"Destruction, hence,
like creation, is one of Nature's mandates."
—Marquis de Sade (French,
1740-1814)
Word
for the day
Brinkmanship (n)
The technique or practice of
maneuvering a dangerous situation to the limits of tolerance or safety in order
to secure the greatest advantage, especially by creating diplomatic crises.
Malice
towards none
Since we do not have any
major election till October, let's bother about UK elections!
First random
thought this morning
These days, 1.25bn Indians have
got a variety of spokespersons.
Earlier it used be only
politicians speaking for all Indians. But now days, anyone and everyone who has
a social media account, thinks himself entitled and empowered to speak at
behest of all Indians. So much so that people do not mind blatantly
generalizing their bedroom and bathroom experiences and habits to all 1.25bn
Indians.
One such spokesperson, for whom
India means South Mumbai and the road from there to Sahar International
Airport; and vacations in India mean annual visit to Shirdi, was heard saying
"Indians are habitually unpunctual", "Indians are habitually
dirty", "No Indian wants to voluntarily repay his debt", and
much more.
Few things are certainly different this time
With benchmark indices ruling
close to their all time high levels, valuations flirting with red lines, and
broader markets showing distinct signs of accumulated froth - this is the time
in a market cycle when most people volunteer to suffer from a certain degree of
cognitive dissonance. "Cautious optimism" is the euphemism normally
used to explain the phenomenon.
This a time when I get uncomfortable with valuations and run away
stock prices, but at the same time do not want to be left behind. Just like any
addict, I choose to feel guilty and but keep indulging. "This time it is
certainly different" is my chant to get over the guilt. I am sure, I may
not be alone in my predicament.
Having pleaded guilty, I must say that there are few things that
are different in Indian markets as compared to the situation during the global
financial crisis (GFC) in 2008. These differences assure me that we may not see
market collapsing, the way these did in 2008 and 2009. For example, consider
the following structural changes in the Indian stock markets:
(a) Risk management
standards are much better now as compared to 2008. Back then more than 80%
derivative positions were in individual stock futures (considered to be most
risky), while less than 10% positions were Nifty options. Today the situation
is exactly reverse. This means, the chances of a 5% single day fall in Nifty
are just a fraction of what it used be in 2008. For record, in Nifty we had
over sixty moves of 5% or more in a single day between 2007-2010. We have none
since then. Even 3% single day moves have been rare in past seven years.
(b) The volatility has
subsided materially. In past three years India VIX has averaged below 15, vs
over 35 during 2007-09.
(c) The Indian financial
markets have seen stupendous growth in institutionalization. From a mere
Rs3.26trn in 2007, the asset under management of domestic mutual funds has
grown to 19.26trn (30 April 2017). The number of folios in equity mutual funds
schemes have almost doubled since then to 45million. Add to this the growth in
PMS and Pension funds, the growth looks even more impressive.
What it essentially does is to rationalize the investor behavior.
The cases of panic selling and buying get minimized. The corporates are forced
to become more accountable. Today more than 25% of the companies traded on NSE
hold quarterly analysts meet/investor conference call against less than 3% a
decade ago.
(d) Another important
change is the rationalization and stabilization of long term market returns.
Notwithstanding the high returns seen in broader markets in past couple of
years, long term Nifty returns have now mostly normalized closer to nominal GDP
growth rates. The 5yr rolling Nifty CAGR ranged from -3% to 41% during
1995-2007. The range has moderated to -1% to 13% in past five years.
So the benchmark indices are at least running close to economic
realties.
Long term Nifty returns rationalizing
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