Spark Asia Impact Managers Private Limited (Formerly Spark Fund Managers Private Limited) is the Equity Asset Management (EAM) arm of Spark Capital (Spark). Since inception, Spark has cut its teeth on equities as an asset class. Be it assisting clients raise equity capital from investors in their role as investment bankers or recommending stocks directed at its wide roster of institutional investors as part of its erstwhile institutional equities business, the asset class is firmly imprinted in Spark's DNA. As proof, Spark's noteworthy track record has led it to being reckoned by market participants as an equities house possessing considerable heft. Leveraging off this body of expertise, the EAM initiative complements and completes the suite of equity solutions presented to clients.
SAIMPL has Asia Impact from Europe as a strategic investor. Asia Impact is an entity sponsored by a group of private bankers with considerable business success in Asia and deep roots in Southern Europe, through them we hope to tap European investors in order to give them the best that Indian markets can offer in the years to come.
With the PMS license coming through in November 2018, two approaches are currently being offered, subscriptions for both of which are open:
a) India@75 Flexicap Strategy: This approach will have the leeway to position the portfolio across the cap-curve continuum, depending on the team’s assessment of valuations, risks and volatility. Instead of being aligned with only a specific market-cap range, the strategy will look for safety (read large-cap) in phases characterised by frothy valuation and elevated risks; it will look to add to beta (read mid- and small-cap) when it believes valuation has turned saner and risks have receded. The belief is that this approach will seek to optimise client returns by tweaking portfolios to reflect attendant market realities. With a portfolio comprising 20-25 stocks, the objective will be to deliver superior returns adjusted for risk. Open-ended and long-only in structure, the minimum investment into the strategy is Rs 5 million.
b) Core and Satellite Strategy: This
strategy aims to capture on rotational sector momentum that
is a key feature of Indian equity markets. While the core
portfolio will reflect positions backed with high conviction
that can have a holding horizon of over 12 months, the
satellite component of the portfolio will focus on names
where there’s momentum on account of near-term business
drivers and event-related triggers (and a shorter holding
period). The portfolio will comprise between 12-18 names.
Given the strategy’s concentration, it is best suited for
investors who understand the volatility inherent in equities
and can be patient with their capital. Expected minimum
ticket size for this strategy is Rs 5 million.
Across both these approaches, investors have the option of being onboarded either directly (Direct Plan) or through a distributor/partner/intermediary (Regular Plan). For more details, please refer to our Disclosure Document.
We are investors in India's growth at the right price. The price of growth needs to be sized up in a world of uncertainties. We seek to create alpha over market returns. Managing risks is key to achieving this. To do so, we need to understand the risks we run and the blind spots. Robust process and diversification of alpha sources is key to repeatable results. Recognising mistakes and taking corrective action is critical to this. Great investment results are as much about painstaking and patient execution as they are about stock-picking.
Summary of our investment philosophy:
We are investors in India's growth.
Growth needs to be properly priced. What we pay for what we buy is important. The price of what we hold is equally important.
Timing is not everything. But timing is important as cycles are getting vicious, shorter and are increasingly all-pervasive.
Go after alpha and don’t confuse beta for alpha.
Be aware of the risks we face. Quantify them where possible. Grade them. Identify and be wary of risks that are not well understood.
Go for good managements, robust business models, sustainable balance sheets and acceptable return ratios. Recognise that these are not good enough to generate alpha.
We are in an era of information overload. Information arbitrage is not a sustainable edge.
X-factor is in execution. Focus on building blocks. Do not become a prisoner to a given style. Flexibility of approach is an approach that is enduring.
Repeatability of performance emanates from good processes. That includes understanding alpha sources, alpha drags and not being dependent on a few outliers.
Recognise mistakes. Mistakes will happen. Take corrective action.
Our Investment Philosophy - An articulation of what we stand for:
We are firm believers in the dictum that financial products including equities have a fair price. The Indian equity story derives its optimistic outlook from the promise of growth that India holds forth. Piece these together and we get one important cornerstone of our investment philosophy - which is that we are investors in India's growth but only at the right price. No stock can be a Buy or even a Hold at all prices.
The second cornerstone of our philosophy underscores the fact that business cycles are getting shorter and therefore the same will apply for market cycles. All businesses carry some cyclicality. For some, it may be more pronounced and for others, it might be less so. In order to add value to our client strategies, a keen understanding of what drives growth and what can slow down growth is essential.
