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Play Smart, Drill Deep
Overall, barring technical rallies, I remain less than sanguine on global equities. Since 2008, I have never seen any really compelling reason to be a table thumping bull. Save for the zero interest rate policy bit.
Photo Credit :
By Shankar Sharma, V-C & Jt. MD, First Global Stockbroking
The year 2015 was a rare one. It turned out almost exactly the way I had thought it would. My big call was a massive strength in the US dollar, and a concomitant crash in commodities. That played out. Linked to this was my view that in 2015, emerging markets would present the worst investment option in equities. As the data shows, emerging markets were an absolute disaster in 2015, and many emerging markets centred portfolio managers are busy circulating their resumes to e-commerce firms!
Closer home, I had opined in a similar column for Businessworld last year that India was in for a major disappointment as the government was concerned. Before and after the Lok Sabha elections in 2014, the entire country had taken a collective leave of its senses and placed an all or nothing bet on one mortal. Such bets rarely work out, and it has been no exception.
If politically one were to agree with Arun Shourie’s assessment that this government is nothing but Congress plus cow, then, in terms of economics, it has turned out to be Congress minus $100 a barrel oil. That pretty much sums up the economic performance. But actually, that’s not completely accurate.
This government has been urban focused because it believes its core constituencies are English channels and pink papers. That worked beautifully in 2014. But the same proved quite a disaster in 2015. As is evident from the Bihar, Gujarat and Madhya Pradesh elections across different electoral fora, the rural vote is turning decisively away from the BJP. And if a political party loses rural India, it loses the throne. That’s what will start playing on the minds of analysts who have a bit of sense and farsightedness, though, mercifully, their numbers are in single digits. The 2019 Lok Sabha is by no means a slam dunk now for the BJP, given that there is a natural attrition of 4-5 per cent in vote share, and there will be some degree of consolidation by the Opposition.
The problem the government finds itself in today is that the financial markets, which the BJP regards as the sole true barometer of political success, place negative value on anything done for rural India or the poor. So, if the government cuts outlays for health and education, as it has, the financial markets love it. But rural India hates it. This quandary has become more acute following the recent electoral debacles the BJP has faced. With the Uttar Pradesh polls coming up, the government is in two minds as to which constituency it should be catering to.
Of course, oil has been an unmitigated boon for the government, and that’s pure luck. If one is looking for skill in economic management, that’s hard to see, save for Nitin Gadkari’s work in building roads. So where does all this leave investors?
My central view on Indian equities through the past year and a half has been that large caps are pretty well discovered and discounted, and barring some exceptions like Maruti, one is hard pressed to find high conviction ideas in this segment. However, the picture has looked, and continues to look, dramatically different in the midcap and small cap segments.
Here, I find an incredible array of companies, engaged in diverse businesses, that are hard to encapsulate and pigeon-hole into any discrete industry group. Many of these companies are innovating hard, tweaking business models, thinking out of the box, working hard to sweat assets. In short, many of these small companies are doing quite a few things right. That’s what makes small caps extremely intriguing as a group. What also makes the segment full of intrigue are dodgy promoters, dodgier accounting, manipulated stock prices.
Hence, small cap investing is not for the faint-hearted, nor is it for the recreational investor. It’s deep-into-the-trenches type of investing that requires, first of all, a vast investment of time. I find that understanding a large cap takes all of a few hours, while figuring out the innards of a small cap can easily take a few months. Given the tepid economic growth situation in India, small caps appear to be better even with this modest growth — there is enough growth going around for small caps to deliver large percentage revenue and profit growth. This tailwind, such as it is, is simply not strong enough to lift large caps.
All this being said, I will unhesitatingly put Indian small- and mid-caps as arguably the single best equity asset class in the world. Buy them singly or via mutual funds, but definitely have exposure to them.
Let’s finally talk about the world a bit. The US Fed delivered what, in my opinion, was a gratuitous rate hike. US growth is patchy, and inflation looks all but dead. So apart from the optics and theatrics, I see no well thought fundamental reasoning behind the rate hike. The Fed has also indicated a full 1 per cent hike in 2016, something I outright disagree with. If they get 50 bps done, that will be a miracle.
Overall, barring technical rallies, I remain less than sanguine on global equities. Since 2008, I have never seen any really compelling reason to be a table thumping bull. Save for the zero interest rate policy bit. With that policy going away, the last remaining leg of the equity stool is being sawed off.
(This story was published in BW | Businessworld Issue Dated 11-01-2016)