One small cap solar PV module manufacturer stock has yielded a return of 100x in less than two years, since its IPO listing in October 2022. There are many other “clean energy” stocks which have witnessed 5x to 20x rise in their stock prices. In most of these cases, the improvement in business and financial fundamentals of the concerned company is not commensurate with the rise in the stock price.
Sustainability has emerged as one of the major investment themes in the post Covid-19 period. Businesses engaged in the activities related to renewable energy and electric mobility have received substantial massive investments and have seen massive rise in capacity building. Nonetheless, the astronomical rise in the stock prices of companies engaged in basic manufacturing like solar PV cells, EV battery modules, electric scooters, etc., may not be sustainable.
This reminds me of my favorite instance from the Hindu mythology. I have narrated this instance many times before. Let me do it again.
“Once the forces of good (gods) and evil (demons) had a protracted battle. The battle lasted so long that both the groups exhausted all their resources and valor. Completely tired, wounded, frustrated and exhausted, they approached the Savior, Lord Vishnu. The Savior advised them to go and explore the great ocean (Sagar Manthan) to find new resources and vigor to make a fresh beginning.
Following the advice, both the groups went to the great ocean and explored it extensively. During their exploration they discovered a huge amount of wealth and resources that included the Amruta (nectar of the gods) that would immortalize its consumer and Vish (venom) that would destroy whoever consumes it.
Realizing that if demons get the access to Amruta and other resources found during the exploration, it would seriously jeopardize the interest of gods, Lord Vishnu tricked demons and appropriated the entire nectar for consumption of gods.
Lord Vishnu also requested Mahadev, Lord Shiva, to absorb the venom so that it does not harm anyone and the balance of the universe is maintained. Obliging, Lord Shiva drank the entire venom and preserved it in his throat.
Post this, gods became more powerful. But whenever they deviated from the path of common good, they were overpowered by demons and dethroned. Each time only after a great deal of repentance they would be rehabilitated with the help of Lord Vishnu, Lord Shiva or the Mother Supreme.
Over the years I have realized that it is not just a mythological story, emphasizing the victory of good over evil, to be heard during religious ceremonies and forgotten immediately thereafter. It is much more. This applies to all aspects of life, even economics.
The ocean exploration mission (Sagar Manthan) is basically a collaborative research effort to find solution to a problem that afflicts all alike, e.g., a prolonged war like World War, a pandemic like plague, smallpox, HIV AIDS or COVID-19, or a major economic crisis like great depression. The experts collaborate to find solutions like vaccines, hygiene products, UNO, Nuclear deterrents, globalized markets, etc. to mitigate the losses and prevent recurrence of such problems.
In modern economic parlance, ocean exploration is akin to the period of recessions followed by irrational exuberance, fiscal and monetary profligacy, and household extravagance.
When all the participants get tired, frustrated and exhausted from a significant economic weakness, collaborative efforts are needed to stimulate the economic activity. At this time all the stakeholders muster courage, and supported by the 'authority', they do things they would not do in normal times. Invariably, this effort involves excessive and seemingly irrational borrowing, investing and spending. Capacities are built to the scale which are unfathomable during normal times. Usually this drives the asset prices to levels that cannot be explained or justified by conventional methods. These unexplained phenomena are generally described as “bubble” in market parlance. The nectar or the good that emerges from these bubbles is shared by all. However, the venom is consumed only by the financial investors who invariably end up poorer after these bubbles burst.
The financial assets' prices correct upon bursting of bubbles but the productive capacities built during the bubble phase stay for long, supporting and promoting growth and development.
If you are not able to correlate to what I am saying - imagine would India be a ITeS superpower without Y2K or technology bubble during late 1990s! Had we built so many houses, roads, malls, power plants, cement plants etc. during the decade of 2000s but for a subprime credit bubble! Would capital be so easily and cheaply available to Indian entrepreneurs without a QE bubble in the west! The capacities built during these bubbles shall continue to support India's growth and development for long, even though the financial investors lost significant fortunes during 2001-02 and 2008-09 burst periods. Most of the entrepreneurs who built large capacities (power plants, roads, ports, airports, mines, steel plants, housing, etc.) ended up bankrupt or financially weaker, but the capacities they created are benefiting the society.
The global shut down due to Covid-19 in 2020 necessitated the latest round of Sagar Manthan (Ocean Exploration). Sustainability became the key theme of development, attracting massive investment, disregarding the sustainability of the investment itself. A bubble-like situation is developing in the sector.
Like the earlier instances, the renewable energy and electric mobility capacities built in this decade will benefit society for long. However, the financial investors who are investing in the companies building these capacities at valuations driven mostly by ‘hope’ and ‘euphoria’ might suffer for long. Mahadev of economy (financial investors) must prepare to absorb vemon, once again.
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