The third pillar of our investment philosophy is an acute recognition of the fact that fund managers create alpha and beta is in the domain of the market or the gods. A level of historic return, perceived as high, generated at the level of the market or a specific strategy/approach or product, does not tell us much. Our emphasis is in building alpha over time and let the market go about its business of discounting the growth in the economy at a pace and trajectory of its choice.
The fourth piece of our philosophy stresses the importance of risk management and that of good process. As India matures as a market, execution is going to be the key differentiator. Business mortality risk, management risk, cyclical risk, liquidity risk, balance sheet risk and valuation risk are all key to the success of execution. Our philosophy is accepting of the need to zero in on risks we may not understand well enough and focus on mitigating those.
The fifth aspect of our philosophy is what we will emphasize are hygiene factors. In an emerging market like India, managements can make or mar investor returns. Identifying management capability and alignment is critical. The other hygiene factor is in determining whether the business we invest is generating or is poised to generate returns on capital in excess of cost of capital on a sustained basis. The ability to generate shareholder value will depend on these. These are hygiene factors and do not offer investment nirvana.
Finally, the last and a crucial pillar of our philosophy is a lesson in humility. Recognising mistakes, benchmarking investment outcomes and not being a prisoner of any style are important to generate and repeat alpha. For alpha generation to be sustainable and repeatable, the sources should preferably be many. Diversifying the source of alpha, understanding the drivers, measuring them and building on the same, block by block – these are key to the good execution we seek to achieve. Part of this is understanding alpha destroyers as well. For this to be effective, we are clear that we should not be boxed into an investment style. Flexibility is the most potent weapon that we carry in our armoury.
Chief Investment Officer
Parameswara Iyer Krishnan is the Head of the EAM business at Spark Asia Impact Managers Pvt Ltd and its Chief Investment Officer. He is an industry veteran with over 32 years of experience in asset management across India/Regional Equities. Krishnan had a highly successful stint of 19 years with DNB Asset Management (DNB), a leading Scandinavian fund management house that is part of the largest bank & insurance house in Norway. During his tenure, he helped build Carlson Fund and DNB as the most credible India and Emerging Market voice in the Nordic region between 1998 and 2017.
As manager of Carlson Asian Small Cap Fund (CASC) and Carlson India Fund (CIF), he successfully negotiated a few crucial market cycles in India and Asia for close to two decades. CASC had NAV returns of 29% CAGR (in Euro terms) from 1999 to 2007. Assets under management (AUM) grew from under USD 10 mn to over USD 1 billion during the period. CASC was a highly regarded Asian growth fund in Northern Europe over a number of years. With an India allocation above 50% in 2014, CASC emerged as one of the top performing Asian funds across categories that year. CIF, starting in 2008, returned 15.9% CAGR (in Euro terms) between 2009 and 2017, despite the Indian rupee falling by 12.5% against the Euro during this period. Krishnan played a pivotal role in growing its AUM from USD 3 million at inception to about USD 150 mn.
In the 1990s, during the formative years of the Indian fund management industry, he was the first Portfolio Manager of India's maiden private-sector mutual fund scheme (now Franklin India Bluechip Fund). He started his career with SBI Mutual Fund in 1990 where he was responsible for India's first bank-sponsored mutual fund scheme, MRIS-1987.
Apart from India, Krishnan carries with him invaluable experience in Asian emerging markets such as China, Taiwan and Korea; he is amongst the few managers in the domestic fund management industry having regional experience. Krishnan has won several accolades as an India expert and country manager. He holds a B.E in Computer Science and PGDM from IIM, Bangalore.
Life is off balance nowadays. We plan to reflect on this on a lighter vein once in a way, from the lens of a market animal. There is never a dull moment in life. Why should there be? Enjoy the zigzag roller coaster with multiple twists. This part of our web experience will get populated only when we notice something interesting that puts us off balance.
Investing is the art of taking optimism to the limits of possibilities. Professional investing is all about bringing in discretion to that optimism. In the fabled story of the Indian markets, optimism has seen few boundaries. We know that Diwali is the festival of lights. But one never knew that it can also be construed as a festival of stock picks.
The market is in the business of pricing assets based on incoming data and not a place where festivities are supposed to bring about a firesale. Never mind. Professional investing has gone on from the world of fiduciary responsibilities to the bright new world of arc lights.
That said, the market pays scant regard to these milestones. It should not. The data that ought to have a bearing on stock prices has no correlation to any festival save for the fact that festivals bring about higher consumer spend which is usually in the price well in advance. Yet the practice of coming out with Diwali picks has endured.
