Vijay Kumar Gaba

 If we consider the returns given by various global equity indices in the past one year period, the MSCI Czech Republic Index tops the chart with 45% return. MSCI Turkey with ~34% return and MSCI Argentina with ~31% return share the podium with Czechs. In the past five years—

·         The Czech economy has grown at less than 5% CAGR; inflation has averaged ~3%; interest rates have risen from near zero in 2017 to 3.75% presently. Youth unemployment rate has ranged between 5% to 12%.

·         The Turkish economy has also grown at less than 5% CAGR; inflation has ranged between 10% (2016-17) to 36% (present); interest rates are ~16%; and unemployment rate is above 11%. Turkey has witnessed violence, political instability, and Lira collapse.

·         The Argentina economy has hardly grown in the past five years. The inflation rate has ranged between 15% to 60% (presently 50%). Interest rates have ranged between 25% to 85% (presently 40%). Financial and political stability of Argentina has been under severe stress. The Peso collapsed.

(In comparison, MSCI India Index has been the fifth best index with ~29% return. Indian economy has grown above 5% CAGR; inflation has averaged below 6% and interest rates are around 4%.)

Prima facie, this selective set of indicators would imply that the stock market performance is mostly alienated from the economic, social and economic realities, at least in the short period of one to two years.

Someone can argue that the outperformance of Turkish and Argentinian equities must be seen in the light of past underperformance and hopes of recovery in near future.

To that my answer would be – (a) MSCI Turkey Index has been amongst the top 10 performing global indices in past 3years; and (b) if hope is one of the primary criteria for investing in equities, regardless of the prevailing hopeless condition, then perhaps the whole discipline of equity research and analysis may be redundant. Investors should buy assets that have suffered from hopelessness in the recent past. This strategy has worked very well, for example, in the case of Greek, Italian, Portuguese and Spanish equities & debt post global financial crisis.

This implies that the key to make money in financial markets lies in “hopelessness” and not in “hope”. Perhaps that is what drives investors to buy stocks of hopeless companies like DHFL, JP Infratech, BILT, Sintex etc. However, the investors bothering about non-events like union budget and state elections and reacting in the hope of a “lottery” outcome and markets staging a pre-budget rally complicates the narrative.

Regardless, I do not prefer to hinge my investment strategy on hope alone. I would like to explore if there is some method in equity outperformance in the present period of socio-economic distress; and whether the asset prices in general are actually reflecting the ground realities.

I would in particularly like to test the following hypotheses:

(a)   Are the rising inequalities world over resulting in larger businesses growing faster at the expense of smaller and unorganized businesses?

If this is true, in Indian context it may mean 1000 odd listed companies gaining market share at the expense of lacs of micro and small enterprises. So greater the stress in MSME, better it may be for the larger listed entities and therefore for stock markets.

(b)   Are citizens losing faith in state controlled assets like currencies and public debt?

This may reflect in less preference for cash and treasuries and rising preference for unregulated assets like private equity, cryptocurrencies, NFTs, private realty, corporate debt etc.

(c)    Is equity becoming the most preferred inflation hedge with household investors?

Does this explain the underperformance of Gold, a traditional inflation hedge?

(d)   The past decade has seen two phenomena – (a) a sustained rally in equity prices and (b) remarkable rise in the role of technology in business.

Does this mean the new average jobs now require high skills, leaving very low paying jobs for average skilled or poorly skilled workers, pushing the youth in 20s and thirties who have seen only a bull market in equities towards “lucrative” business of equity trading that is commonly assumed to require low skills?

I would love to hear the views of readers on these propositions. I shall be sharing the result of my exploration in due course.

The valuations of Indian equities, or the global equities in general, has become subject of intense debate, with participants analyzing the markets with personal biases and prejudices.

A variety of models, methods and timeframes are being used to justify the current valuations as reasonable, or reject these as unsustainably high. Many analysts have preferred to ignore the aggregate valuations and adopted different yardsticks for various classes of businesses.

Given that the benchmark Nifty has close to 38% weight of financial services, it may not be appropriate to give undue consideration to the aggregate PE ratio of the index for benchmarking the “market” valuation. Some analysts prefer to use global indices (e.g., MSCI India Index) to assess the valuations of Indian equities.

Many new age businesses which are solely focused on revenue growth and may not be profitable in short to mid-term. For these businesses applying the conventional valuation methods might not be appropriate.

Nonetheless for reference purposes, on conventional parameters, post the recent correction, the valuation of Indian equities may be marginally higher than the long term (10yr) averages, and do not appear to be a cause of significant concern.

However, midcap valuations relative to large cap is high; India PE premium over global PE is still quite high, and the risk premium (Equity yields vs Bond Yields) is very low. Therefore, the upside in short term may be limited.