Derive from December

The economy is set to slow down on the consumption side. Clearly, the financial results for the third quarter will be nothing to write home about. It is clear that the news flows will be bad in the coming weeks. The markets seem to be taking a stoic view of this unexpected turn. Domestic investors haven’t really reacted to the sudden shift in sentiment. FII’s have also reacted with limited selling. The markets are still waiting anxiously to see how FII behavior will impact global emerging markets. This  isn’t clear yet. The coming weeks will see the markets play this guessing game. A few players will move with greater conviction and take a stance on market direction. The majority among market players are not expected to do much. With market direction not clear, investor anxiety is centered around the currency. The dollar is hardening again. The imminent interest rate hike is creating a trend of flows away from global emerging markets back to the US markets. The lack of clarity on how a Trump regime will help the US economic performance improve is not helping matters. How rates, flows and growth play out in the US markets will determine global fund flows in 2017. For now, everybody is only clear on the rates. The exchange rate and policy direction of a Trump regime are still  subject of intense guessing. What we are seeing now is the habitual year end away trade from emerging markets. We will only know in January if this trend will reverse and the intensity of the trend reversal is still a matter of speculation. This leaves the field open for a few high conviction players who will take an early start and prepare their action list for 2017.  The battle will clearly belong to those who build conviction correctly and action on their conviction in a realistic manner. Keeping quiet and waiting is clearly not going to help much.

“An investor should always realize that some mistakes are going to be made.” – Philip Fisher

“Sell in December and go away” is a popular slogan among global investors. Seasonality in stock markets may defeat all rationality. Yet, there is no denying its existence.The difference is that FII’s are advancing their selling by a month. The reasons are both local and global. The rate hike in USA is imminent and Janet Yellen is constantly cautioning the global markets about it. The demonetization has put the brakes on India’s parallel economy , the size of which is much speculated and unverified. If India’s parallel economy grinds to a halt over the next 7 weeks, it is certain that its ripple impact on the real economy will be greatly felt. The lack of currency for a few weeks is going to create a near- term phobia among people. Remember people waking up in the night even weeks after the Chennai floods with nightmares of rising water! People will keep worrying about the availability of cash and tugging onto cash tightly long after this crisis blows over. Corporate earnings will take a knock. This may surprise those who observe the straight faces that Corporate executives keep while they negate any potential impact from demonetization. They will comeback and simply say ” We read it wrong”. But, the key question before us is ” Did the government read it wrong?”. That looks unlikely. What looks more plausible that the government took the plunge to pull people out of a deep complacency that had set in during the past 15 years. Property speculation, tax evasion and gold accumulation have been three routine features in the average Indian’s lives for the past 15 years. The state has been a passive onlooker even as people refused to invest their savings in the real economy. Money rested comfortably outside the banking system. November,8 was a Ctr-alt-del day for Indian financial behavior.  It shook things up. While people are picking up the pieces and trying to patch up things, we may not have seen the last of strong government action to ensure  ample tax compliance among our people. To pick a tougher decision and to play it hard is never easy. India’s leadership knows it well enough. Yet, the government made that choice. We will know in the coming weeks if the people respect that decision enough.

Every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer

It’s back to basics

Equity investors are most unlikely to be keen followers of bond markets. Even when their equity investments benefit greatly from events in the bond market, equity investors tend to not follow the interconnect closely. Bottom-up investing is a convenient excuse to say ” I don’t follow the economic macros”. I am only bothered about my investments and how they are faring. The fundamental flaw in this assessment is that one’s stock performance is largely a function of economic macros. How one’s stocks perform is deeply impacted by the way the economy is being run. When tougher economic decisions are taken, there is no escape from their impact on one’s portfolio. The demonetization of 1000 and 500 rupee notes is not just another economic event. It is a black swan. It is going to disrupt everything. Consumption, real estate, liquidity, fintech, banking, industrial production and agriculture are all likely to see deep change. These changes will be behavioral in origin and financial in outcome. Businesses and investments are likely to reflect these sharp changes. So, trivializing the demonetization as an exercise of queuing up before banks and changing old notes would be naive. The deeper impact will be evident in government efficiency, tax buoyancy, cashless transactions, tax compliance, liquidity and public investment sentiment. Importantly, the wealth effect which we witnessed during the boom years  in the parallel economy will not be playing secularly anymore. Equity investing is yet to factor in that remarkable shift in the public mood. How our demonetization and the rapid shift in the global bond markets combine to impact equity is not going to be easy to predict. But, it is a much easier thing to prepare for an event in global bond market. Our wait may not be as long as we imagine.

“An investor should always realize that some mistakes are going to be made.” – Philip Fisher

Is the Wait over?

The cash call is the most difficult thing for an investor to take. To leave a party where the excitement soars endlessly is more than just difficult. It is impossible. To achieve the impossible, one has to rise above the ordinary. To sell when everybody else around you talks only of buying is seldom easy. Yet, that is the only way to raise your investing to the next level. If you learn to walk away from the herd, you have merely begun a new journey. But, make no mistake that it is merely a beginning. There is much to do beyond taking a cash call. First, there is the waiting phase. Then, there is the bigger responsibility of investing the money back. It has to be done sensibly. The wait to invest the money back must be just right. Waiting is not one’s core business. One must remember this all the time. Only then, one will ensure he does well in his core business- Investing. While the time to take a cash call has been well put behind, the time to wait is nearing its end. The time to be investing is near. The cash call, the waiting and investing are the three stages of outlier investing. It is not yet time to recognise outlier investing. It is the time to practise the last phase. Investing