The packaging of investment products or the positioning seem to have taken a lot of mindspace. One should not go so far to state that this has started to take precedence over substance. One hopes that it does not. Investing is too important for an individual or family for optics to prevail over substance.
It is ultimately for the investors to decide which side of the bread is buttered. The questions to ponder over are:
Should there be stock picks all the time?
Is investing about finding the right nest for hard earned savings or about prime time entertainment?
In order to remain an optimist, should we assume that markets will offer opportunities upon demand?
Investment Management service is like no other consumer product or service. It is certainly not an entertainment industry. Challenge that notion at your own peril. It is not akin to a high value consumer durable either. The investment management service itself is not very steeply priced nowadays. A consumer durable performs from day one whereas here, it takes time to experience and assess the outcomes in investment management. It is not like old wine because old wine is opened after it is bottled up for ages. In fund management, the consumer experiences the product day in and day out. It is a high touch product. The closest one can come to comparing is that this is like the good old family physician. It gets better with time. You feel the need every now and then. It is not out of place to mention that the family physician does not prescribe a course of action because it is festival time.
At the best of times, it has not been easy to make money in the markets on a consistent basis. Investors should think twice (or many times) before mixing festivity with the serious task of investing. The latter is too important to be treated as an entertainment sport. As for me, when there are picks or when you get a fruitful exit from a pick, that is when it should feel like Diwali.
On that note, wish you and your family a happy Deepavali!
I keep a couple of lovely crystal pieces at home. A raging bull and a lurking bear. They keep reminding me of the constant tussle in my professional life. A while back, these pets suffered some damage thanks to my maladroit hands. They started reminding me that there is an ageing bull around. I had to do something. I got this lovely Nandi to sit and stare at me from another piece of furniture. The calm demeanour, the poise and the grace of the Nandi are too conspicuous to be missed. This is a real life story but that does not matter. I have since started thinking about the ageing bull and the timeless Nandi.
Wiki tells me that Nandi comes from the root Tamil word that promises growth and which is meant to flourish. Are we seeing the true Nandi in our markets ? Is it for real ?
The ageing bull can damage itself. If you count the age of the bull from the time the Fed started fattening it, it is nearly a decade-and-a-half old. By the way, India is a baby bull that gallivants around the Mother in the States. Going by the duration of the previous avatars, the Mother is ageing rapidly. Mother's milk is good for the health of the baby bull. Nothing else is as nutritious. The incessant nourishment has kept the baby bubbling up with joy.
Then came the Inflation. The China shop announced a stock-out on commodities like steel. So far, the Mother Bull has handled the bad boy very well. That said, we all know what a bull in a China shop can do, that too when stocks are low. It is the job of the Fed to deal with the inflation virus before it assumes pandemic proportions. But then the Fed doubles up as the physician of last resort nowadays. It remains to be seen whether it is good with geriatric care.
Now comes the Delta. While the fan club of the Mother Bull may breathe easy on inflation, Delta hurts demand. Delta is taking its revenge on the much bandied-about revenge spending.
Is the world in a good place or not? Hard to decipher. One thing is clear. The fan club of the Mother Bull is much like the superstar fan clubs. Logic is permissible as long as the conclusion is along what the fans want.
So far so confusing. Now you know why I look up to the revered Nandi these days. But there is more to that. It is Made In India. It is part of Atmanirbhar Bharat. It represents prosperity, tradition, strength, resilience and is the Guardian Bull. Above all, it is calm and composed. Will it prove to be all of the above if and when the Mother bull takes a bow or a break ?
Past performance has been rather unedifying. But then, the past performance is not supposed to be indicative of the future. One reason why there is hope for the worshippers is that the lack of forest cover has driven the bear further away. Bear is searching for real estate. And the original Real estate is looking for returns. Returns in Real Estate are hard to come by in spite of repeated attempts at financial gymnastics.
Therein lies the hope for the Equity Bhakts. The TINA factor was coined in Delhi. It has now diversified its base to cover Mumbai as well. Believers galore and there is no other place to go. We now need fresh nourishment and good health for our Nandi. Vaccination is meant for the latter and to keep Delta kids from interfering. For nourishment, there is the business cycle. The Indian business cycle is young and raring to go.
To sum it up, it seems a good idea to look at the solid Nandi and forget about the crystal. Those living in concrete dwellings should not play with glass articles. Those who follow the timeless Nandi should not rush to get financial nirvana so quickly either. What is timeless deserves a break now and then. It is time for some introspection. Play for the long haul. Pray for the long haul.
Jai Ho Nandi.
