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.

Date	Time left to start holiday (days)	Notes
28th July	7	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	6	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	5	My son suggesting them to exclude some destinations and include Balphakram National Park instead.
31st July	4	No communication from TC
1st August	3	TC says Balphakram not possible due to monsoon. We suggested an alternative (Pobitora national park). No response from TC
2nd August	2	With only 3 days left to board the flight, we panicked and escalated our compliant to level 1
3rd August	1	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	0	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!

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

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

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	Great	Good	Poor	Total
No of stocks	14	9	7	30
Market cap weight (%)	33	31	36	100%
Average. RoE ( %)	28	45	27	33
Average D/E ( %)	44	10	2	18
Annualized Net Income growth (i%)	27	2	0	7.4
Portfolio Performance	34%	17%	8%	16%

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

GCC needs monetary policy independence

This Article was Published in Gulf News,  Arab Times, Akhbar Al Khaleej and Alqabas

Typically, the topics in the business section of a newspaper in the GCC will almost always focus on issues such as the budget, deficits, subsidies, investment, etc. Meanwhile, a publication in the United States will dedicate more time towards speculating on the Fed’s imminent actions. Global financial markets gyrate to every move made by the Fed and hence are constantly trying to guess what its next one is likely to be. The GCC spends most of its time on fiscal issues since it has effectively outsourced its monetary policy responsibilities to the US Federal Reserve and therefore they are compelled to mirror the Fed’s policies regardless of its domestic economic underpinning. Fortunately, for most part of the arrangement, this worked reasonably well with business and economic cycles of the US and GCC being roughly synchronized. Additionally, strong oil prices throughout much of this period enabled GCC governments to build reasonable reserves; which also thwarted any occasional challenges which would pressurize the pegged currencies.

However, the recent drastic fall in oil prices and oil revenues (on which the budgets are heavily dependent) and the near unanimous consensus of the new low oil price reality going forward has changed that scenario. Given the high and growing break-even oil price (the oil price required to balance the budgets), GCC governments will now either have to draw down on their reserves at a faster rate or resort to borrowings to fill the gap. Being modeled as welfare economies, the restructuring process to rationalize subsidies and stop providing pseudo-employment in the public sector can be painfully slow. Hence, GCC governments will focus on reducing their role as the main investor in their respective markets and dedicate resources towards diversification strategies. The private sector will be encouraged to play a larger role in this diversification effort, especially in sectors such as healthcare, education and transportation where the government is currently forced to commit significant funds and capital. Also, research and innovation will rightfully be granted a higher priority as it can quicken the transition from public to private sector-based economies.  As the shift happens, maintaining a positive business environment will take precedence over government expenditure. Improvements in ease of doing business ranking will have to be achieved in swift time as the economy faces liquidity shortfalls, increase in cost of capital and higher risk premium.

In such a scenario, where government spending and employment will reduce and private sector led diversification process takes center stage, an outsourced monetary policy model may be counterproductive and costly. The ability to set short-term interest rates in order to manage domestic cost of capital and inflation will become important in order to orchestrate the transition. Monetary policy independence would be a necessary requirement for this to be possible. Otherwise, a pegged currency dictated by US monetary policy, where the interest rate curve may be sloping upward going forward, can create serious frictions in  the GCC’s low economic growth environment.

GCC monetary policy independence is also warranted in an environment where the Fed is running out of ammunition. According to The Economist, in the 3 most recent US recessions the Fed slashed rates by 675 bps, 550 bps and 512 bps respectively. However, what is interesting to note is the time taken for rates to return back to normal levels. The Fed took 2.5 years and 3 years to return to normalcy in the first two recessions respectively. However in the most recent recession of 2008, it is 8 years and counting. Should another recession occurs, the Fed will not have the necessary tools at its disposal. It is generally opined that long-term problems which are enveloping in the global system like low economic growth, deflationary concerns and lack of business confidence cannot be solved using the Fed’s short-term monetary tools. For a variety of factors, sooner or later, the Fed will lose its role as the financial market’s sole saviour. Such factors include the fact that its short-term interest rates have already hit rock bottom, an inability to move back to normal rates for a long stretch of time and the long-term nature of many problems that the Fed do not have resources to provide solutions with.

It is therefore time for the GCC to have an independent monetary policy framework like its fiscal policy framework. Such monetary independence will provide the GCC with the ability to set short-term rates and help guide the capital allocation process more cost effectively. It will also enable better control of inflation and will reduce friction in a challenging low growth economic environment.