Category Archives: Market Wrap

The much awaited surprise

An upgrade of India’s sovereign rating right in the middle of one of our history’s toughest economic reform programs is clearly a shot in the arm. It is a booster shot for global sentiment on India, capital raising exercises by government and companies, and domestic sentiment. This will further speed up reforms and public investment.

But, should the markets runaway? Possibly not. The markets need greater evidence on the ground to become more expensive than they already are. Current valuations of several market-leading companies are already discounting much of the good news.

And, the spoiler could be in the form of public issues that mop up much more liquidity. IPOs could play spoiler. Mutual funds are also mobilising huge sums in already overvalued categories and themes through their IPOs. This could lead to misallocation of capital. Corrections usually follow such misallocation of capital and are triggered by an accidental scarcity of capital on a temporary basis.

Measured investing is the need of the hour.

“Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.”– John Bogle

A coming of age moment

Indians don’t fancy financial products much. A mutual fund, ETF, or ULIP is supposedly meant for investors who don’t have any idea about equities. If one can’t choose the right  stocks, he is perceived as a candidate for a mutual fund scheme. Investors genuinely believe that these products don’t have the potential to deliver big returns. Whereas the underlying assets in these products, stocks, can.

So, people think that personal portfolios of stocks can deliver more returns than funds. Everybody forgets that they too construct a portfolio of stocks which may not perform as well as their best stock picks. Aggregate performance of an individual investor may not actually be far ahead of the best performing fund scheme. Every portfolio will inevitably have stocks that don’t perform or even fail. This can retard overall returns.

Fees could be one reason why returns moderate between the underlying and the derived. But then, we have ETFs as low fee options. Why do we shun them as being investment unworthy? It is in the way portfolios of ETF schemes are constructed. A well constructed ETF can deliver competing returns. India’s ETF industry badly needs a well constructed ETF. That moment is before us. We have a very interestingly constructed ETF before us.

This is a John Bogle moment for the Indian public investor. Be at the Vanguard of a new revolution.

“When everyone believes something is risky, their unwillingness to buy usually reduces the price to the point where it’s not risky.” – Howard Marks

Reversion Returns

Every market opens up newer investment opportunities. There will always be businesses that nobody wants to own. Or at least, only a few people would seek to venture into them. Businesses that are shunned often drift in valuations, until they reach extremely attractive levels. Then, an event or news or policy causes a sharp reversion to mean.

Usually, the reversion to mean happens so swiftly that it catches everyone unawares. The duty of a contrarian investor is to spot such reversion opportunities and ensure that he invests early enough to catch them right. There is no other way to catch such opportunities.

This sharp reversion is happening in telecom, pharma and PSBs. It only reaffirms the long-held belief that you can’t predict. You can only prepare.

It may well be time to prepare for future reversions in sectoral valuations, thematic fortunes, and cyclical preferences. The markets will continue to see dynamic churn going forward and one must keep his investing ahead of the times.

 

“Large amounts of money aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates.” – Howard Marks


The S-Factor

Markets have a habit of surprising investors. The surprise tends to vary in intensity and impact. How markets react to surprises, determines the extent. When the intensity is strong, the impact is likely to be high.

Markets always tend to be unprepared for surprises. This is ironic considering that markets know fully well that surprises can happen at any time. Yet, the market always assumes that it knows when surprises won’t happen.
The truth is that the markets just don’t know.

The government’s announcement to recapitalize PSU banks came exactly when prices were near yearly lows. Nobody thought that the government had answers to their problems. What we forgot is that the government was faced with a TINA situation. There was no available alternative but for the government to deal with their biggest economic problem. And, they did just that.

That the stock market missed the woods for the trees only shows the negatives of market’s anchoring. The sharp price reaction to the recapitalization news is not mature either. The mature approach would have been to weigh the impact on each bank, to understand how companies would evolve, and assess the extent of capital that the government needs to revitalise the public sector banks.

The game has just begun.

“The road to long-term investment success runs through risk control more than through aggressiveness.” – Howard Marks

Class is permanent 

Investment styles in mutual funds are unique. The valuation paradigms of each fund manager drive them. Every fund manager’s approach to risk will be clearly visible in his portfolio. Investment choices speak louder than words.

To appreciate a fund manager’s risk construct, all we need to do is to closely track their portfolio’s positioning. If their portfolio is always seeking alpha, at times, it can fail to be defensive when valuations are not in favour. This can have a weakening impact on the portfolio.

Risk must be dynamically handled in mutual fund portfolios. Often, fund managers take a defensive posture in their portfolio. They focus only on how to lose less money. This may sound strange to those accustomed to only seeing returns. But, losing less money is just as crucial to the art of making more money.

It is not as if investing can always be played like a T20 cricket game. At times, classic test batting and not losing the wicket is critical. These are times when one must stay at the crease and not choose a bad shot. Trying to do less in a portfolio will actually be a far more sensible strategy now than trying to do too much.

That is what classic investing is all about. Class is often understated, underemphasized, and inadequately acknowledged. But, we need to understand that class is permanent. Style only helps class deliver.