Inflation has seldom caused so much confusion in the world. We thought it was a simple enough number. It measures the rate of change in prices of a basket of goods & services you and I are likely to consume. If it goes up, the price increase is in acceleration mode. Usually, this is no good news. First of all, this means that our income will give us lower bang for the buck. Secondly, the value of our savings is going down. After all, today's savings is the raw material for tomorrow's consumption.
The lessons of economic development also tell us that the countries who had low and stable inflation had the best shot at economic prosperity. People trust the value of their savings and know what to expect in a low and stable inflation environment. Such savings are available to people who need capital to invest and this sets in motion a so-called virtuous cycle.
When inflation goes up, central banks are expected to squirm in discomfort. Conventional wisdom tells us that interest rates will be pulled up so that savers get positive real rates of return. Higher interest rates would then correct the imbalance by slowing growth by just about enough to create a slack in labour markets which will moderate wage increases and then inflation itself. This is how the impresario is supposed to run the show. In a deft and sure-footed manner.
Now, we have inflation in the USA going up and touching levels not heard of for many years. The Fed however, is showing some ambivalence. On one side, conventional wisdom dictates that you act. On the other hand, the Fed has been so transparent in its thinking that even its future thoughts have been brought into public domain. It is pre-committed to low interest rates as it were. Their plot is known as the Dot Plot. It is a beautiful array of full stops which reassures everyone to go and make merry as long as the Fed is plotting the plot and dotting the dots. This diagram has told us that interest rates are not likely to increase meaningfully for a couple of years more.
The bond market in the USA, a gigantic arena where big boys play with money, is also telling us that interest rates are likely to stay low. The US ten-year treasury inflation protected bonds (TIPS as it is fondly referred to) are flashing yields deep in the negative territory. In other words, the markets are trying to tell investors that inflation may actually cool down. The Fed may well be right on its stance on inflation.
However, at the moment, prices are going up. This is reflected in CPI rates around the world. Commodities are on fire and prices appear to be sticky at their new bully pulpit.
That brings us to the issue of growth. The (bull) market pundits are telling us that growth, which seems to be picking up almost everywhere, will be at risk after some time. It is too tepid for inflation to stay up and so the Gods of inflation will make inflation pivot.
In all this, will some tightening of rates do any harm to us? After all, getting interest rates further down has hardly been a recipe for our good. Remember Japan? Why are we obsessed with near zero cost of money?
It appears the answer lies in who " we" are. If "we" are the denizens of the deal street, Dalal street or wall street, we want to have the cake and eat it too. Simple. We want just about enough inflation to keep the wolf of deflation away from the door. We want it to be below the radar which the Fed uses in occasional bursts of fealty to one of its key mandates; Price stability. We want governments to run as much fiscal deficit as required to keep growth staying above levels where markets will be worried. We want enough money sloshing around as global capital to seamlessly oil the deals that make every bull live happily hereafter. The last one is a tough ask because the fat animal is so bloated that it can't have enough. Never mind.
In this mad, mad world which will soon come to be known as la-la land, the Gods of inflation must be crazy to not do enough to let ordinary savers make a turn on their money by giving them real rates of returns on Treasury bonds. Or are they so wily that they are biding their time to strike? After all, an ageing and fat bull could be more fun to have a go at.
In India, we have not been fortunate to get the Goldilocks economy. But we got the Goldilocks Market. Or so it seems.
It seems the earnings are rising, the business cycle is on the ascendant, policy is music to the ears and stock prices are rising. That is the Desi version of the virtuous lock. If you are to believe the media blitzkrieg in poll bound states, our welfare State has solved all the problems of its citizens. But then, such image building is the political equivalent of improving the valuation of the brand in question. Par for the course in pre poll build up.
Goldilocks Market may itself be an oxymoron. Markets love extremes. At extremes, there is always a convincing explanation, often from bright people (well compensated for the effort). If P/E ratio is up, the refrain goes that P/E is a wrong measure. Or that the inverse correlation between bond yields and P/E is the correct measure. Or else, some cute analytical model that a few smart investors claim to possess will tell you how stocks can go higher. Anything is acceptable as long as the conclusion justifies buying stocks. Unfortunately, extremes don't last forever, and the protagonists usually come up with other theories or go on to explore greener pastures of punditry.
In 1992, the infamous Harshad Mehta propagated the concept of replacement value. Then, there was the era of how blue chips can break free from the pack and hit the stratosphere. It might be instructive to know that blue chips of the day also included stocks such as Century Textiles and Great Eastern Shipping. How many of the new gen fund managers would agree that these could even have been light blue in colour?
