi is emerging to be a credible leader due to which economic and business confidence is moving up. There is clearly a Modi wave at play here.

This brings us to the second reason which is foreign fund flows. On the back of Modi wave and in the last one year, the fund flows have jumped sharply. Fund flows can happen either through FDI’s (long-term and stable money) or through FII’s (short-term hot money). In India’s case, it is more of later though FDI’s have also picked up significantly. While in all of 2016, there was a negative flow of Rs14,000 crores (USD 2.17bn), so far during the first five months of 2017, the fund flows totaled Rs.100,000 crores (USD 15.49bn). Due to this the forex reserves at RBI are at an all-time high of USD 370 billion.

Thirdly, the Federal Reserve of US where after 8 to 9 years of ultra-low interest rates close to zero, the arrival of Trump and his policies are expected to reverse that course and increase interest rates. However, due to growth and inflationary concerns that increase is proving to be slow and painful. When interest rates in US do not go up as expected, money starts flowing out of US into other markets in search of yields. India is a sweet beneficiary in this process.

Finally, the Reserve Bank of India (RBI). With the change in leadership from Raghuram Rajan to Urjit Patel, RBI seems to have grown more tolerant towards a strong currency. RBI has decisively kept away from the Open Market Operations (OMO) leaving the rupee to settle down wherever the market forces decide. In the past such sharp appreciation in the Rupee would have forced RBI to intervene to protect the interests of exporters. Not this time around.

What is the outlook for INR?

At the beginning of 2017, almost all major investment banks had a negative call on INR. Year-end predictions for INR ranged from 70.8 (Barclays) to 65.5 (Mizhou). However, the continued strength of the currency has made many of them revise their forecast which now ranges from 64.5 (MUFG) to 68 (Nomura).

In the short term (meaning second half of 2017), the Rupee will weaken from the current levels if fund flows start to reverse on the back of some bad news on the Indian economy and Modi front coupled with Fed’s resolve to stick to interest rate increases as announced. Both of them look unfeasible as of now. In other words, the near term outlook for Rupee is one of continued strength and can even approach Rs.62/USD.

In the medium to long-term term (beyond 2017), we should be careful in assuming that INR will continue to be strong. Being an emerging market with all attendant problems, the long-term direction of INR is clearly one of weakening and not strengthening. Until and unless the fund flows into India are FDI and not FII, we should be wary of the hot money leaving the country at the blink of an eyelid. Also, the Modi magic will continue only if his administration moves beyond rhetoric and delivers results as promised. Increasing infrastructure, creating jobs and improving ease of doing business can be tough for an economy that languished for so long. Modi will need two or three terms to fulfill the promises not one.

NRI Strategy

The Kuwait Dinar (which is mostly pegged to USD) was quoting at nearly Rs.230/KD during Feb 2016 and is quoting now at Rs.212/KD which is an 8% reduction in value for NRI’s. Obviously the key question in their mind is whether they should wait for the value to rebound or send money now without waiting. Many of the NRI’s have a regular need to send money home. Hence, they will not have the luxury of timing the remittance. However, for those that enjoy this luxury, given the outlook for continued strength of INR for 2017, it may be a good idea to remit now than later. However as they step into 2018, they will have to turn cautious and expect rupee depreciation. 

PS: The author thanks Deepak Radhakrishnan for data assistance

April 17, 2017

Be that Doctor!

A recent blog article in Wall Street Journal caught my attention. There are 64 job occupations that earn more than $100,000 per annum in US as per latest data from Labor department.

While this in itself is a good news, what is surprising to note is the dominance of medical jobs. Here is a fact check:

     ·         There are 9 job occupations that earn more than $200,000 with a median salary of $228.780. ALL OF THEM BELONG TO MEDICAL PROFESSION
    ·         There are 6 job occupations that earn between $150,000 to $200,000 with a median salary of $172,880. 4 OF THEM BELONG TO MEDICAL PROFESSION
    ·         There are 49 job occupations that earn between $100,000 to $150,000 with a median salary of $114,120. EVEN HERE 7 OF THEM BELONG TO MEDICAL PROFESSION

Almost all conceivable medical designations pop up in this list: Anesthesiologists, Surgeons, Obstetricians and gynecologists, Oral and maxillofacial surgeons, Orthodontists, Internists, Psychiatrists, Pediatricians, Dentists, Prosthodontists, Podiatrists, and finally Veterinarians!

The top job is held by Anesthesiologists who earn an income of $270,000 and their income grew by 40% between 2007 and the present. Surgeons are not far behind at $252,000 experiencing the same scorching growth rate.