It is that festive hour

It’s that time of the year when the festive mood creeps into market trade. Every investor is optimistic and every fund manager worth his salt doles a positive prognosis about markets. No matter where markets are, how valuations look, and where the economy is heading, market players turn politically correct around Diwali. The Muhurat is too sanguine to issue cautionary statements.

So, we shall enjoy a week of complete consensus. Hiding one’s festival agnostic market views is one helluva job. WhatsApp adds to the chaos with millions of shares of Diwali picks. Investors experience a sugary high from these forwards, and quickly check which stock is trading lower.

Funds spend Diwali bandying their usual happily ever after story. Every Diwali brings the same elements into play. The market context hardly seems to matter. The sartorial assault on our sensibilities is a side show that only gets more gross every year. Sadly, those selling those garish clothes are yet to list. But who cares! It is that auspicious hour.

“Investor psychology can cause a security to be priced just about anywhere in the short run, regardless of its fundamentals.” – Howard Marks

Back on Track

GST’s travails went through another interesting week of twists and turns. The acceptance of a new, modern tax system by its stakeholders is innate to its success. If people reject a system, and choose to operate outside it, as has been the habit, it would not meet its objectives.

The GST system came with structural fault lines. There were periodicity issues with complicated filings, higher tax structures that dis-incentivised consumption, and stricter compliance requirements. Too many filers needed to report every month, causing an overarching fear psychosis.

The current changes to its structure and working, are a step in the right direction. The government needs to move now. To ensure full compliance, we must remove the fears and create a conducive atmosphere to onboard assessees. While evaders will always keep trying to get off the hook, the system will need to wield a carrot and stick approach.

Government revenues are contingent upon meeting fiscal targets, public investment, job creation through newer projects, and macroeconomic stability. Taking a quick call to resolve the weaker areas of GST without hanging onto pride was the best thing it could have done.

Going forward, the government must maintain the same flexibility and show zero tolerance to tax evasion. By adopting a carrot and stick approach, the government will gradually raise tax compliance under GST. That would mee its stated objectives in initiating tax reforms.

“Price is what you pay. Value is what you get” – Warren Buffet

Think beyond the immediate

The week marked remarkable change in domestic investor sentiment. The Indian market story has long ceased to be a secular one.

We are a heterogeneous market and have ample breadth of business performance within our economy. We have churned our indices to remove companies going through difficult times. This counters the wide disparity in business performance and restricts its damage on markets. We have tried instead to focus on winning themes and concentrate our capital flows within a narrow band of companies. The problem is such narrow approaches don’t end well.

When we take a narrow approach to investing, we raise our risks by over paying for investment buys. This reaches a point where the narrow approach becomes detrimental to our investments. Often, this leads to loss of capital. We are at a point where we need to end this narrow approach and identify longer-term trends that will drive our investment buying.

Time to leave the herd and think beyond the immediate.

 

“Most people are driven by greed, fear, envy and other emotions that render objectivity impossible and open the door for significant mistakes”. – Howard Marks

Yin and Yang – Indian style

When DIIs sold, FIIs bought and when FIIs sold, DIIs bought. This was almost mistaken for some kind of Yin and Yang phenomenon. Investors and analysts reduced it to a complementary system, where the two counterbalanced each other. This would work well for the overall market. But, the two aren’t complementary enough to create a more dynamic market.

Often, one tends to overwhelm the other and the net effect is to weaken the system. In this case, the system happens to be the Indian market ecosystem. We could soon find out that the DIIs overestimated their ability to provide market stability. To make matters worse, we might face a situation where their indiscretions and indiscipline on the buy side will hurt their own performance.

FIIs have held a steady and stable approach in the past month. They are not seeing value in our markets and are relentlessly selling. Indian investors – institutional, HNI and retail, are living under a fallacy. They believe that they can sidestep the challenges created by overvaluation by simply coming together and buying whatever FIIs offer for sale.

Experience shows that fallacies in stock markets rarely last long and inflict swift and heavy costs on those who are not disciplined enough. This time, Yang could well take Yin down.

Disruption Returns

The last week saw a heated debate on electric vehicles. This brought back intense focus to the threat, disruption poses to the automobile industry. Advancements in technology can disrupt the world much more in the next ten years than it has in the last fifty.

This is not just restricted to the automobile industry. In fact, the threat to traditional BFSI (banking , financial services, and insurance) due to the triangulation of telecom, data analytics, and automation is much bigger. Consumers clearly stand to benefit. But, investors may have a lot more to lose than imagined. The reason is simple.

Disruption creates deep change at double-speed. It can hit an industry and make it irrelevant to the future. The threat of obsolescence can force businesses to cede pricing power, give more to consumers, and pay to retain their relevance. It can completely take away profitability. Bankruptcy will also need to be seen as a logical extension when all else fails. These are new to the Indian milieu. We are yet to see listed companies wind up, simply because they don’t have a reason to be. In such a scenario, discounting earnings for a longer time horizon may not be prudent.

This brings the investment focus firmly back to consumption and essentials. These are likely to remain more stable over longer periods of time. The risk markets run in every bull cycle is, that they tend to overstretch valuations of sectors just before they face massive disruption.

This time is no different.

“The number one problem in today’s generation and economy is the lack of financial literacy” – Alan Greenspan