In my April review of investment strategy, I had emphasized that
"the current crisis is unprecedented in the sense that it has seriously
impacted the liquidity, solvency and viability of a large number of businesses,
all at the same time. The number of businesses going out of business before
this crisis ends would therefore be much larger than the crises faced by global
economy in past 75 years since the end of WWII.
The only way out of this crisis is to inflate a colossal bubble
in asset prices, which is equally unprecedented." (for
full strategy review note see here and the presentation
of "the big call" could be seen here)
Incidentally, the global markets have been behaving mostly like
I have been anticipating. The central bankers world over continue to inject
billions of dollars in new liquidity almost every day. Consequently, the asset
and commodity prices are racing to pre COVID-19 period, despite there being
definite signs of recessions in the global economy. The more noteworthy part is
that the markets have been largely ignoring the warnings that recession this
time is not a post facto thing like on previous occassions; it is likely to be
there for much longer period than earlier anticipated.
I am not competent enough to make intelligent comments on the
economy and markets. Nonetheless, I do possess some wisdom collected over past
three decades of investing and studying economy and markets closely. I usually
find this small piece of wisdom I own, sufficient enough for making and
executing an investment strategy for myself.
I continue to believe that the inflation of bubble in global
asset prices will continue. I also believe that Indian assets will participate
in the global buoyancy but may not be able match the performance of its peers
due to a variety of reasons. The socio-economic conditions in India are
worsening at a fast pace and so far there is no hint of any reversal. At this
pace, the economy may take much longer to revert to a sustainable growth path
of 5-6%, than presently estimated. The rise in Indian asset prices will
therefore be mostly dependent on the global events and liquidity. Hence, the
volatility and risk may be much higher than usual.
In this context, it disturbs me to note that since the lockdown
was implemented from 25 March 2020, the smaller companies (small cap) have
outperformed the benchmark Nifty by a whopping 34%. Incidentally this is the
segment of economy which is worst affected by the demonetization, economic
slowdown, GST, and COVID-19 induced lockdown. The outperformance of this
segment is worrisome to the extent that it is commensurate with the facts that
domestic flows have receded materially and foreign flows have dominated in past
5-6 weeks. The conventional wisdom is that foreign investors usually invest in
large cap liquid names. I am therefore inclined to suspect recurrence of some
malpractices by the broker-promote-financier cartel.
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I shall totally avoid this space no matter how much my sense of
greed incites me.
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