It merits to pause and reflect on what has caused this extreme skew in favor of medical profession.

Obviously it is a demand factor at play. US is ageing, and with life style related health issues (like obesity), more people are queuing up in hospitals than movie theatres. Rising cost of medical insurance is not making it any easier to get affordable medical care. As opposed to other products and services, buyers have little choice to either think through or negotiate the terms of diagnosis. They are not in a technical position to challenge the diagnosis and at best can seek a second or third opinion. Medicine prescriptions, duration of treatment or tests to be taken are all factors beyond the bargaining power of a typical patient. This unique position of the seller (doctors) enables active or passive understanding with other service providers like pharmaceutical companies, medical device manufacturers, and medical accessories manufacturers. Conflict of interest can easily be either undermined or ignored and this can explain the super healthy rate at which salary levels are growing in almost all medical specializations ranging from anesthesiologists to dentists.

To be fair, the high levels of salaries persisting with the medical field can also be a function of investment and length of time to qualify and practice as doctors. When factored for these, the return on investment measured in terms of payback period can be on par with other professions.

Is this skew in salary levels in favor of medical profession doing any “public good”? Obviously not. While the role of doctors in treating patients is important, it cannot be so important that other professions like engineering, sciences, legal and finance are completely crowded out. The median salary for Sciences and Education is $105,000 a far cry from Medical median of nearly $180,000.

One cannot control or direct how this shapes up as they are mostly dictated by market forces. But such a structure can have a heavy influence on career choices by young people. If you want to earn well, be that doctor!
PS: The author thanks Subha Iyer for data assistance

January 21, 2017

Indian Equities: Invest in “Quality” but….

While globally the trend is clearly in favour of ETF’s or passive investing, emerging markets like India still offers plenty of scope for stock selection and active management.  Investors can take a cue from bellwether indexes like Nifty 50 or Sensex and develop strategies around them to gain alpha. In this context, the recently launched index by National Stock Exchange (NSE) 2015 attracted my attention. . It is titled as “Nifty 30 Quality Index” comprising 30 best Indian companies evaluated across three important parameters i.e., Return on Equity (RoE), Debt to Equity ratio (D/E) and Net Income growth. It is normally understood that highly profitable companies with low levels of debt perform well over time compared to medium to low profitable business with high leverage. True to this logic, the Nifty quality index returned 16% annualized during the last three years compared to 13% for Nifty 50. Definitely some alpha here for chasing quality.

While index investing is a good idea for lay investors, professional investors can do more in terms of deciphering some strategy around these indices. Any index is always a combination of great, good and poor stocks. Buying the index (in the form of ETF) means not only buying great and good but also poor stocks. This article attempts to improvise the quality index by focussing only on great stocks and see if we can perform better than the index.

The 30 companies in the quality index can be broken down into three groups viz., , great, good and poor based on their stock performance since the launch of the index.

While great group are super performers, the good group eked out decent performance while poor group actually performed poorly true to their name. The poor group pulled down the overall performance of the quality index as they enjoyed higher share of the index by virtue of their size. Here is the summary of the three groups:

 April, 2013 to September, 2016
No of stocks
Market cap weight (%)
Average. RoE ( %)
Average D/E ( %)
Annualized Net Income growth (i%)

Portfolio Performance

Dissecting the 30 companies constituting the quality index, we can see that 14 of them are star performers, 9 good and 7 companies draggers with more or less equally divided weights among themselves. It is interesting to note that all three groups enjoy high return on equity. However, the great group has the highest debt to equity ratio while the poor group has the lowest. However, the key among the metrics is the net income growth. The great group show a robust net income growth of 27% annualized while the good group show only 2% growth. Worse, the poor group show 0% growth. If you carve out these three groups as distinct portfolios, the great group portfolio returned an astounding performance of 34% annualized, the good group 17% (equivalent to the quality index performance) while the poor group returned only 8% severely underperforming the overall quality index.

In each of these groups there are surprising entries as well. For eg., in the great group we have companies like Emami and Tata Motors recording negative income growth but stellar stock price performance. The poor net income growth can be attributed to latest quarters and hence they may be penalized going forward. In the good group category, Tech Mahindra enjoys high RoE, low D/E and high NI growth but performed average relative to index which is surprising. In the poor group, we don’t see any surprises as all of them report poor net income growth.

Caveat: This analysis looks at the past performance and extrapolates into the future. There is a good possibility that companies in the great group can drop down to good or poor and vice-versa. Hence, it behoves to revisit this strategy annually to make changes to portfolio.

PS: The author thanks Rajesh Dheenathayalan for data assistance