Vijay Kumar Gaba

If we cut the noise and overcome our recency bias, Indian stocks have given a decent return over the past five years; though this period had been particularly eventful. We witnessed the worst pandemic in over a century crippling the world. A variety of economic and geo-political conflicts impeded the global economy. The financial markets witnessed unprecedented liquidity deluge that led to over US$20trn bonds trading at a negative yield; followed by sharp monetary tightening. The world moved from severe deflationary conditions to sharp inflationary spikes. Central banks cut the policy rates close to zero (even below zero in some cases) and then hiked the rates at the fastest speed in five decades.

In the domestic economy, we saw macro parameters like inflation, fiscal deficit, current account deficit etc. worsening sharply. We witnessed a monetary easing and tightening cycle. Banks went through a massive credit cycle.

The benchmark Nifty50 has yielded an 11.4% CAGR over the past five year (January 2018- December 2022). IT Services (19.6% CAGR) is the only sector that has meaningfully outperformed Nifty50 over the past five years. The sectors that should have theoretically benefitted from abundant liquidity and low rates like Auto (1% CAGR) and Realty (4.5% CAGR) were actually amongst the worst performers, failing even to match bank deposit returns.

The market breadth has not been great. The broader indices like Nifty 500 (10.2% CAGR) actually underperformed the benchmark Nifty50 (11.4% CAGR). In fact Nifty Next 50, that represents the set of 50 largest stocks next to Nifty50, underperformed massively with just 6.4% CAGR. Banks (11% CAGR) and Metals (11.3% CAGR), that many might think to be massive outperformers have performed just in line with the benchmark Nifty50. 

If we observe only the benchmark indices, the situation appears calm and simple. However, the story beyond benchmark indices is quite revealing. For example, consider the following facts:

• Only 384 stocks (out of 1428 actively traded stocks on NSE), have outperformed the benchmark Nifty50 over the past five years.
• 54% stocks (770 out 1428) gave a positive return during the past five years, while 46% (658 out of 1428) yielded a negative return over the period of five years.
• The top 100 stocks gained 267% to 6299% during the past 5 years. These include a variety of stocks, largecap, microcap, midcap, chemicals, textile, infra builders, power, metals, FMCG, ERD services, entertainment, NBFCs, pipes, cables, industrials, pharma, etc. The list however excludes banks, top IT services, and PSUs.
• Over 270 stocks lost more than 50% of their value during these five years.

The primary idea of this analysis however is to assess two things:

1.    Do we have a secular trend in the Indian equities?

2.    Do we have significant pockets of froth in the markets?

The answer is:

We may have a secular trend in the Indian equities. The trend is deepening and widening of growth. A large number of sub sectors from the economy – Materials (metals, chemicals, building material, energy, textile, paper, sugar etc.); industrials; utilities (power, telecom); infra builders and owners; consumer (discretionary, durable, staples and internet); healthcare; financials (lenders, non-lenders and service providers); IT services (engineering, digital, cloud, conventional software, BPO) etc. are now participating in growth together. The market is neither sector specific nor segment (large cap, midcap etc.) This had happened briefly in the early 1990s only. This trend could actually be reflective of some structural changes in the economy per se. Of course an intensive research would be required to confirm this.

There does not appear to be froth in any pocket of the market. Though there may be cases of some individual stocks that are still in the process of normalization post the bubble burst.

The latest correction therefore could be a good opportunity to increase exposure to the Indian equities.

 योगस्थ: कुरु कर्माणि सङ्गं त्यक्त्वा धनञ्जय |

सिद्ध्यसिद्ध्यो: समो भूत्वा समत्वं योग उच्यते ||2:48||

Be steadfast in the performance of your duty, O Arjun, abandoning attachment to success and failure. Such equanimity is called Yog. (Srimad Bhagavad Gita, Chapter 2 Verse 48)

One who prudently practices the science of work without attachment can get rid of both good and bad reactions in this life itself. Therefore, strive for Yog, which is the art of working skillfully (in proper consciousness). (Srimad Bhagavad Gita, Chapter 2 Verse 50)

In the present times, ‘politics’ is a struggle to find balance between economics and popularity.

Good economics (fiscal prudence; balanced monetary policy; equitable taxation; etc.) usually does not get popular votes. Whereas poor economics (subsidies; helicopter money; unsustainable incentives like tax concessions, lower rates, subprime credit; etc.) may get popular votes in the near term, but it creates enough problems (inflation, unemployment, lower growth etc.) for the people as well as politician in power over mid to long term.

Unfortunately, most modern day politicians show a natural bias towards popularity over economics as it helps them in gaining and retaining power. Recent visits to three states going to elections in the next couple of months has shown that Indian politicians are no exception to this general rule.