Then, there was the craze for MNC stocks and the tech boom that we are all aware of. Some emerging icons from that era included Visualsoft and Software Solutions. They submerged. There was the infra and real estate boom and that is even more recent.
It may be convenient to argue that the stocks that evaporated from those cauldrons were of dubious quality and that giants like Infosys emerged stronger from the turmoil. That is very true and no taking away from that. One is well advised to look carefully as to how long Infosys took to regain the previous high and how much capital may have been wiped out from the peak in the interim for people who for various reasons had to sell.
Thus, the issue is not always about whether the markets are right when they get excited. At the present moment, there is enough good reason to be optimistic on a number of counts - On the prospects of a great business cycle in India; On earnings growth; On stressed assets of banks; On revival of investment spending. The market has been right in picking up many of these pointers and more.
The question is more about how high is high enough. That was always the question on previous occasions as well. Replacement value can be one insightful metric, particularly when inflation is high. Blue chips created wealth and so did MNC stocks. Tech has been just short of Nirvana for many, including investors. But then, some investors still managed to lose a lot investing into these themes - when they chose to be indiscriminate about prices and about timing.
Market discourse is driven by market participants which comprise of Fund managers (including Yours Truly), Analysts, Investment Bankers and such like. The common binding factor for this tribe is that they benefit from bull markets. Bear markets affect their earnings. It would help if a simple version of disclaimers is added to the discourse from the market men which says that they adore rising markets and their prayers are always with the bulls.
If the Goldilocks Market is a reality that is here and for good, then its definition may read something along these lines.
Goldilocks Market is a market in which the Fund Managers from the comfort of their home office instruct broker dealers who punch the buttons to buy stocks at all prices on the basis of encouraging commentary from companies who give guidance which will always be short of what they will report, so carefully calibrated that they cannot miss the same. It is a market in which Analysts will do such brilliant work on that guidance that they in turn come out with numbers that the companies comfortably beat so that they can revise the numbers higher forever, in a carefully selected approved list of companies that can make their paying clients comfortable and richer. It is a market in which bankers will help raise capital which will not dilute earnings because their models will convince all concerned that growth will always justify the capital raise. It is a market in which investment bankers dare not go into the earnings part of the earnings model of unlisted companies as they are not supposed to be measured by profits. It is a market in which policy makers can raise deficits and debt without causing any disturbance in rates or to inflation. It is a market in which the primary function of Central Banks is to ensure that they give such guidance to markets in which they retain the right to act but relinquish the right to keep that choice with them.
If only life were that simple.
It occurs to me that this kind of market exists in a very well-known location that no one has been to. That place is known as Utopia.
We have another word the comes close - jugaad.
Corporate India seems to be in performance mode. It is dancing to the chest beating rhythm of the permabull community of India.
1. How are profits going up when GDP is going the other way?
2. How could the markets have gone up, up and now away - when large sections of Indian society have been in distress?
3. How come our Covid graph is showing an inverted picture of that in the Wealthy West?
All the above are worthy of intense research of the jugaad at work. No claims to clairvoyance and to be sure, we are not into research on the subject. Indians are supposed to be born with the Jugaad Gene and let me try a recipe for putting some food for thought on the table.
Third question first. There are those who have already gone on the front foot and announced that 50% of Indians have antibodies. Yes - I heard the head of a think tank say this on National media!!!. Even with our supposedly superior capabilities to make impossible things look easy, no data supports this, and we should leave medical science out of our rope tricks. We don’t know whether we will have another wave and where we are on the eventual curve of the pandemic. Let us leave it for Scientists, Vaccines and God.
1. GDP has taken a hard knock. Even the revised (and less damaging) fall of 7.5% on output is a display of Gross Domestic Pain of a severe order. Let us not trivialise that.
2. GDP measurement is not through double entry bookkeeping. It uses many assessments and approximations and, in a sense, GDP in a country like India lies in the eye of the beholder or the statistician. To be clear, I am not alleging any attempt at distorting data - the process has limitations even for the developed countries and in India with its large informal economy, FY21 is not a statistician's delight.
3. GDP measures an average and, in this instance, it looks like Indian economy has behaved a bit like the hapless gentleman who was doing well on average with his feet immersed in boiling water and his head stuck in a piece of ice.
Brings us a bit closer to stitching together an explanation to the profit growth being reported by the companies that have created immense wealth in one part of the country known to us as India.
