Back from the brink

An important lesson from the stock market’s recent brush with bears is that valuations is a dynamic concept

The near 1,200-point slide in the stock market following the Federal Reserve’s stated resolve to begin the cycle of interest-rate hikes and the eventual recovery have plenty of lessons for investors. The first is that the rules of the game have changed. Equities are shrugging off the control of foreign investors, though the category still has the power to sway the market like the four trading days in September. In fact, companies with high foreign fund holding have become liabilities due to their sensitivity to international events. Instead, mutual funds are the new movers and shakers. Many of them are maintaining a higher percentage of cash to deploy on dips. Their exposure is not limited to index constituents as is of most pension funds from the developed economies because of their investment objective. The second change is the shift of mood.  Investors are tapping players creating ripples in niche platforms, bypassing those with established revenue models. Retailers, pathology labs and fast-food providers have emerged as forces to reckon with in contrast with tech, telecom and banks in the pre-2014 era. The slowing of MNCs in the large-cap space in providing capital gains is the third conclusion. They do surprise from time to time. These occasions are exceptions rather than the rule. Indian peers are seizing the initiative as consumers are shaking off their reverence for established brands. They score with their value-for-money proposition by spotting space in the market that big players have ignored or unable to tap due to the low margins. Some are becoming MNCs in their own right by going to neighboring countries.

The fourth inference is the preference for listing gains, as reflected in the huge over-subscription to IPOs of late, rather than bracing up for the long trot or fluctuations in the secondary market to gather capital appreciation. Some dodgy issues, to be sure, don’t elicit the necessary interest, a display of maturity of the market that prefers quality even if it is expensive. The fifth outcome is the dramatic transformation in the outlook for valuations. The yardstick of using historic P/E to determine if the current prices are over the top is turning obsolete. Fancy for stocks in high double-digits seems to be a reiteration of the understanding that the economy is set to scale up at a faster pace. The sixth observation is that many hot and happening sectors have let down investors unexpectedly. The lukewarm reception to e-commerce properties is in consonance with their de-rating by private equity and venture capitalists earlier. Volumes cannot be a substitute for quality of the earnings is the message of the market.  The seventh noticeable trend is that every phase has some comfort sectors. These continue to perform steadily, irrespective of the internal and external environment. Passenger cars and two-wheelers fit the slot. A range of models cater to different needs, without bloodletting. There is seamlessly adoption of new challenges.

Each bull-run throws some surprises, too, is the eighth fallout. The trigger could be transformation in the market’s taste or change in technology or regulations. Ignored till recently, deregulation of petrol and diesel have made refiners the market’s darlings. The danger here is that just as loosening control permitted PSU oil marketing companies to bloom, any tinkering with norms could also make them wilt.  The eighth footprint is that traditional safe harbors are no longer dependable. FMCG and pharmaceuticals, once considered defensives, are now becoming unpredictable. Sales of personal-care products bob according to rural consumption that, in turn, depends on rains. Drug producers’ fortunes wax and wane as per the observations and clearances by overseas regulators. The ninth marker is that sub-segments can perform in a diametrically opposite fashion. Even as state and some private lenders are fighting off the market’s negative perception in the financial services space, NBFCs continue with their trail-blazing run due to their nimble-footing in customizing to borrowers’ needs. The riddle is if consolidation will make banks responsive or shackle them with more layers of decision making.  There is possibility of hitherto-shunned industries making a dramatic comeback is the tenth inference. Non-glamorous nuts-and-bolts producers are coming out of hibernation. Bearings, components for machines, water and sewage treatment, chemicals and metals are once again meriting a closer look from a market that is fed up of the hype and want India Inc to walk the talk.

Mohan Sule