Memo 32 – Investing through interesting times!

Memo 32 – Investing through interesting times!
A complete victory over Covid seems at least a few months away, but that has not stopped the stock markets from making new highs yet again. The 2nd wave made little dent on the markets even though it had much deeper impact on lives & livelihood of large number of Indians. The divergence seems even stronger when we see that unemployment rate in India is stubbornly high but most start-ups are facing unprecedented attrition as well as wage inflation! Let’s have a slightly deeper look at the construct of Indian economy & the stock market to understand this a little better.

GDP & stock market can be very divergent: Stock indices are 35% higher than the highest levels seen in 2019 despite the consensus that Indian GDP will surpass the FY19 levels only in FY23. This divergence is because few large but suffering sectors of the economy like government services, agriculture and the unorganized sector i.e., MSME, have low representation in the stock indices. On the other hand, winning companies like Reliance & HDFC twins constitute approximately 28% of NIFTY 50 even if their GDP contribution would barely exceed 5%. Thus, GDP performance can remain divergent from market performance.

Pockets of “Party” are for real: While the healthcare, tech & delivery-based economy is clearly witnessing unprecedented boom times, a few more sectors are witnessing good times – the producers & processors of commodities like metals, sugar, paper, textiles, electronic component manufacturers and factory upgradation equipment! These old economy sectors went through very long period of pain over 2012-2020 and lot of weak players were wiped out, ending up in a serious capacity constraint, in case the demand surged. Now that demand from developed economies like China & US has bounced back, these sectors are witnessing tremendous uptick in the selling prices of their products.

Pockets of “pain” are for real: This list is probably longer with restaurants, cinemas, malls, airlines, resorts, theme parks, laundry ecosystem, taxi/auto services, office space owners, vehicle manufacturers, event management, fashion & beauty companies, loan companies, FD investor, and last but not the least, the low skilled labourers who cannot work from home.

The white collared middle class isn’t in pain and probably celebrating because of no salary cuts, lower living expenses in Covid and gains from stock investments. But the much larger, blue collared middle class & informal economy, is definitely under pain. As an illustration, India’s finest mass premium brands in innerwear, footwear and luggage segments i.e., Jockey, Bata and VIP Bags are all witnessing high degree of downtrading i.e., people switching to products or brands at lower price points.

Mean reversion of “pockets” is also inevitable: It will be very simplistic to assume that the winners will continue to win and the losers will continue to lose. Once the fear of Covid subsides, the affluent class will desire to step out to watch a movie on the big screen; eat piping hot food at their favourite restaurant rather than the Zomato’s hot/cold food eaten in front of Netflix screen; visit a mall for retail therapy, play outdoor games, and finally go on their long awaited domestic and international trip! Once the fear of income uncertainty reduces, the non-affluent class too will start spending on the things beyond basic necessities. That would probably be the time when the current winners will rest and the current losers will try to shine.

Markets & investing – simple but not easy!
The beauty about stock markets is that it definitely rewards the patient long term investor but it is impossible to get the short term correct, no matter how hard you try or how intelligent you are. More than 500 stocks declined by more than 50% in the Covid fall of Mar-Apr20. Had someone asked us for our view then, we would have surmised that only the 100 best companies out of these 500 would bounce back, that too by 2022. And look at where the markets are today. Approximately 800 stocks have more than doubled i.e., 2x, 3x, 5x and majority of them have even comfortably crossed the pre-Covid highs.

Thankfully, investing isn’t about getting these short-term trends right. It is more about finding a few good businesses that can do well over the years, holding them dear, and avoiding the ones that will destroy wealth over time. It is more about having a disciplined approach to investing rather than succumbing to the volatilities of the human mind.

Currently, there are numerous pockets of excessive optimism and excessive pessimism in the market. One can be reasonably sure that over years, you will earn sub-optimal returns in the 1st basket and make decent returns in the 2nd basket. As long-term investors, we have learnt not to worry about when or how much will the markets fall in the coming months but rather focus on having low exposure to the 1st basket and high exposure to the 2nd basket.

Trivia – New age investing!
As recent as 2007, if you wanted to invest in stock markets, you needed to have some “contact” in the broking industry who would help you open an account, execute your trades and even advise you. We recall our days at B-School when we helped dozen odd batchmates open their first ever trading account with a broker (it’s a different story that their first investment happened in Reliance Power IPO, the Sub-prime crisis hit and many of them never traded after that 😊).

Fast forward to 2021, you can open an account by clicking few buttons. It will need fewer clicks to buy & sell stocks, F&O, apply for IPO, invest in cryptos, etc! And the icing on cake is that a hell lot of advice is available online and all this is for free. The barriers to investing have substantially reduced and the same is corroborated by the millions of new self-investors joining the party. The only problem is that the barriers to excellence in investing continue to remain extremely high. Sooner or later, every do-it-yourself investor will have to go through a pain period that will test their grit.

Some batchmates who entered the market during 2008 and saw only losses for eighteen months may have got the wrong impression about equity investing. But some of them stayed invested, went through their own learning journey and can now boast about their sizeable investment portfolios. For those who have entered the markets in the past 18 months, profit is the only word in their lexicon. They would probably have outperformed professional money managers too. Many of these investors too will go through their share of lessons and some of them will eventually cross the barriers to excellence.