Politicians from all parties are promising a variety of freebies to lure the voters. Free electricity and direct cash in the bank accounts of adult women are two most popular promises. Aam Aadmi Party (AAP), which is governing Delhi presently, is showcasing the Delhi model of governance (free electricity and improvement in public education) in these states and gaining support. In fact it is emerging as the main contender in Punjab and a strong challenger in Uttarakhand. The principal opposition in UP (Samajwadi Party) and Uttarakhand (Congress) have certainly taken a few leaves out of theAAP book. In UP and Uttarakhand, the ruling BJP is apparently seeking votes on the issues of good governance and development. However, on the ground, emphasis on subsidies, freebies and revival of Hindu nationalism is conspicuous.

My interactions with people in these states indicate that no party in Uttarakhand and Punjab may get a decisive mandate; though Congress seems to have a marginal edge in Punjab. In UP BJP may retain power with a clear majority, though its tally may be much lower than 2017 elections. If I may summarize the input received from various media reports, opinion polls and other sources, the other two states, i.e., Goa and Manipur, may also see an indecisive mandate.

In all the states, religion and caste remain key considerations for most political parties. In UP and Uttarakhand, predominantly Hindu states, all parties are vying with each other to prove themselves more Hindu than the others. The constitutional mandate of “secularism”, that used to be a key theme of non BJP parties in previous elections, is conspicuous by its absence from the main narrative.

Unsurprisingly, however, none of the parties seems to be concerning itself with the teachings of Hindu scriptures. For example, the above cited two verses of Srimad Bhagavad Gita, propound some quintessential qualities for the leaders (or politicians in modern context), viz., steadfastness in pursuit of righteous duty, equanimity, equipoise, and detachment.

The Lord says perform your righteous duties without bothering about success or failure; without attaching yourself with the results. Listening to what Lord says, the politicians today must be pursuing Good economics – adopt policies which would bring the prices down, create productive employment, make taxation equitable, and make growth inclusive and sustainable, even if pursuit of these policies does not fetch enough votes.

It is not that various governments have always ignored this guidance and pursued only poor economics. But they have definitely always shown a bias towards poor economics. Usually, the governments resorted to good economics only when it was inevitable, i.e., when the economy faced a serious crisis, e.g., Congress in early 1990s and NDA in late 1990s and early 2000s.

Obviously, the economic policy has been mostly driven by the political ambitions of the party in power, rather than the steadfastness and righteousness.

Of course, many would argue that this is not true about the incumbent government at center. I would certainly like to hear the arguments to find if there is any material difference.

 An impromptu discussion with my friend, & favourite fund manager, yesterday was quite disconcerting. We raised some pertinent questions and tried answering those questions with even more pertinent questions; the answers though remained elusive.

The discussion started from my yesterday’s note (see here) which highlighted that despite signs of recovery, India’s GDP may contract in 4QFY21 and may barely grow at 1% CAGR during twp year period (FY20-FY22). Also, some suspect, FY22 may also not be as good (10%+ yoy growth) as presently anticipated. Some of the questions that did not have clear answers were—

·         How could market be excited about cyclicals, especially commodities, with 1% CAGR growth over FY20-FY22?

·         If logistic constraints are leading to higher commodity prices, should investors be not worried about manufacturers who face raw material shortages, higher input cost in a demand driven market?

Most auto manufacturers have already cautioned about poor supply of semi-conductors and rising commodity prices as key risk factors.

·         Do we see enough capacity building projects to justify sharp rise in prices of base commodities like cement and steel?”

Especially when average capacity utilization remains below optimal and ministers are complaining about price manipulation and RBI is cautioning about plateauing recovery.

·         In which pocket of the market this extreme stress in sectors like MSME, intermediation, hospitality, etc is getting reflected?”

Logically, this stress must reflect on retail lenders (NBFCs & Banks) and consumers discretionary (due to lower income on poor employment & business closer etc.) and commercial real estate, at least. The trends in market are however not showing any sign of this stress!

It is widely acknowledged that MSME sector is in a terrible state. The pandemic has tremendously helped the large corporates with deep pockets to gain market share at the expense of MSME units.

·         Is Indian economy prematurely rushing to complete its “Americanization”?

With consolidation of businesses into top 100-200 entities, we may soon have 5% population growing, 60-65% population just surviving from payday to payday, and the rest 30-35% being taken care of by the government. Is this model desirable for India?

The general principle is that when you fail to get answers from economics and history, you may look upwards and seek answers in philosophy. My philosophical answer to the market conundrum is “Hope is a good thing, maybe the best of things, and no good thing ever dies”.