Vijay Kumar Gaba

Equity markets are making new highs every day. Other assets like gold, bitcoin, bonds, cash, real estate, etc., are also performing decently. Logically, investors should be happy and looking forward to a great holiday season. However, multiple interactions with investors and other market participants, over the past couple of weeks, indicate to the contrary. Investors appear stressed for a variety of reasons.

 “No one was ever lost on a straight road.”

All three major global credit rating agencies have assigned the lowest possible investment grade rating to India’s sovereign credit, placing India just one notch above the junk grade. For example, Moody’s Investors Services has assigned Baa3 (stable) rating to India’s sovereign credit, just one notch above the junk rating - C.

The Government of India is making a strong pitch to the rating agencies for upgrade of sovereign credit, arguing that India’s economy is the fastest growing major economy in the world, with strong macroeconomic fundamentals. Many government officials, politicians and market participants have challenged the assessment of these ratings agencies often terming it as unfair.

On the other hand, Moody’s Investors Services has recently flagged high public debt and risks of fiscal slippages ahead of general elections in 2024 to support their rating stance.

Moody’s reportedly said, “As the government balances the commitment to longer-term fiscal sustainability against its more immediate priority of supporting the economy amid high inflation and weak global demand, and ahead of general elections due by May, we expect some risks of fiscal slippage arising from possibly weaker-than expected government revenues”.

Moody’s argued that “India had a relatively high level of general government debt—estimated at around 81.8% of GDP for 2022-23, compared with the Baa-rated median of around 56%—and low debt affordability. India’s debt affordability, in terms of general government interest payments as a percentage of revenues, is estimated at 26% for fiscal 2022-23, compared with the Baa median of around 8.4%.

In social interactions, it is common to hear that many advanced economies with GDP growth of 1-3%, are running public debt much in excess of 100% of GDP. Most notably, Japan’s sovereign credit is rated AAA despite having public debt in excess of 220% of GDP. USA with its economy on the verge of a recession and public debt over 115% of GDP has AAA rating for its sovereign credit.

Recently, a report by the brokerage Morgan Stanley’s India unit, titled “How India has Transformed in Less than a Decade”, was also viral on social media. Thousands of enthusiastic market participants and political campaigners forwarded this 37-page report containing some selective charts & statistics and random hypothetical projections, without actually bothering to read it; leave alone verifying the data with alternative sources, correlating it with related socio-economic parameters or making any comparative analysis with peer groups.

My point is simple, at present the market participants, especially non institutional investors, are extremely positive about the markets. As I had mentioned a couple of weeks ago also, “sentiment of greed is dominating the sentiment of fear” (see here). In their fear of missing out (FOMO), small investors and traders are latching on anything that would support their positioning. Obviously, all bad news is getting ignored while good news is getting amplified.

If you feel that I am being unduly cautious and taking a risk to miss out on the structural bull market in India; you might be wrong. What I am suggesting here is to stay calm and not get carried away by the gravity defying moves in the market. I am religiously abiding by my asset allocation and return targets, disregarding the noise in the market. I shall review my asset allocation at the scheduled date, i.e., end of 1HCY2023 and decide if any changes are required. More on this tomorrow…

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

The National Statistical Office (NSO) released the estimates of National Income for the first quarter (April-June) of the current fiscal year (2022-2023) on Wednesday evening. A lot has already been written, said and debated about the reported GDP/GVA numbers. Apparently, the reported yoy GDP growth of 13.5% for 1QFY23 is slightly short of what the market consensus was expecting.

In my view, the economic growth of India has been grossly inadequate and unbalanced, especially in the past 5yrs. The worst part is that the manufacturing and construction sectors that are traditionally considered having material employment generation potential are growing the least. It is primarily the exports that have helped the Indian economy to grow at the rate of 1.4% CAGR in the past 3years. Given that the global economy has perhaps entered a phase of protracted slowdown or sub-optimal growth, the exports may not sustain the Indian economy for too long.

The markets must take cognizance of this. Especially the excitement in construction and capex space is not getting much support from the economic data sustain. Moreover, the piling inventories across supply chains globally and in India at a time when demand is getting crushed and inventory carrying costs are rising, also call for additional caution.

Technically markets are showing some strength and may move a little higher from the current levels. However, this would be a rally to sell into rather than getting infected with FOMO.

 Presently, a large part of the market analysis and commentary is focused on the stock rally from the low prices recorded in March 2020. The popular narrative is that investors have made extraordinary return on their equity portfolios, in what was a once in a decade opportunity.

In my view, this narrative suffers from a serious lacuna. This narrative assumes that—

(a)   Investment is a discreet process and not a continuous one. Investors make investments only on occurrence of some event and exit as soon as the impact of that event dissipates.

(b)   The economic behavior of a majority of investors is rational. They are able to control the emotions of greed and fear very well.

(c)    Most of the investors have infinite pool of investible surplus, and they are able to invest material amount of money at their will.

Unfortunately, none of these is even half true.

Investment is a continuous process. Most of the investors stay fully invested in markets at most of the times. Usually, they reduce their exposure to risk assets like equity when down trend is fully established. So in March 2020, investors were raising cash not investing fresh money.

The economic behavior of a majority of investors is not rational. They are materially influenced by the forces of greed and fear. In summer of 2020, fear was the overwhelming sentiment. Expecting investors to increase risk in their portfolio at that time is akin to expecting a patient lying in ICU to worry about the sale in neighborhood grocery store.

An overwhelming majority of investors have a finite pool of investible surplus. A large part of this surplus remains invested at most of the times. The crash in March-April 2020 resulted in erosion in the market value of these investments. For the investors who could stay invested in the fall, the erosion has been mitigated by the subsequent rise in prices. The investors whose risk tolerance was breached by the fall would have exited their positions and therefore there losses would have become permanent in nature. Very few investors would have made material incremental investments close to the market bottom last year. Only these investors have some reason to celebrate. For most others, it is business as usual.

Statistically, if we eliminate the fall in March and April of 2020 and subsequent V shaped recovery and assume a market in ad continuum, Nifty is up about 26% from the pre Covid high recorded in January 2020. The past two year (June 2019 to June 2021) have yielded a near normal return of ~13.5% CAGR.

Small cap (55%) and Midcap (52%) have given better return than Nifty (26%) since pre Covid high of January 2020. However, if we consider the return of mid and small cap for past two years, there is hardly much to distinguish.

Most notably, PSU Banks and Media sectors are yet to reach their pre Covid highs. Banks, Realty, FMCG and Services are all underperforming Nifty if we consider data from pre Covid (January 2020) period. Metals, IT and Pharma are the only sector that have outperformed Nifty meaningfully in Past 16 months. These sector put together account for less than 30% weight in nifty.

The point I am trying to raise is that the investors must cut the noise out and focus on their investment strategy, which must be in full consonance with their and aptitude and risk appetite. Listening to the popular narrative and getting overwhelmed with the feeling of missing out (FOMO) will only lead them to make mistake that may cost dearly.