We are officially in bizzarro world. So much going on around us which would have ideally made excellent content for a satire before it started happening for real!
They say in the business world that things that take the staircase on the way up can sometimes take the elevator on the way down. Maybe globalization is headed that way, going by the recent events. While each one of us has been a beneficiary of globalization, we may well have to find other trends to benefit from. Especially India which really hasn’t shown leadership in too many segments for a long time now. Even today, our rich cultural heritage, philosophy and wisdom are the areas where the world looks up to us. We have had our share of opportunities over the past 15 years to change this but we somehow manage to underperform our potential every time.
This is one of the big narratives driving the India selloff ever since the market peak of Sep 2024. The FPIs look at India and see a nation whose biggest white collar growth engines are slowing down. We do not rank high on technology leadership , at best we have been good executors at a reasonable price and this now looks ripe for some disruption from the AI wave. We are at least a decade behind on infrastructure development compared to even other emerging nations but have leapfrogged many developed nations in the UBI (Universal basic income) wave due to the new political reality since 2024. The saving grace has been political stability since 2014 which has kept a floor under the valuation multiples due to favorable demographics. But the market cannot be driven by the same old narrative for more than a decade. Those who live outside India aren’t restricted in their options and they will take their money elsewhere if things aren’t on track; that is what appears to be happening now. We need to see a healthy pace of growth and reforms to convert potential into real economic outcomes. Good growth tends generate new narratives by itself.
At the same time, India finds itself in a sweet spot once again. Crude oil price below USD 70 per barrel, low inflation (at least in the domestic scheme of things) and a rising global stature that the world cannot ignore should continue to present enough opportunities in the future. This already reflects in the plethora of trade deals that India has been signing over the past few months. The proposed FTA with the European Union getting successfully concluded will essentially mean that India has a favorable open dialogue with every large economic block in the world – other than the US which is flying in a different orbit. While we were hopeful of a successful conclusion of the US India trade deal in 2025, we now appreciate that deals don’t mean anything if the counterparty cannot be relied upon to keep its word. The way things stand right now, a deal with the US is most likely a meaningless exercise so long as the thinking of the current US regime remains as it is. In a convoluted manner, the antics of the current US regime is pushing the rest of the blocks to align together (even if temporarily) to weather the storm out. This will present many opportunities for India and we sincerely hope that the Govt will make them count.
It is too early in the Q3 earnings season to draw reliable conclusions about numbers but we see encouraging signs in the banking credit growth rising closer to 15% YoY and auto sales numbers continuing their good run post the GST rationalization. It is not that economic data points are all gloomy, just that the geopolitical antics are forcing investors to underweight some positive domestic developments. In this regard, we have just one advice to offer to investors who haven’t seen too many bad market cycles before this – Don’t brood too much over the negative narratives, instead focus on behavioral indicators that have been proven to work reliably in the past. The thing with narratives is that the media will highlight them as a justification for price action, once the price action changes trend the narratives will fade away slowly.
Every bad market cycle has a different set of narratives driving the pessimism but the underlying human psychology that affects price behavior is usually the same. Go back to the March 2023 bottom, the bull run had already run its course for a few months before consensus emerged that we are indeed in a bull run. Go back to the March 2020 COVID bottom and the narrative was in a totally different domain. Every investor was waking up and checking the number of COVID cases before checking market related news. That the US Fed threw a liquidity, QE and fiscal bazooka didn’t matter were all sidelined since the pandemic was the dominant narrative then. The vaccine came only in November but the NIFTY 50 had already made a new ATH by then. Don’t obsess over the narrative and become a budding geopolitical expert in response to what DJT tweets overnight. Instead, focus on a few objective indicators that have reliably proven to be good markers in the past. For example –
- Number of stocks below the 200 DMA compared to previous corrections
- Number of stocks that have broken below long term, monthly trend lines with no respite in sight
- The divergence in the return of NIFTY 50 & SMALL CAP index over the 2Y, 3Y and 5Y periods
In addition to these, ask yourself the following questions
- Do FPI’s and domestic investors base investing decisions off the same factors?
- What is your view on the interest rate regime in India for the next 12-18 months?
- How exposed is your portfolio to the trade war situation?
- If a stock price is getting beaten down every day without having any direct exposure to the US, what is at play here?
- If every sell over the past 3 months looks like an excellent decision, what does that tell you about the market?
