Some food for thought
"In all my years of baseball, I have always expected to be
traded. I never liked the idea."
—Jackie Robinson (American Athlete, 1919-1972)
Word for the day
Hoggery (n)
Greedy behavior.
First thought this morning
In a federal democracy, the disputes between the federal and
provincial governments are neither unusual nor unexpected. It is perfectly
alright for the provincial governments to use all means available within the
perimeter of the constitution, to secure maximum federal resources and
concessions for the people of the province. It is also the duty of provincial
leadership to protect the interests of the provincial employees and officers.
The events that took place in Kolkata in past few days may look
bizarre, but these were certainly not unprecedented.
In January 2014, we had seen very similar scenes in the national
capital when the then CM Arvind Kejriwal sat on a dharna demanding action
against two policemen, and actually resigning from his post on that pretext.
Last summer, he again staged a dharna in the office of Delhi's Lt Governor,
apparently over a rift between the IAS officers and the Delhi government over
an alleged assault on Delhi Chief Secretary in CM's house.
The difference however was stark in the reaction of other
political parties; especially the Congress party (INC). INC had badly
castigated Delhi CM's protests as anarchist, while it is now supporting West
Bengal CM whole heartedly.
Before that, MGR (1982) against center's refusal to allocate
more rice to the state of Tamil Nadu; Jayalalitha (1993) against Karnataka
state refusing to release agreed quantum of Cauvery water; Shivraj Singh
Chauhan (2014) protesting against inadequate relief from center for farmers;
and Chandrababu Naidu (2018) demanding special category status for the divided
state of Andhra Pradesh - protested by sitting on dharna.
In past there have been many instances of state governments
calling statewide bandh to protest against center's policies or pressing their
demands.
I am not taking any sides in the latest dispute. Just
highlighting that this is nothing new, and people should not be worried about
the future of democracy in the country.
Chart of the day
Benchmark diverging from broader market - No change in strategy
In past few weeks, the divergence in performance of benchmark
indices and broader markets in past six months, has been a matter of intense
discussion amongst market participants. Post August 2018 highs, BSE Sensex has
fallen about 6%, whereas BSE Midcap has corrected ~14% and BSE Small Cap has
corrected ~20% (till 05 February 2019).
This divergence has divided the market into various camps. For
example—
1. The fearful are
capitulating, and looking to completely exit the mid and small cap portfolios.
Some of them are even considering changing the asset allocation to underweight
equity exposure altogether.
2. The greedy are
looking for bargains in the stocks that have fallen dramatically in past few
weeks in particular.
3. The rationalist
are arguing for maintaining the asset allocation in equity and keeping the
portfolio well diversified, regardless of the recent underperformance in
broader markets.
4. The opportunists
are looking to increase exposure to mid and small cap stocks that have fallen
unduly, purely due to poor market sentiments.
In my view, the recent skew in performance of stocks calls for
no change in investment strategy. It is important to note that for the market
cycle (End February 2016 to current) the performance of the benchmark and
broader markets is almost the same. Since February 2016 lows, BSE Sensex has
gained ~59%, whereas BSE Midcap is up by ~51% and BSE Small Cap Index is higher
by ~43%. Therefore, the recent sharp correction in mid and small cap is nothing
but the mean reversion to normalize the outperformance during 2017-18.
Another pertinent point to examine is whether the performance of
benchmark and broader markets can diverge further.
In my view, the answer to this question would depend upon a
number of factors, for example—
(i) Whether the
contagion in debt market could be contained to a few names or it will spread
further to engulf more companies.
(ii) Whether the
political conditions post May 2019 are good enough to sustain the confidence of
investors, or fear of instability will precipitate a fresh round of panic
selling.
(iii) Whether the
global economic conditions deteriorate due to Brexit and trade conflicts
causing widespread "risk off" trade.
While these are all unknowns as this point in time, nonetheless
the market performance during January 2008 to March 2009, when somewhat similar
situation prevailed, could be a good basis to make forecast about next
6-12months.
This 15month period saw BSE Sensex returning (-)54%, while BSE
Midcap (-)67% and BSE Small Cap (-)73% did much worse.
I have made one more observation. Most market participants are
comparing the stock price performance in isolation to judge the performance of
stocks in various categories.
In my view, this could be seriously misleading exercise. The
stock price changes could be result of equity dilution, changes in balance
sheet leverage, some corporate action etc.,
I believe, to find opportunities in distress, it would be better
to evaluate the stock price correction, in conjunction with changes in
enterprise value (changes in debt, cash and market capitalization), changes in
profitability etc.
For example, other things remaining the same, if the stock price
of a company has fallen by 80%, but the enterprise value has fallen by just
25%, that means that the debt of company has risen materially in this period
and therefore the stock may not be that attractive as the fallen stock price
may show in isolation.
The following tables show some indicative data for the top 20
losers and gainers out of the most liquid NSE listed stocks (stocks traded in
F&O segment). Investors may ask their respective advisors to research
further details.
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