Vijay Kumar Gaba

Wednesday, March 11, 2020

Who is accountable for PSUs' conduct

The government of India has been the greatest value destroyer for the investors in Indian Equities. The Nifty PSE index, comprising most listed PSU stocks, now trades at the same level as it was in 2006, implying no return for 13yrs, if we consider point to point investment period.

The CPSE ETF comprising top 22 Central government undertaking stocks, launched in 2014 is giving negative return to its investors.

Many large Public Sector companies are now trading at multi year low prices, adjusted for all dividends and other corporate actions.

The government of India therefore has legal and moral duty to explain to the investors, why it should continue to manage these businesses. They have obviously not managed these great businesses like MTNL BEL, Coal India, etc well and destroyed huge wealth for the nation as a whole and individual investors as well.

The Supreme Court may like to examine, whether the government should be permitted in the first place to raise equity from investors through sale of minority stakes, given that the Constitution of India requires the government to be "Socialist" and not indulge in profit making at the people's expense. Or at least it must consider extending the provisions of the Companies Act relating to oppression of minority shareholders and mismanagement to the listed government companies.

The market regulator must consider bringing the concerned ministers and bureaucrats from the respective operating ministries and departments within the regulatory framework for disclosures and investors protection.

In an unrelated but important matter, the finance minister publically admitted that the RBI and the government were aware of the mismanagement and impropriety issues at Yes Bank since at least 2017. Considering that Yes Bank is a constituent of Nifty and Bank Nifty indices. The National Pension Scheme (NPS) is permitted to make equity investment only in ETFs based on benchmark indices. This means the government deliberately let the money of the subscribers to NPS (mostly government employees and small poor investors) to be invested in Yes Bank at a price of over 300, despite knowing that it is a bad bank. This is a blatant breach of trust, which needs to be investigated and punished.

If the government wants to build clean, accountable and strong corporate and financial systems, it will have to begin the work from itself and show the path to others. The other way round has never worked; it never will.

Wednesday, March 4, 2020

Anatomy of a bear market in equities

In past seven weeks, the Indian equity markets have corrected sharply. The benchmark Nifty50 index has fallen almost 9% in this period. The gauge of fear (volatility index) has risen over 60% in this period of seven weeks.

This sharp correction in values, when everything appeared to be working normally for Indian equities has triggered an intense debate about the sustainability of present levels of equity prices. Some prominent analysts and investors have highlighted that the 11 year old bull phase in global equities that started post Lehman collapse and commencement of easy monetary policies may just about to be over. The disruptions created by spread of coronavirus (COVID-19) may have opened many fault lines in the global financial system, hitherto camouflaged by the persistence monetary stimulus by central bankers.

Many technical analysts and chartists also fear an extended winter for Indian equities this time.

Since I have recently increased my allocation to equities, by cutting overweight on gold and bonds, many readers have wanted to know my reactions to these prominent market voices.

I would not like to comment on the views of various market experts. I am sure all of them have very strong basis to form their opinions and views. Moreover, I had explained my rationale for changing my asset allocation (see here).

I would not like to entertain a "valuation" argument at this point in time, because a lot of businesses in India appear standing at the threshold of a major transition. Therefore, both the numerators and denominators in the valuation formulae could be subject to dramatic changes in next 3-5years.

I would however like to highlight a few well know facts about the Indian equities, which make me believe that the downside in Indian equities may not be significant from the current levels. Since the rate trajectory appears firmly down to me, the relative outperformance of equity looks more likely to me.

1. The Indian equities have been in a bear market for past five year at least. The advance decline ratio of the issues traded on NSE has been negative for five years now.

2. Amongst the benchmark indices, only BankNifty has matched Bank Deposit returns over past 5years. Nifty Small Cap has returned negative return and Nifty just about managed the savings bank interest.

Over past two years, only Bank Nifty has returned positive return. Small and Midcap indices have lost massive ~18% CAGR and ~8% CAGR respectively.

3. Of various sectoral indices, only financials & services, mostly driven by few private banks and NBFCs, have consistently beaten the Bank term deposits, over past five years. Many sectors like Media, PSUs, commodities, Auto, Pharma, and Infra have given negative return of ~2% CAGR to ~14% CAGR over past five years. The returns have been significantly poor over past 2years. Only Financials and IT could beat the bank deposit returns over past 2years.

I am not at all suggesting that the Small Caps, Commodities, PSUs etc that have severely underperformed in past five year may outperform henceforth.

The point I am trying to make is that (i) a blanket opinion about Indian equities, or any market for that matter, may be misleading; and (ii) there could be plenty of opportunities to be availed in markets.