India seems to be in fine fettle, if we look upon it as the
closed ecosystem that consists of some 200 odd top companies,
their customers, suppliers, shareholders, employees and
cheerleaders. It stands to the credit of the players involved
that they have weathered the storm rather well. It is not as if
they got a special stimulus which they actually did not.
To begin with, these corporates and their brethren were not hurt by the loan mela fiasco of the UPA era as they did not borrow much. Then came demonetisation and this cohort never had a cash stash to speak of. They did not require much of the digital push as they were the ones pushing that juggernaut. When GST happened, they were already compliant while some of the competition did not know how to do business while paying taxes. The competition could not do multitasking on this one.
Finally, the visitor from hell came along through China - Covid.
The folks in India took to work from home like fish to water. We have to say that Indian jugaad came up trumps on this one. Lateral thinking seems to be the factory setting on which we have been wired.
Now another uncomfortable truth is coming out. Bharat may not have been contributing as much to the economy before Covid 19 as was being estimated. For a healthy change, Bharat is not just in tier three cities and villages and India does not stop at municipal limits. Bharat is that part of our nation which was not driving consumption, productivity and the so-called upward mobility. India expanded its footprint but may have never trickled down to Bharat in three decades of liberalisation. Bharat has been impacted severely in this recession, but India has soldiered on. In the last ten months, India saw demand go up - be it in painting the town red (actually in towns and villages as per the leaders in this activity), personal mobility, buying the gadgets that solve all of life's problems, buying homes that became affordable thanks to the squeeze or services that enable domestic infighting to continue unabated. The rather uncomfortable truth is that many of the smaller enterprises (not all) were not competitive enough and may have been a drag on the economy. It also transpires that a certain part of the overall labour force was redundant viewed from the standpoint of economic productivity.
In short, demand drivers are from India. At this stage, Bharat
makes up a lot of numbers but is not commensurate in output or
On the supply side, efficiency gains that were eked out by curtailing discretionary spending may have helped us learn some lessons in cost cutting sans the subscription.
The first one is that you can lock down the people, but economic
exchange cannot be shut down for long. Secondly, most business
travel was beneficial only to the travel industry. Thirdly, high
decibel marketing campaigns were not required against
competition which may not have existed in the first place.
Fourthly, some of the folks hanging around in offices were
ornamental and maybe the offices to keep them appear busy were
not really required to drive revenues.
The profit story so far has been underpinned on demand from India and the productivity gains that were borne out of adversity. Recessions benefit a few that can stand up to the carnage. In India, those are the listed leaders and the ecosystem that thrives on them. Their profits have edged up against all odds. If the tea leaves have a message, the outlook is strengthening as we try to make sense out of all this. The business cycle ahead may begin with positive surprises for many incumbents and the smart contenders. This could well last well into 2021.
What is next for Bharat ? We may see Bharat striking back when tomorrow comes. Bharat exposes the reality of a large under employment issue in India - what you may call disguised (un)employment. This will likely be a big challenge to the economy going forward as there are more voters in Bharat than there are in India. Besides, demand in India alone may not be enough to sustain the underlying aspirations - for the corporates and for individuals. Bharat cannot be left behind - both from an economic and certainly from a social angle.
The perennial optimists will have us believe that India will pull Bharat up when the recovery gains steam and everyone shall live happily thereafter. They may also aver that markets are saying so. That is the subject matter of the second question posed at the beginning of this piece.
The market left everyone speechless while sprinting up to the floor from which it came down by an elevator earlier on. It did not pause to stop and kept climbing. Market pundits who have egged on this rally are obviously nonchalant. They say we are not in a bubble. They say valuations measured on P/E miss the photo as interest rates have never been lower. Interest rates drilled down to negative territory in Japan three decades back. To put this in context, Japan was the most celebrated growth story in the world in the post War era. The mega low rates did not prevent the Japanese economy getting mired in a quagmire from which it is yet to come out fully. Japanese stock prices succumbed to the illogical acrophobia they were steered into. We saw something similar play out during the dot com bubble when technology stocks were certified as exempt from gravity.
Of course, the current refrain is that history is only for those who are old and/or out of sync. Jeremy Grantham made some remarks the other day about a stock market bubble. The bulls pulled out the analytics on that instantly. He has been bearish for a while and has got it wrong on the bull run of the last few years.
We note here that the average age of an Indian is less than 30. The average age of the market players (in India and elsewhere) could well be lower. Since markets are run by market men for the benefit of their types, a bullish trend is always a friend. Most investors have not been witness to trends that can also cause hurt.
1. Markets do not measure Gross National Happiness. They are
meant to price assets that the owners of capital (the rich) tend
to possess. Period.
