Some food for thought
"I looked real Neanderthal. I could have been Mexican, I
could have been black; I could have been anything."
—Wolfman Jack (American Entertainer, 1938-1995)
Word for the day
Substantive (adj)
Important, real, or meaningful
First thought this morning
Following the top political leaders on their election campaign
leaves one with a pungent sour taste in mouth. No one, yes none, is presenting a
vision for the future to the growing youth population of the country. Most
leaders look like pied pipers trying to lure the populace towards dark forests,
totally oblivious of the fact what lies there.
The principal opposition Congress is criticizing the incumbent
government for failure in alleviating rural distress and creating enough jobs
for the youth of this country. It has however, not provided an iota of hint
how, if brought to power, it would solve these problems.
The regional parties, which face some opposition from BJP, are
mostly indulging in scaremongering. They are painting the incumbent PM as an
anarchist, and seeking support to save the country from becoming a totalitarian
state by voting him out. Giving their undivided attention to the immediate
problem at hand, i.e., PM Modi, they do not even appear considering presenting
a socio-economic agenda for future.
The other regional parties, e.g., in Tamil Nadu, Andhra Pradesh,
Telangana, Kerala, Punjab, are busy with parochial issues. Nonetheless, they do
talk about issues of development, employment, inclusion etc.
The situation of BJP is however most peculiar.
The incumbent government has initiated a number of programs, the
execution of which might well extend into next 3-10years, e..g, Urban Rejuvenation
(Smart Cities), Infrastructure (Railways, Expressways, Irrigation, Civil
Aviation-Udaan, etc.), Social upliftment & Security (Housing for All, Power
for All, Cleanliness, Health Insurance, Quota for hitherto Unreserved, Clean
Cooking Fuel for all, Self Employment through MUDRA loans etc.).
The problem is that BJP is finding hard to make any fresh
promise. It is feeling like the old father who has handed over all its assets
to his Children, and now no is bothered about him! Every morning, the father
invokes the question of morality, ethics, righteousness and duty to his
children. He would keep reminding them what all he did for them. But, who
cares!
Having spent all arrows in their quiver, and even the Brahmastra
(10% Quota for EWS), BJP appears like a headless chicken moving in circles, not
actually moving anywhere.
The worst, in past five years BJP has undermined its traditional
agenda - Ram Mandir for Muslim votes, Article 370 for forming a government in
coalition with PDP, and Uniform Civil Code for expanding footprints in North
East and Kerala). It is hence finding it challenging to keep its core support
base intact.
The 2019 Lok Sabha election may therefore be the most localized
election so far; only a slightly less than a local body election. Most people
may be voting for the candidate and not the party or leadership. The faces of
Rahul Gandhi and Narendra Modi might not be too much relevant in the
forthcoming elections, after all.
The issues to dominate will also be mostly municipal and favoritism.
The candidates most seen in the constituency, and friendly with the
constituents, would stand a better chance.
Market still some distance from the Rock
Many investors, especially the young ones, are bewildered by the
resilience of benchmark indices, in an environment when diversified portfolios
are virtually yielding no (or even negative) return in most cases. Many SIP
investors have started to question their wisdom in continuing with their
strategy of rupee cost averaging.
I receive many queries from readers seeking suggestions about
the appropriate strategy under the circumstances. I may clarify that I am in no
position to offer any advice or suggestions in this regard. For this they need
to consult a qualified investment advisor.
Nonetheless, I may help by sharing how I see the markets.
Historically, the market cycles in India have seen broader
markets outdoing the benchmark indices in both the rising and falling phases.
In the first phase of a market cycle, small and midcap stocks rise materially
more than their large cap peers; whereas in the second phase they fall much
more than their large cap peers.
For the full cycle, optically the performance of large is
marginally better. However, adjusted for the transitory stocks, i.e., the
stocks that migrate from small or midcap category to large cap category, during
a market cycle, generally there is little to distinguish.
Now analyzing the current market cycle, there is little
consensus over the duration of the cycle.
Many analysts recognize that the current market cycle started
from lows of February 2016. But I believe that the current market cycle started
from late August 2013, along with significant macro corrections and is still
continuing. In any case, I feel that the market cycle peaked in January 2018
and the rally from February 2018 to August 2018 was purely a bear market rally.
I would therefore analyze the cycle from both view points.
View: Market cycle started from August 2013, peaked in
January 2018, and bottoming process is on.
If we take this view, we find that the broader markets are still
outperforming the benchmark indices materially. In fact, even after one year of
peaking, the market cycle compares very well with the beginning to peak phase
(July 2006 to January 2008) of the previous major market cycle (July 2006 to
March 2009). This is actually little strange given the near absence of earnings
growth in the present cycle.
For record, for the entire duration of August 2013 to January
2019, broader markets are giving ~21% return, as compared to 14% for the
benchmark Sensex. That is a 50% outperformance. Historically, this kind of
outperformance has not been sustainable.
I like this view, because the beginning to peak return of
benchmark as well as beginning to current return of benchmark is more aligned
to historical averages and correspond well to the nominal GDP growth trends. It
would therefore be reasonable to believe that though the bottoming process
started a year ago, the market may still be some distance from actually
bottoming out and being ready for commencing a fresh market cycle.
View: Market cycle started from February 2016, peaked
in January 2018, and bottoming process is on.
If we take the duration of the current market cycle from
February 2016, we find that the performance of broader markets is already
aligned to the benchmark.
Since the current rate of return is still higher than the
historical trends, I would think that market is still some distance from the
rock.
