Lone wolves

More than pandemics and political turmoil, governance issues at companies are triggering market backlash

Stock market indices in the US hit record highs even as one of its most important export markets and an important link in its supply chain struggled to contain a pandemic. The toll from coronavirus has exceeded the 774 fatalities compiled by the World Health Organization during the outbreak of Saar in 2003. The magnitude of the impact of quarantining the second largest economy in the world is yet to be quantified by multilateral agencies that were quick to scale down expansion estimates due to the over one-and- half year trade tariff tiff  between the US and China. China’s growth is projected to drop below 5% in the first quarter of the current calendar year from 6% in the fourth quarter last year. Instead of fretting over the looming slowdown, eqity markets gloated over the bumper American corporate performance in December 2019  quarter, till Apple’s earnings warning put a break on the celebrations. There is an underlying optimism that the current crisis will be satisfactorily concluded sooner than the nine months it took to contain Saars after identifying the first patient in November 2002. Besides isolating suspected cases, the inoculation includes monetary and fiscal stimulus within and without China. The federal Reserve held its lending rate unchanged in January despite robust job creation, keeping in mind the uncertainty introduced by the newest threat to global stability.

Not surprisingly, socio-political eruptions are losing potency to influence stock movements. Volatility in prices of assets I sort lived. There were no traces of destruction of wealth, if at all happened during the brief period of the Saars scare, a few months later. The spike in crude prices following the missile strike on two Saudi oil facilities retreated soon after. The killing of a top Iran official in Beirut by the US did not escalate into a full-fledged war. Policy makers around the world are quick to intervene to insulate the economy from any infection. Clashes between opposing forces and protests against economic woes in Latin America and rebels trying to dislodge autocratic governments in Africa are shrugged off as common occurrences.Instead, actions of lone wolves seeking financial dominance are mauling stocks and inflicting long-term damage. George Soros betting against the British pound, the flock of foreign investors pulling out of South East Asia during the currency crisis of the late 90s, collapse of Lehman Brothers under the weight of worthless mortgage- based securities, the UK deciding to exit from the European Union and the US starting a punitive trade war with China have signed even those nations that were merely on the sidelines. These eruptions changed the way the world functioned. Countries have become more circumspect about the kind of capital inflows they will allow. US has cited Huawei as a security threat and banned its participation in its 5G networks. Bilateral and multilateral trade pacts are no longer sacrosanct. The US succeeded in tilting the field in its favor by putting pressure on China to import more farm produce. The UK refused to subsidize weaker European nations through a common currency has balked from joining the regional Comprehensive Economic Partnership and hiked customs duty in the recent budget. Textbook solutions are being thrown out the window. The global risk-aversion after the meltdown of financial institutions in the US was countered by injecting more liquidity.

An exodus of auditors from over 200 mid and small companies in the first seven months of CY 2018  has resulted in a loss of confidence in the space that is yet to be fully restored. The causes of market backlash are now extending beyond insider trading and cooking of the books. Governance is meriting a closer scrutiny. NSE’s IPO plan seems to have gone into cold storage even after the conclusion of Sebi’s probe into preferential trading access to a few participants. Bank stocks are under panic attack due to the reluctance of Vodafone Idea and Bharti Airtel in make provisions for the demand of the Department of Telecommunications to calculate fees based on income even from non-core operations to calculate fees based on income even from non-core operations. The loose oversight by the board of IL & FS has paralyzed the financial services sector  and is hurting consumption even one-and –a half year later. The insolvency and Bankruptcy Code had to be amended to send DHFL to the resolution court. YES Bank’s struggle to shore up capital has spoilt the sentiment for private banks. The lesson for investors, it seems is to not miss the trees for the forest.

---------Mohan Sule