Vijay Kumar Gaba

 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”.

 From the queries I receive from friends and readers these days, one thing appears certain – these are most challenging times for small and HNI investors, especially those who decided to raise substantial cash in their portfolios last spring as the pandemic fear gripped the markets.

Many of these investors are not convinced about the sustainability of current stock prices and continue to expect a sharp correction is in the offing. Nonetheless, they find the daily rise in stock prices alluring and difficult to resist. In this intense struggle between their convictions, expectations, beliefs, fear of missing out (FOMO) on a secular rally (if their conviction is misplaced), and greed to make some quick money, some of them appear to have already surrendered to their fears (FOMO) and greed and invested in stocks which normally they would have avoided due to inferior quality of management, earnings and/or balance sheet.

I personally do not support –

(i)     A binary call on portfolio, i.e., mostly invested or mostly cash.

I like to stick to my pre-defined asset allocation, regardless of the market conditions. An opportunistic tactical allocation sometimes becomes necessary, but it does not exceed 10% of the standard allocation.

(ii)    Investing against conviction.

I find investing in ideas without conviction or with borrowed conviction totally avoidable. Empirically, I have found most investment endeavour that lacked conviction or were based on borrowed conviction, usually get wound up in an unpleasant manner.

(iii)   Allowing the sentiments of greed and fear to drive investment strategy.

Investment strategy of an investors should be driven by his individual circumstances – stability & security of income, health, savings, financial and social status (house, marriage, dependent children & parents) etc. Market movement driving the investment strategy is a certain prescription for disaster, in my view.

(iv)   Investing in poor quality for quick gains.

Just because the good quality stocks and bonds are have become expensive cannot be an argument for buying poor quality bonds or stocks. The events in stock and bond markets during 2017-2019 could be a good guide on how to conquer the temptation to make quick gains in stocks or earn few extra bps on bonds.

(v)    Bothering about relative return.

The rule is that if you are diabetic, the sweets in neighbour’s plate should not be your concern. The investment goals (returns) of an individual investor should be mostly pre-defined as per his investment strategy based on his risk profile. Benchmarking returns to some random index or other measure may be appropriate for professional investors (e.g., fund managers) whose remuneration depends on his performance. For individual investors it is meaningless. Remember, you have to pay your child’s college fee from the money you earn from investment. You cannot be happy losing only 2% when Nifty is down 12%.

So, my suggestion is that the investors suffering from fear or greed may urgently call their respective advisors and make an investment strategy for themselves, rather than floating uncontrollably between hope & desperation.

I would also recommend keeping investment strategy away from the realm of fiction. Being average is a great strength for an investor. Over 90% of Indian investors may be earning less than nominal GDP growth rate on their financial investment portfolio over a longer period. Chasing the returns usually seen in fictional success stories and few cases of extraordinary brilliance, could be dangerous to their financial health. Always remember you are riding an ordinary bicycle. You should not be competing with 1500tonne Lorries racing on expressways, for you might get crushed without anyone noticing.