2. In the current juncture, it is not clear whether markets are keen on measuring profits or cash flows. They seem to be content with beats of estimates which in the first place are primed to generate beats. Never mind. Liquidity takes care of the sceptics and spreadsheet is a revolutionary innovation for the market
3. Markets are not driven by good (or bad) analysis. Money drives markets. Money may not grow on trees but the US Fed seems to have effective printing machines however. The resultant liquidity has been the lubricant that has energised all markets. This has been the prime mover for the Indian market as well.
The humble observation here is that markets love extremes in their journey of price discovery. In India, they have been broadly right in sizing up the breadth and depth of the counter intuitive sweet spot that the listed corporates (those that are tracked - others don't matter) have stumbled into. Hence, anyone who calls this a bubble may go wrong for longer than he can afford the cost of indulging in such blasphemy. Market players love bull markets. Make no mistake about that.
At some point, the market may stop and look at where Bharat is. Bharat has a lot of people in it and such an introspection can only be postponed and not avoided.
For now, the dance of the bulls may continue into the night and it looks like we have a long night ahead. Just make sure that you carry your antidote for a hangover. For, the morning after has seldom been pleasant.
The fact that a period movie could have bust all sorts of box office records in the post-modern world was in itself an unexpected outcome. Was it the triumph of high tech in visual effects? Was it the melodrama of which there was less of it than in the usual Indian recipe? Was it the usual triumph of the hero over the villain which is almost axiomatic?
All these aside, there was something that was special. The winner-take-all manner in which events played out, mid-way and in the end. The winner has it all and the loser is left out in the stone age or was dead. The force with which the end game brings out the victor is truly seismic. The winner delivers the knockout punch in the most graphic (and gory) manner known to filmdom.
The market and the economy are displaying this characteristic to the fullest. Capitalism and market economies have no time for those who find themselves on the wrong foot. Is there a feedback loop at work here? (for better or not we do not know and may not care for now).
The latest market move has been perceived as one where no one seems to have made the bucks. Really? Mathematically, nothing can be farther from the truth. The wealth that has been generated has gone to someone's spreadsheet. The market may not be up by much if you refrain from the favourite pastime of some busybodies - annualising hourly moves and measuring what has gone up by how much from the worst moment of the market's life this year. But we are firmly at a new high and the market is as much about extremes as it is about the average.
There is one lesson from any recession that we have to focus on to understand the mind of the bull. Recessions are the ultimate clean up act in capitalism. For over a decade and more, India refused to do this but did the pandemic do it for us?
In other words, have we ended up eliminating all the marginal actors in a floundering economy who were a drag on growth? In the apocalyptic lockdown, there were companies that sold goods that consumers wanted to buy. For non-traded goods, the selling was even more intense and rewarding. It was as if there were two economies which were in play. In retrospect, India was always about many economies and not just even two. Unshackle the India that knows how to grow and leave the rest at least for now. That is what the system was reluctant to do and the pandemic managed to deliver.
IT sector for instance realised that the glass and steel monstrosities in which they assembled their raw material were a huge overkill. Capital goods companies found that e-tendering was not just a tool for confidentiality but for productivity as well. Consumer companies discovered that marketing spend as percentage of revenues is not cast in stone. Yoga trainers understood that their skill sets had nothing to do with their presence and the power of absence was a killer app. The biggest cost take out effort in history was engineered in the shortest possible timeframe. Free of cost.
This is what a recession is supposed to do. Which it seems to have done with finesse. Pardon me for not sparing a thought for the human cost. Unfortunately, market economies have always looked beyond wars, famines and all else in their path.
Economic cycles have often been powerful once the brutal clean up act is done. They will certainly last much longer than the shortest bear market in history and the quickest resurrection known to mankind after the original act.
It also stands to reason that the winners of this round will rule the morrow. The banks that raised capital will get the deposits and extend loans to the folks who may have the best intent and capacity to repay. The companies that have applied for the new PLI scheme are the ones that got their mojo to make such applications. The consumer czars who have delivered margins (if not top lines) are the ones who have a chance to grow when consumers go back shopping (online or by whatever means). We need not mourn the death of bus transport operators who were lugging reluctant passengers to destinations that they did not enjoy going to on journeys that were pointless.
All of this is good stuff. The stock market is not bothered about the few thousand companies that are struggling. It is bothered about the fistful of companies that are in the right place at the right time. That number may have shrunk a tad or two from earlier on in 2020. But Covid was only the highly destructive amplifier to a trend that started when crony loans were extended to pretenders in the name of free market years back. The seeds of destruction were sown long back.