As an investor you will do well to remember the fundamental behavioral principle – diversity of investor opinion breaks down during market extremes; both in scorching bull runs and burning bear runs. The more clustered investor views become, the higher the probability that most anticipated developments are priced in. It is easy to freeze in the face of a 1% cut to the portfolio daily, but that should not stop you from doing the work needed to keep fine tuning your portfolio.
Before the Battle of Gaugamela started, Alexander told his men – “Conquer your fear and you will conquer death”.
While we don’t wish for his kind of battle recklessness in any investor, taking decisive action in the face of adversity while keeping a good tab on emotions is a trait we must all aspire for. Clarity of time horizon is very important in investing. Management teams that have proven their ability to steer the ship well during a crisis aren’t sitting around praying all the time. They are at work right now, trying to figure out ways to hedge the impact and to keep the business growing through other lines. Many of them will succeed in their efforts though a few may fail.
While we are primarily in the business of taking investment decisions on individual stocks, it is sometimes helpful to zone out and ask if the current geopolitical muck can continue endlessly. The source country of the current geopolitical volatility is a democracy with many checks and balances. It is not an autocracy where one man’s whims and fancies can rule for a long time. With mid terms coming up later this year in the US, political pressures will only rise from here. While individual preference and style may dominate for a few months, the system is mature enough to self correct when needed. Investors today are very deterministic in their outlook that the current muck will continue for 3 more years. We have seen some investors who can’t explain what the GDP but can give a confident 10 min lecture on what drives DJT’s actions right now.
Every single time we have had a situation where FX, bonds and equity all go into a coordinated spin, it has signified a pivot point for India after some more pain. At a time when proven large cap stocks that are delivering good numbers have gotten beaten down 15% from the peak for no apparent reason, it doesn’t make sense to question why a particular stock is going down every day. All we can do is to accept that the market is in the mood to beat down prices for now and separate business trajectory from the stock price trajectory. Every narrative and price action right now screams sell but investing isn’t that simple going by history.
Closer to every market bottom we’ve seen over the past few years, the technical & fundamental analyst are looking at one another hoping that the other knows something that he doesn’t. Below a price though, it is just brave fundamental investors that are willing to buy after having clarity on the investment time horizon. Price action is eventually a slave to business numbers and not the other way around. You get the business trajectory right (with some buffer of error built in), you have a good chance of success over the medium term if you don’t pay up too much. You get in at a low enough price, you sometimes make good money even after getting the business trajectory wrong.
Focus on the primary variable and block noise out to the extent possible.
It may not reduce short term pain but it will set you up to benefit once the tide turns.
As the final segment in this newsletter, please see this chart posted in the public domain by the first investor in Aequitas PMS
The obvious thing is the 34% odd CAGR over the time period – excellent by any yardstick.
But what would it have felt like between 2018 and 2022 ? It was ~4 years of nil return and most likely average CAGR since inception if measured then. Investors would have experienced a drawdown of > 65% from the 2018 peak to the lowest point after the COVID crash. One will have to congratulate not only the fund manager (Siddharth Bhaiya, unfortunately gone too soon) but also the investor for having the conviction to stay put through this 4 year period. During this period you had Marcellus PMS and ASK PMS performing well, it must have been very tempting for the investor to switch out and for the fund manager to change his style. Having options tempts to steer off the course you may have carefully chosen in the past!
Small cap heavy investing is not for the faint hearted. The market will test you every 4-5 years and have you screaming in agony at times. The spectacular returns accrue only to those willing to deal with the pain. Social media today is full of folks who claim they can exit close to the peak and enter near the bottom such that their net worth rarely erodes by a lot. A few of them might be genuine but I’d very surprised if any of them have compounded their equity portfolio at 30% over a decade. Whereas many folks within my investor network (many of them from the valuepickr forum) can easily whip out their trading account statement that shows > 30% p.a. (even if measured today) over more than a decade since they chose to exclusively dabble in the undiscovered stocks universe.
It is in the staying that big money is made in the bets that work out well. Two bets that go on to become 20x+ over 5+ years can significantly change the trajectory of your net worth. While we are not in the business of promising such outlier outcomes in the offerings we run as an RA, we will not be surprised if a handful of our bets do go on to make such returns for the investors who have the mindset (and the luck) to stay put in those outlier stories.
The upcoming few weeks (maybe months) could offer excellent entry points for some stocks that have their business trajectory headed in the right direction while their valuation is headed in the opposite direction.
Please don’t let the current frustration and pessimism stop you from doing the work it takes to find stocks with outlier potential.