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.
