Is it already time to take out family silver?

Convention wisdom says, “if you can see a financial crisis approaching near you, make an assessment of your resources well in advance.” This preparedness involves getting the disposable assets valued at realizable value.

In the past one week, I have received several messages indicating that the investors are sensing a crisis approaching near them. The confidence is shaken. The argument has shifted from “this is a temporary blip; long term India story is intact” to “alas! even a fixed deposit would have yielded better return”.

They have taken out their family silver and are assessing if they should still be owning it. Stock holding cherished for decades, viz., HDFC Bank, TCS, Asian paints, Hindustan Unilever, Infosys, Kotak Bank, etc., are being evaluated as these have yielded no or negative return over the past five years.

Also, the never-ending debates like “buy & hold vs flow with the current”; “large cap vs small cap”, “active investment vs passive investment strategies”, “direct investing vs mutual funds” have returned to hog the headlines. The social media timelines are inundated with investing memes, suggesting that several of “active investors” and traders have suffered material losses or sub-optimal returns in the recent months.

For record, the benchmark Nifty50 has yielded an ex-dividend return of 8.7% CAGR for the past 5 years; marginally better than a 5year bank deposit. However, the NSE Small cap 100 index has returned a much better yield of 12.9% CAGR (ex-dividend). Most equity oriented mutual funds have also managed to provide returns in the 11-15% CAGR range. The total return should ideally be not much of a problem for an investor.

The problem lies, in my view, in the fact that most investors were overweight in the stocks which did very well historically but have yielded no return in the past five years. They did not reorient their portfolios in tandem with the market trends for tax consideration, high conviction in their traditional holdings, and/or lack of market awareness. This has resulted in their portfolios earning sub-optimal returns. The current market volatility and clouded market outlook for FY27 has made these investors jittery. This is even more true for the investors who have low risk tolerance and/or may need to sell stocks to meet their professional or personal requirements.

  

Alto K10 vs Ferrari SF90

 Ricky Ponting, the former captain of the Australian cricket team, commented during a TV show on Sunday that Indian team may not be able to score 200 runs in the fourth inning of the third test match played in Sydney. Ponting was obviously trolled badly on unforgiving social media for his “prejudiced” and “audacious” forecast. India went on to score more than 300 runs and even managed to draw the test. Ponting later clarified that his “view” was based on the condition of the pitch on fourth day. The pitch did not deteriorate on fifth day as expected. Nothing much should be read into his statement. He need not have presented his defense. The social media would have forgotten his statement in couple of days, anyways.

The stock market experts (strategists, analysts, fund managers and seasoned investors etc.) who stick their neck out and make forecast about the market trends and likely levels of benchmark indices often face the situation like Ponting; especially for past 2 months those who are cautious on the market and warning a sharp correction are consistently at the receiving end. Regardless, the markets will keep rewarding investors and keep having corrections.

Moving on to business, I found the following five points worth noting from media reports in past couple of days. In my view, these five points aptly highlight the internal conflicts and challenges within the policymaking framework, and pose potential risk for the seemingly unstoppable stock rally.

1.    The road transport and highways minister Nitin Gadkari, highlighted that probably steel and cement manufacturers have made cartels to keep the prices artificially higher. The two being the key inputs for physical infrastructure development, may lead to material rise in the cost of development and even hamper the viability of projects. He even proposed a regulator for monitoring process of steel and cement (see here).

In UPA-1 tenure, the then finance minister tried to hit the cement cartel by introducing differential tariff structure based on price per bag, Rs190 being the differential point. Should the market expect something similar in weeks to come? In 2007-2008 the differential pricing and price regulation only helped the government in raking higher revenue. The industry and private consumers did not benefit much. (see here)

Besides, the suggestion for a pricing regulator also highlights the tendency of the government to impose deeper and wider regulation to control various segments of the economy. This is obviously contrary to the commitment of “less government more governance.” It also confirms the rising policy unpredictability.

2.    WPI inflation has now risen for seventh consecutive month led by food (see here). Energy prices have also been rising steadily over past few months. This may require a rethink on the RBI premise that food inflation may be mostly a seasonal phenomenon and wane in few months due to base effect. If the food & energy inflation persists, the second round effect may begin to become pronounced from the next quarter. The hopes of a meaningful monetary easing may be belied; and even fears of a rate hike might begin to bother markets.

3.    Many analysts are interpreting higher food inflation as good for rural income (and hence consumption demand); and higher energy prices as good for languishing energy sector stocks. “Cyclical” is projected to be the mood of this spring (see here). Higher energy prices shall reduce at least some of the cost advantage of cement and steel producers that has led to sharp earnings upgrades.

4.    The finance minister has earnestly committed a historic budget 2021. She went on to say that this shall be a budget unlike any presented in past 100yrs (see here).

There is no empirical evidence to support the finance ministers’ inclination to think radically or take risks. During the course of 2020, she made many attempts to enthuse the markets with a series of “historic” stimulus packages; but was hardly found inspiring by the markets.

The good thing is that markets may not be placing much high hopes from the budget; and the finance minister has a chance to surprise the markets this time. The bad thing is that no one is expecting higher taxes; even though the reports are indicating a serious discussion within the government about a Covid cess (see here). The ugly thing is that LTCG is again in the agenda of various budget discussions.

5.    TCS has reported an excellent set of numbers. Most other IT companies are expected to follow the suit. The Nifty IT has yielded a return of ~66% in past 12 months; ~89% in past 24 months; and 122% in past 36 months. In past 1 month, the IT sector has yielded a return of ~18% vs (~17% for Nifty in past 12 months). In past couple of months, most brokerages have published uber bullish reports on the sector, forecasting strong returns over next 2-3years. IT sector along with pharma, has been a massive outperformer for past 3yrs, over all other sectors.

The question is whether risk reward in the sector is still as attractive as it was a year ago?

In my view, the market is now running like a Formula One car. It can see the challenges and obstructions but cannot afford to stop or slow down. So far it has negotiated the sharp turns and obstructions brilliantly. But at least I cannot say with confidence that about the next mile. I am therefore happy watching the race sitting at the fringes, till it lasts. I have no intention of entering the track with my Alto K10 to compete with Ferrari SF90.