Before going on the Diwali break, I had mentioned some of the investment strategy challenges (see here) that a tiny investor like myself is facing due to sharp divergence in the macroeconomic evidence and market performance. Speaking specifically in the Indian context, the macroeconomic evidence is not particularly strong to support the investors’ enthusiasm.
The market participants are spinning new stories to overcome every new challenge. For example, consider the following—
Overheated consumer credit market
Last month, the Reserve Bank of India expressed concerns about the overheating consumer finance market. His statement read, “Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest.”
It is pertinent to note that the “Personal loan” segment of the overall credit has been growing at the fastest pace in the past eighteen months. In particular, the credit card outstandings witnessed over 25% growth in this period, as compared to the about 15% growth for the overall credit.
The unsecured personal loan growth has come on the back of mostly stagnant real incomes for households, declining personal savings, a sharp rise in household energy, education, and healthcare inflation, poor consumer non-discretionary spending growth, and strong discretionary (mostly aspirational) spending. Obviously, the unsecured personal loan growth is unsustainable as it is accompanied by a deterioration in the servicing capability.
The Governor’s concerns were ignored by the lenders as well as borrowers, forcing the regulator to take strict measures to put a leash on the runaway consumer credit growth. Last week, the RBI increased the risk weights for the consumer credit exposure of banks, NBFCs, and credit card outstandings, lowering their lending capacities.
In light of these developments, the natural reaction of the markets ought to have been “caution” on consumption and consumer finance. The actual market performance is however nowhere closer to this assumption. As against ~8.7% YTD rise in the benchmark Nifty50, Nifty Auto has risen ~33%, Nifty FMCG has risen ~19%, and Nifty India Consumption is higher by ~16%.
Belying the expectations that some part of the unsecured consumer loans is being used to facilitate margin trading in the stock market, and this segment could get impacted materially, in the last week, NSE witnessed the highest average daily volume in the past six weeks.
Moreover, the Realty sector should be impacted materially by the stricter norms for consumer loans and restrictions on the lending capacity of the lenders, is the best-performing sector YTD, with Nifty Realty rising over 60% YTD and ~4.5% in the past week.
Instead of reducing exposure to the financial sector per se, the market participants seem to have moved some exposure to non-lending financial companies like Insurance companies, asset management companies, etc. This sounds even more counterintuitive, considering that insurance and savings in mutual funds are mostly a discretionary option for Indian households.
Ignoring the impact on consumption and the deteriorating debt servicing profile of households, rating agencies have chosen to focus on the stronger risk-absorbing capacity of the lender due to RBI’s restrictive move. They have also ignored the impact on profitability (hence a case for de-rating) as the growth in the most profitable segment gets restricted.
Ignoring bad news
The market has been ignoring all the negative news flows about a leading business group for the past many months. It also ignored the banning of two key products (contributing 19% of its customer base) of a leading consumer lending company for non-compliance, arguing it is a short-term concern. The market has received positively all news relating to the divestment of government’s stake in PSEs through FPOs, taking advantage of unsustainable high prices, ignoring the total failure to make even one strategic disinvestment. Multiple disasters in Himachal Pradesh, Uttarakhand, Sikkim etc. have not evoked any change in the estimates for spending on road and hydroelectric projects. Not many appear to have made revisions in USDINR estimates due to the worsening current account position.
…and latching on to hopes
The minister made a random statement that the government is planning to start 3000 new trains to make sure that everyone gets a confirmed ticket. The railways related stocks zoomed 5-20% on this statement. No one questioned where these 3000 new trains would run? Could the existing rail infrastructure support so many new trains when we are hearing about one train accident almost every week. The dedicated freight corridor projects have been running late for many years. The Udhampur-Kashmir valley train project is running behind schedule for about two decades. How much time would this new plan take to implement is anyone’s guess.
Moving away from the core
Not long ago, divesting non-core business was a major re-rating argument for many stocks. Recently, many companies have announced diversification into unrelated businesses; but the market participants have either ignored such diversifications or built arguments to support these. For example, an adhesive manufacturer and a metal pipe manufacturer have started lending business but the market appears nonchalant about this. A few years ago, an electric appliance company starting an NBFC was punished so severely that it had to abandon the plans within months.
Under these circumstances it is a serious challenge to stay calm – not get carried away by the market momentum; overcome FOMO; and find appropriately valued stocks for small investors with limited resources and information. It is a daily struggle to suppress the demon of greed; face the agony of a sharp underperformance as compared to the peers, who are swimming with the current; and be content with a reasonable (and sustainable) return.
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