Investors learn that entry point is crucial, a theme can go out of favor, and identifiable promoters can be a mixed blessing
By Mohan Sule
Do not time the market, investors are repeatedly warned. Yet the gains made by an investor who jumped into the ring after the euphoria generated by the Lok Sabha election results and who entered before the polls would have varied vastly despite the difference of a few days. And, of course, those who invested during the policy paralysis years of 2012 and 2013 would have reaped a bumper harvest compared with the latecomers fired up by the Make-in-India initiative. The market touched a historic high last year but has come off since then. Perhaps investors fishing for stocks late last year, when some of the mid-year optimism had vanished, might earn better return than those who wait end February 2015 for the Budget, which is expected to take another step in reforming the economy and provide a new trigger for the market. If indeed interest rates come down as anticipated, fixed income instruments will lose their luster and there will be no substitute to beat equity to create wealth. The main takeaway of 2014, therefore, is the entry point is crucial for the degree of appreciation. A dramatic change can alter the market’s likes and dislikes. During the UPA rule, companies with promoters close to the ruling dispensation were sought due to their ability to circumvent regulations and influence law makers to write legislation favorable to them.
Nothing symbolised the rampant crony capitalism better than the commodity producers. Their stratospheric valuations partly reflected the hunger for steel, iron, coal, aluminum, and copper in a growing economy and also factored the reality that the high entry barriers in the form of proximity to the ruling elite, passed down from generation to generation, would insulate the domestic sector from any competition. This remained true till the globe was not integrated. After the World Trade Organization’s Marrakesh treaty became effective 1995, the sector’s return ratios started fluctuating in tune with the global cycles of boom and bust instead of displaying a secular trend. Another reason was the increasing court interventions. Cancellation by the Supreme Court of the coal blocks assigned since 1993 has turned the commodity sector a hot potato. With most of the market cap shared by big houses in the private sector and inefficient public sector, investors had to turn to defensives like the domestic-oriented FMCG sector and the outward-looking pharmaceutical makers in 2014. The result was a rise and rise in their valuations in the absence of the next big idea as tech services providers confronted currency volatility and a lukewarm US market and the infrastructure players needed more time for the hazy policy overhang to disperse. So despite the optimism about India’s potential, investors found safety in the known.
However, there can be an exception. The refinery sector was very near to qualify for the honor as even diesel was deregulated, taking advantage of the falling crude oil prices. Though the measure will reduce the government’s subsidy burden and has the capacity to do wonders to India’s fiscal deficit, oil marketing companies are far from being the toast of the economy. Of what good are lower prices if industrial activity slows down, as was evident late in the year? Instead of dimming the attraction, falling gold prices have spurred buying of the metal, but not of related stocks. The increasing imports strained the current account deficit. The joker in the pack in 2014 was the banking sector. How a supposedly bright outlook can numb investors to forget historical performance is clearly on show here. Banks are caught between mounting non-performing loans and the need to disburse credit for industrial activity to pick up. The market believes cut in interest rates, around the corner, is the solution. Besides increase in offtake, there will be treasury income by dint of a portfolio of high coupon debt instruments. Indications of the government reducing its stake to 51% provide comfort that banks will be given the freedom to address shareholders’ concerns. Not surprisingly, beaten-down PSU banks were in demand. This leads to the final lesson. Is an identifiable promoter a good thing? Mukesh Ambani placing his wife and children on the boards of his group companies is taken as a sign of confidence in his businesses and eyebrows are raised when Infosys’s founders sell stake. The travails of the Sahara group, the FTIL group, Kingfisher Airlines and now SpiceJet led market participants to wonder how they got charmed by larger-than-life promoters just as by self-styled investor activists, who have dismissed the losers in the NSEL default crisis as bad investors.
