Vijay Kumar Gaba

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. 

It has been over five year since I visited a local garbage dump in West Delhi. The visit was a revelation in many respects. A casual discussion with the rag pickers exploring the heaps of stinking garbage to collect pieces of paper, plastic and metal, was quite enlightening.

Out of seven people diligently scanning the dump, three were children under the age of 14, including one girl, and three were youth in the age bracket of 19-27. On being asked why they chose to do this menial, risky (health wise) and stinking job, when they have relatively decent options like pulling a cycle rickshaw or even driving an e-rickshaw, working at a nearby auto garage, cleaning cars in nearby housing societies etc., the youth politely answered, "We are doing this job for past 12-15yrs. How could we change it now." On prodding further, one of them admitted that many of their peers live on hope that "Someday they will find treasure in the garbage. More years you have put into the job, the greater the chances of you hitting on a treasure." Though, the best they could cite of a treasure find was a gold bangle found by one of their seniors 8yrs ago.

The discussion did two things to me: (a) it prompted me to drop the search of the lost earring of my wife, which she thought could have been dumped there with the daily kitchen waste, with the hope that it may complete the treasure hunt of some child; and (b) raised numerous pertinent but disturbing questions in my mind.

I am reminded of that instance today, because in the past three weeks I have come across an unprecedented number of “regretting stock traders”. Incidentally, they are regretting buying; not selling; and not buying the stocks of the same business group in a span of three weeks.

·         Some are regretting buying Adani Group stocks at a high valuation in the past one year.

·         Some are regretting not selling Adani group stocks on 25^th January itself, when the Hindenburg research first appeared on social media and stocks were down just 3-4%.

·         Most are regretting not buying Adani group flagship, early morning on 3^rd February when it was locked at lower limit and went on to rise over 100% in the next three trading sessions.

My three decades of experience in studying financial markets and investors’ behaviour indicates that regret of missing an opportunity to buy or sell could be perilous for traders. This usually leads to development of severe FOMO (fear of missing out) syndrome amongst traders. Suffering from FOMO syndrome, traders take impulsive decisions, commit serious errors, incur material losses, and violate their trading strategies & plans.

Over the past three decades I have seen numerous cases of traders losing their entire capital in hunt for one elusive “20% gain in a day” opportunity. Just like the rag pickers, these FOMO patients have heard folklore of some veteran making a fortune from extreme market volatility. They are also anxious to see their names on the hall of fame of the stock markets.

In the past one decade itself, we have seen numerous instances where traders have burnt their hands badly in their attempt to make some quick gains. JPA Group, ADAG, IL&FS, DHFL, Yes Bank etc. all made traders regret the “opportunity” on multiple occasions; infected them with FOMO syndrome and caused material erosion in their wealth.

I am definitely not suggesting that Adani group is taking the same route as JPA or ADAG which incidentally had similar profile, asset base and cash flows. I am just suggesting please do not regret and avoid FOMO. It is injurious to your capital

In the past one century, Drug lords in the Latin America; Italian mafia in the USA; war lords of the Africa and Arab world; Russian oligarchs; Japanese Zaibatsu; Australian media moguls etc. have perhaps been as popular with the media and entertainment industry as the intelligence agencies like CIA, KGB, Mossad and MI6. It is widely acknowledged that they did exert influence over political establishments, judiciary and financial systems in their respective jurisdictions; and many a times even beyond that.

In the post global financial crisis era, some entrepreneurs have emerged as the center of power. Historically, the large entrepreneurs have been influencing policy making, but their domain of influence was mostly limited to the policies relating to trade and finance. Geopolitics, for example, was usually not on their agenda. However, it seems to be the case, no longer. The corporate czars are now widely believed to be influencing politics, geopolitics, trade and finance, with impunity. The media and entertainment industry is obviously enamored with these new lords of the universe.

The struggle between the traditional houses of power and the emerging power centers is visible in many countries. The authoritarian regimes like China, Syria and Iran etc. have acted strictly and materially restricted the sphere of influence of the merging czars. European communities are also trying to check the growing influence of social media and other technology enabled business with pervasive influence over society and politics. Other jurisdictions like India are also trying hard to restrict the area of influence of global social media and ecommerce majors.

The acquisition of social media platform Twitter by the maverick entrepreneur Elon Musk should be seen in this context, in my view.

A significant transition in the power structure is also visible in India. I am highlighting this since I find it important from my investment strategy viewpoint.

Large business families have always enjoyed significant socio-political power in India. The families like Tata, Birla, Bajaj, Modi, Shriram, Sahu Jain, Bangur, Poddar, Singhania, Goenka, Wadia, Kilachand, Dalmia, Lal Bhai, Sarabhai, Murugappa, Thapar, Kirloskars were powerful, had political influence and made significant social contributions in the area of education, health and religion. Patriarchs from many of these families took part in the freedom struggle. However, their domain of political influence post-independence was mostly limited to the policies concerning trade and finance.

These powerful businessmen have never been known as the key drivers of consumption patterns, financial markets, foreign relations and geopolitics.

Of course the financial markets were not much developed when they reigned. The development of Indian equity markets started in true sense with FERA dilution of MNCs. It was incidentally the same time when the legendary Dhirubhai Ambani entered the public equity space. For more than one decade after the FERA dilution and Reliance IPO, the equity market was mostly dominated by MNCs like HUL, Nestle, ITC, Castrol, ACC, Cadbury, Reckitt Colman (now Benckiser) etc. Abolition of Capital Controls and permission for foreign portfolio investors to invest in the secondary market in 1991 started the journey of Indian capital markets in true sense.

Late 1990s was the era of professionally managed technology companies and private banks. For the next two decades, these businesses dominated the markets. These businesses were not particularly known for exerting any political influence or influencing the markets. The businesses, and not the person behind the business, dominated the narrative. For almost two decades, the Indian markets did not like the so-called oligarchs. Most of the post-independence oligarchs (many factions of Birla clan, Modi, Singhania, Dlamia, Sahu Jain, Lalbhai, Kilachand, Sarabhai etc.) had already diminished materially post 1991 liberalization. The remaining ones like Tata, factions of Birla, Bajaj, and emerging ones like Ambani, etc mostly underperformed the MNCs, technology and private banks.

But what has been happening since the past five years is something very new to the Indian markets. It is not the businesses, but the oligarchs who are driving the Indian markets. It does not matter what these Oligarchs do. They may be in the business of commodities (coal, copper, aluminum, steel, carbon, oil, gas etc.); technology, automobile, power, retail, financial services, food processing, textile, retailing or e-commerce etc. The market is being driven by the person behind the business, not the business itself. Valuations are being placed on the persons (Oligarchs) rather than the business. The argument is that “this person” can turn dust into gold, so paying silver for the dust is not a bad deal.

I am confused by the transformation in the market. This is something very new for me. I am not sure how this will end. Whether the dust will turn into gold; or silver will turn into dust – we would only know in hindsight. Nonetheless, I am sticking to my old methods for now – focusing on businesses and ignoring the personalities.