Market economies deliver the financial equivalent of the cosmic cycle of good and bad enshrined in the Gita. India was a reluctant market economy but the pandemic may have pulled the fence from under it. The future looks much brighter when viewed from a five year horizon as against what passed off for non-growth in the last decade and change.
The extent to which the market has rewarded the winners is a point of discomfort. And then there is this problem of all boats rising with the tide. There will be air pockets and some nasty ones at that. There will be casualties and that is nothing new. These issues will be settled in the coming months.
The challenge for India is what it will do with those who could not keep up with all this. Many of them are in that position for no fault of theirs. Mao solved a similar problem in Chinese communism by redefining it. To be rich was to be glorious. The country moved on with no change in the colour of all growth henceforth. It continued to be red.
Are we so lucky in India? There are so many who are left behind. This is going to be the biggest risk to the bull charge. Of course other than the virus itself which seems to have been side-tracked in the USA (where it is the biggest comeback story other than the stock market). By vaccines yet to be administered and stimulus that draws from the empty.
To the banks who deliver negative real returns on diminishing savings? To the Central bank which has played on durations to get its controlling stakeholder cheaper money? To companies who have just realised that they can get more work for less by keeping away from offices and maybe even factories?
To an educational system that has pushed through a digital divide as a fait accompli? To a job market that may be in the middle of its biggest transformation ever on skill sets? To corporate honchos who have gained by talking about large capex but not putting their money where their mouth was?
These are questions that beg some answers when we go into 2021 in the hope that 2020 was the axiomatic annus horribilis. These questions may or may not impact the spreadsheets that are on overdrive to churn out FY22 upgrades. The market that was ahead of everything including the deadly virus in 2020 may not like to fall asleep on the wheel and find itself behind the curve.
On a cold morning a few millennia ago, in a battlefield in the Gangetic plains, one of the most famous and fair minded rulers from our lore faced the most decisive test of his Dharma. Yudhistira and his brothers were on the verge of losing the battle of their lives. Their guru Dronacharya was at his glorious best and was hitting the balls out of the park. Yudhistira was the Gold standard of his times on governance. He was the custodian of righteousness. Krishna, the Master of the Universe / Great leveller / Strategic Advisor, read the riot act to him. Winning is not important. Winning is everything. Soon, a hapless and unknowing battle weary elephant by name Ashwathama was collateral damage. Yudhistira made certain disclosures to Dronacharya with disclaimers lost in transit amidst the Dilli smog. The rest is, as they say, mythology.
The art of spin bowling was born in India.
Bishen Singh Bedi, B.S.Chandrashekhar, Anil Kumble and Muralitharan have gone on to be part of that legend. Stock market pundits are doing all of them proud. 23% drop in GDP was good as the worst is behind us. GST collections of over Rs 1 lakh crores in October is good because that is a perfect "V" shape. From where and to what point? Oh – don’t be a party popper. Talking of parties, those are good because the celebratory mood during the festival season signifies that all is always well. If such parties result in resurgence of the virus as the Europeans are learning, that will not be a negative surprise. After all, we can discount the vaccine that is yet to be born. We won’t lock down again. Once locked down, shy forever. Isn’t it? We are even opening colleges and schools you see. We are past the peak.
Going back to GDP, we will soon get the Q2 GDP. I bet that will be "better than expectations". When we got a 23% drop in GDP for Q1, the pundits were quick to mark down Q2. Data shows that Q2 has seen a good rebound in activity but the "market economists" have been unimpressed. How will we get "positively surprised" if they do so. Their clients want positive vibes all day long. Come Q4, and the positive surprise to GDP could go ballistic. Never mind that we lived through a month known as March 2020 when we were locked up in intense house arrest. The enterprising salesmen of our country could not do their usual hustling in the last fortnight of the last year and a very favorable base effect set in. But who cares? A beat in time is worth beating the hell out of those who got left out. We are in a world of "positive surprises". All that equities have to do is to dance to the beat. It is a market of the market men, by the market men and for the market men. Long live the beat.
If we thought we are alone in this fine art of spin bowling , think again. Americans are in a class of their own. Now that Joe Biden seems to have won the elections in the US, that is good. The Senate is still with the Republicans and they would reign in fiscal profligacy. Had Trump emerged the winner, that would have been good too. Who doesn’t want continuity? Did we teach spin bowling to Americans? Hard to make a case but who knows? We can be sure that there is Indo-American co-operation at work here.
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