“No one was ever lost on a straight road.”
The conventional wisdom guides that roads are meant for moving
forward; ropes are meant for tying and anchoring and trampolines are meant to
get momentary high without moving an inch forward.
Usually, the chances of reaching the planned destination are highest
if the traveler takes a straight road. Similarly, the chances are least if you
just ride a trampoline. Walking on ropes may sometimes give you limited
success.
The developments in global financial markets in past couple of
weeks highlight that presently very few persons are interested in taking the
straight road. Though there are many, like the legendary Warren Buffet, who
continue to vehemently advocate this path, most may find this path long and
boring.
The market reactions to past two Fed statements, RBI action on
Monday evening, Infosys results last week, and government’s announcements
regarding proposed changes in natural gas pricing policy all suggest that
jumping on trampoline is the most preferred activity these days amongst
investors.
The central bankers across the world are seen preferring to walk
the tight rope. US Federal Reserve is focused on employment, BoJ is focused on
deflation, ECB is focused on maintaining integrity of Euro and RBI is focused
on price levels. All of them claim reasonable degree of success in achieving
their limited stated objectives.
But what about other problems? For example, RBI did manage to
control prices and might also be able to stem the INR slide beyond Rs60/USD
level in the short term. However, in the process, it lost focus on
deteriorating growth, employment, asset quality, and consequently financial
stability. Having lost critical time and exhausted most policy tools, RBI may
soon find that it has reached the end of rope without falling, but it means nothing.
Investors may too find it in due course that by jumping up and
down with every bit of news (actually not only NEWS, but on casual remarks of
Bernanke et. al. made at random symposiums) they are only losing their vital
energy and time without moving an inch forward.
In simpler words, we suggest that investors should take a
straight road howsoever long, boring or painful the journey may be. Invest in
businesses that are likely to do well (sustainable revenue growth and
profitability), generating strong cash flows; have sustainable gearing; timely
adapt to the emerging technology and market trends, and most important have
consistently enhanced shareholder value.
Expecting next policy move, especially in the current
environment, is fraught with high risk. Historically, the business that are
impacted by volatility in policy formulation, have seldom rewarded minority
shareholders – public sector enterprises being the best examples.
The economic recoveries have never occurred when over half the
corporate balance sheets are under extreme stress. This stress therefore has to
consolidate in fewer hands. Financials therefore will see much worse days going
forward. Our target ‑ Sub-8000 on Bank Nifty in next one year.
Thought for the day
“There is no good in arguing with the inevitable. The only argument available with an east wind is to put on your overcoat.”
- James Russell Lowell (1819-1891)
Word of the day
Fribble (v):
To act in a foolish or frivolous manner; trifle.
(Source: Dictionary.com)
Shri Nārada Uvāca
Manish Tiwari perhaps forgot that a large part of our population lives on Rs17/day. Therefore, Rs.5 is indeed a big deal for an average Indian.
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