"Nothing profits more
than self-esteem, grounded on what is just and right."
—John Milton (English,
1608-1674)
Word for the day
Deasil (adv)
Clockwise or in a direction
following the apparent course of the sun: considered as lucky or auspicious.
Malice towards none
Manish Tiwari + Kapil Sibal
+ Digvijay Singh + Manishankar Aiyer + et. al. = Sambit Patra
First random thought this morning
The desperation shown by BJP in the ongoing Gujarat elections is
completely beyond comprehension.
This election is a fight of survival for the Congress Party. Whereas
for BJP it should have been just another election. If Congress were to lose
this election, like Bihar, UP, TN, WB, they would have lost another state
forever, as the a local alternative is likely to emerge by 2022. Whereas, if PM
had not invested his personal ego there, the BJP could have been easily
assigned the adverse outcome to the local leadership's failure in carrying
forward NaMo's legacy.
But as things stand today, Congress is at win-win situation, and
BJP may just get an pyrrhic victory.
It's all economics stupid!
The common understanding is that the
market price of an asset is function of demand and supply for such asset at
that point in time.
The demand and supply for physical
assets, e.g., real estate, metals etc., is relatively less volatile and
therefore more predictable, as compared to the financial assets.
The financial assets are more
liquid, mostly dematerialized (not needing any physical transfer), well
regulated and easy to transact. The market for these assets therefore see wider
participation. Especially in case of stock markets, people from cross sections
of the society transact. A vast majority of these traders/investors may not
have any relation to, or practical experience of, the underlying businesses
they are transacting in.
Even the professional portfolio
managers mostly rely on the opinions of the business analysts who may only have
"the acquired" knowledge of the underlying businesses. In fact a lot
of analysts are seen acquiring the business knowledge purely through the
"management guidance" and related "material easily available on
internet" or from various "research vendors". The conviction in
"the equity trade" is therefore usually much lower than transaction
in the related physical asset. (Trivia: Imagine you being treated by a self
trained medical professional, who acquired skills through internet searches and
interacting with other medical professionals, some of which were like him only)
The demand-supply equilibrium in
this case is therefore too unpredictable and may shift dramatically in very
short term, apparently for no relevant reason.
It is not surprising that in the
case of stock markets, many times the demand and supply equilibrium does not
necessarily reflect the underlying business fundamentals. The collective wisdom
of the participants here is materially influenced by the emotions and
constraints of third parties.
For example, the actions of a fund
manager may be influenced by the emotions of the ultimate investor. Similarly,
the action of a trader may be materially influenced by the lender who has
financed his transaction.
This divergence of market price
and business fundamentals is seen by many as an opportunity to make
extraordinary profit, based on assumption that market price and business
fundamentals will eventually converge. In common market parlance these people
are referred as "contrarian investors".
Many contrarian investors have
made big fortunes from their investing style. But the fact is that in many
cases, the money they made may have just been a function of their ability to
stay invested through the market cycle, rather than anything else.
Sharp market movements due to
political events, is just another case of a completely unrelated and irrelevant
factor influencing the market prices.
If anyone mentions the political
changes (or lack of it) as a risk for a business and therefore market, he/she
may just not have any understanding of the basic principles of investing.
For example, if someone believes
that a particular company based in Gujarat is doing well because of the
patronage of BJP government in the state, and may face trouble due to change in
political regime, he should never have invested in such a business, in the
first place. A business that is contingent upon political patronage to survive
and grow, could not be investment grade by any standard.
Similarly, if someone believes
that NDA lose in 2019 elections could be disastrous for the economy, and
therefore stock markets, is only too naive. There is absolutely no empirical
evidence of a particular party or person driving the economy or markets in a
democratic setup, anywhere in the world.
In fact, an in-depth research
would show that most government economic policies are driven by businesses, and
not vice versa.
Beyond political rhetoric, analyze
the following instances:
(a) FDI in insurance and pension was politically a massive contentious
issue for over two decades. But, when it did happen, there was not even a token
protest. The reason is that for two decade, FDI in insurance was only a
theoretical probability. Given the level of accessibility (roads, communication
connectivity, banking etc) and affordability, no one would have been seriously
interested in investing in this business.
Same is true with FDI in retail
trade also. Imagine how a global retail store would have functioned in India with
pathetic internet speed, poor electricity supply, multitude of complex taxation
laws, movement restrictions etc.
(b) How GST could have happened 10yrs ago, when the fiber connectivity
was still poor and banking infrastructure pathetic.
(c) Gujarat could not have become an export hub for automobile and
import hub for hydrocarbons, if the ports at Mundra, Dahej and Kandla were not
developed. The Narmada dam and Bt Cotton have changed the fortune of Gujarat
farmers, not any political party. (If someone wants to argue that any
particular party made Bt Cotton and Sardar Sarovar happen, I am not at all
interested in listening. I find this argument perverse and violent.)
In past two weeks, no one has
asked me about the deteriorating macroeconomic fundamentals and falling FPIs
interest in Indian equities. All that I see in my mail box is who will win
Gujarat elections and how market will react to this.
I have patiently answered all the
queries. But my strong belief remains that elections are totally irrelevant and
unrelated event. Totally not worth bothering about.
