Something has changed in the world of investing, as we know it. Fundamentals no longer matter. Only eternal and infinite promises matter. Numbers don’t matter. Only the promise of numbers matters. Results don’t matter. Just an attempt at results matters.
I must confess I am lost at this new model of investing that has seized India over the past couple of years. The current government was voted in on the pretty much the same basis on which every new government since 2008 has been voted in: the guys occupying the seat have let you down. Have sold you to Muslims/migrants/refugees/Hispanics/minorities in general/foreign powers; these guys have made your country that was once a superpower, a nation in decline; I have a secret sauce that will fix everything; Vote me in. So everybody from Tsipras to Modi to Trump took out their crayons, too out kindergarten playbooks, drew easy, large drawings of dark clouds, ogres with teeth, devouring small citizens, while stuffing wads of cash in their dungarees. Flip the page, and you got a picture of the sun out, grass green, factories going full swing, and all the above-mentioned “enemies” safely banished to far lands.
In this sort of situation, commonsense investment questions are considered heretical – how will “God” revive the capex cycle? What is the actual data saying? How much time should be given before somebody starts showing even the beginnings of delivery?
Naah…all these are very arcane questions. All questions are met with a standard “Gotta give it time”.
Sure. No problems with that. That’s the problem of voters. As a character said in “Wall Street”: “You bought it. Now you own it.”
The voters have to live with their decisions in a democracy for four-five years, but not investors. Investors are unfaithful bedfellows. Or more accurately, markets are. The same markets that cheered the arrival of Modi in 2014, have stoutly refused to deliver any meaningful returns since 2014. Not even inflation beating. Adjust for the weakening of the rupee since then (58/dollar), and you have a market that’s down in dollar terms since 2014.
This is what happens when you invest not in data and thought, but in promises. This is the kind of investing that creates bubbles. Manias. All logic was suspended, easy crayon pictures were bought greedily.
But the beast called market needs earnings to move. The shelf life of promises, while long for voters, isn’t so for markets. And that is why Indian large caps have been such a disappointment. For the market to deliver 17-20% earnings growth, it needs nominal GDP growth of at least 14-15%. Therein lies the problem. With nominal GDP growth hovering around the 7-9% mark at best, it beats me how analysts have been slavishly pencilling in 17% earnings growth year after year.
The actual earnings growth numbers have been spectacularly unccoperative for the past two to three years - between 0% and 5%. And this was before that demon called demonetization came rushing in.
Now all bets are off. All the feedback one gets is 50-90% revenues down across sectors. Hardly anybody left unscathed. Except Paytm, though.
Since we are supposed to follow the Cult Method of Investing, we aren’t supposed to openly ask: what was the necessity to do this, unless it was political. Which is a reasonable answer as far as my thinking goes. And if it indeed was nothing but an amnesty scheme with 50% tax (instead of the 45% on the recently concluded one), what then was the necessity to bring an entire country to a grinding halt, putting millions of lives at risk, imperilling a vulnerable recovery? But we aren’t supposed to ask. We are implicitly supposed to surrender our critical analysis faculties at the Altar of the Crypt. And leave it that.
But we can’t
We must figure out, one; what happens now to the Indian markets?. And two; what then are investors supposed to do?
The answers to both are simple to my reckoning.
Indian large caps have almost no upside left and I have held this view for the past two and half years. The latest move, information technology, pharma, consumers, even banks…all will be hurt. How badly, we will see, but hurt they will. Such macro-economic experiments can go horribly out of control, especially when you don’t even have a single economist anywhere in sight from the government’s side. But when “intellectuals” are a bad word, (last I checked, economists would be classified as “intellectuals”, why even despair?
Hence, I am negative on large caps, have been so, and see no reason to alter my view. And large caps are why India will lag its global peers such as Brazil, Russia, China. About the only exceptions in the large caps are commodity plays (steel, etc), which will benefit from a larger global upswing in commodity prices after a brutal four-five years.
The sole equity investing option open to investors are small, even micro-caps. That’s the only area of the market, I see, as still being in a bull phase – a long-playing one that. I see many companies, small in size, but big on balance sheet structure, governance, low capital intensity models of business. Those will win and win big.
Further, many of them are exporters, many are infrastructure players which will benefit from lower rates. It takes tonnes of work to unearth even a single one, but just one is enough to make a fortune for most.
Spend this year hunting for those. Don’t waste time buying the rubbish emanating from the spin doctors of the government who trumpet almost anything that this government does. Leave all that for the voters.
Cult investing isn’t sound investing. Period.
