Tailwinds and headwinds

 

Duds become stars and invincible stocks tumble as taste turns fickle in a liquidity-fueled era

 

The rebound of the global financial markets from the bottom over the past year is resembling a tempestuous romance, with its share of infatuation, breakups, and temper tantrums. From being besotted with the Fang club, comprising Facebook, Apple, Netflix, and Google’s parent Alphabet, to turning back on tech for the attraction of Old Economy sectors, and the re-discovery of the charm of bonds, the tumultuous ride has been replete with chills and thrills. The twists and turns in the plot have skewed time-tested theories. Nothing is untouchable. The decision of new-age Tesla to invest and accept cryptocurrency for payment propelled Bitcoin into the mainstream.  The search for the next big bet transformed stocks that would not have merited a second look in the pre-covid era into multi-baggers. Hitching on to the turned around electric vehicle pioneer on envisioning a distant future of road fuel-guzzlers being geared up from neighborhood chargers is understandable. Not so is the craze for GameStop, up 1,861% in seven months, and AMC Entertainment, up 715% in less than a fortnight, amid surging cases of infections, triggering more clampdowns, and the massive US$1-billion valuation accorded to the IPO of loss-making digital storage provider Snowflake. The return to growth of the video rental outlet network in the December 2020 quarter after years of struggle and narrowing of pandemic losses of the world’s largest theatre chain operator was perhaps a message of fatigue with OTT entertainment and yearn for taking back control over the viewing experience. Indeed, the anticipation of a sunny outlook for cloud services by ignoring the dull past seemed a throwback to the era when land banks and page views were the basis for demanding rich discounting in the giddy 1990s.

In India, fortunately, such instances of excesses were rare in the secondary market, largely restricted to the pharma and IT sectors, but abounded in the primary market. Expensive offerings across industries garnered oversubscription, with most listing at gains. Hardnosed moneybags swooned over swashbuckling qualities of daring vision and efficient execution to part with Rs 4 lakh crore for 33% holding in the digital arm and 16.5% stake in the retail arm of RIL at the peak of the outbreak. In the process, the counter’s 85.5% spurt outperformed the Nifty’s 69% gain during April-December 2020, emboldening other issuers. What endeared was the agility of India’s largest private sector company by market cap to draw on the indispensability of telecom services to stay connected during lockdown to recoup from the setback of Saudi Aramco putting on hold its US$15-billion investment for a 20% stake in the oil-to-petrochemical business. Sentimental attachments to entities with a record of good governance and dividend payment was discarded in favor of practical attributes. Fast-moving consumer goods dispensers earning major revenues from health and hygiene products were picked for pampering. Makers of entry-level passenger car and two-wheelers were fancied as they found increasing acceptance from pandemic-weary users keen to avoid public transport. Nearly 17% of the value of the name behind a top-end two-wheeler brand was knocked down in days in January. Passenger vehicles of India’s largest automobile producer were sought but its commercial vehicles given a cold shoulder. Tractors hogged the limelight.

Trending fads had short shelf lives. Value-for-money models are likely to lag premium carriers following skyrocketing fuel prices as the economy looks to normalize. Just like in matters of heart, complacency can be fatal as investors betting on leaders in industries with high entry barriers realized. A capital-intensive or cyclical field is no guarantee of limiting rivalry. The fiscal stimulus-fueled boom put a lost cash in the pockets of those looking for the right catch to avoid future shocks of infidelity and live happily. The roadmap preferred was to become an all-rounder, vested with wholesome appeal.  A cement manufacturer’s decision to flirt with paints was viewed as a strategy to become an integrated player by catering to downstream and upstream consumption. The shaking off a staid segment shocked an entrenched kingpin just like Reliance Jio’s entry, with free voice calls, disrupted a smug façade of first-movers’ pricing power due to shrinking of competition stemming from the huge spectrum acquisition bill. Any which way for those looking for suitable matches, the era of playing by the book appears to be over. The winners in the post-covid-19 world will be those who constantly reinvent themselves to stand out in the crowd.  

  -- Mohan Sule

A year later

 

Despite the pandemic’s devastation being more severe than the September 2008 crisis, the recovery has been swifter

 

With the benefit of a rear view of nearly a year since stocks plunged to multi-year lows as nations prepared to down their shutters, the global medical emergency has offered valuable insights into markets’ stumble and rebound. The crisis differed from past blowouts in two ways. First, the magnitude of the devastation. There was no benchmark, sector or stock that was not swept away by the tidal wave of selloffs. While the Nifty’s 59% loss was spread over 10 months to beginning November 2008 amid the credit crunch, the index shed 34.5% in two-and-a-half months to 3 April 2020. Second, the suddenness with which investors were caught unawares. The Nifty was trading at a steady level of 12,200 for two months to mid-February 2020 before it started losing ground. There were sporadic, but alarming, reports about the breakout of a communicable disease that had prompted China to put an entire city under lockdown. Yet the potency and scale of spread of the deadly virus, which was so mysterious that for many days was known after Wahun from where it originated, was not something that had been anticipated. There were contrarian voices during the dot-com boom warning about the sustainability of the eyeball-based valuations and during the home mortgage madness about the dangers of exotic spliced-and-diced debt instruments. Even the beginning of the end of a cyclical bullish phase has enough red flags for those concerned about prices running ahead of historical earnings growth. Covid-19 was horribly different. There was no roadmap to vanquish an invisible opponent who seemed omnipresent and resilient. There was no knowing how long the war would last.

 

Nearly nine months later, the situation had changed for the better, with vaccines from six different sources in use and more on the anvil. The issue occupying much bandwidth is if the recovery is too fast and too soon. The Nifty rebounded to conquer its January 2020 peak in over seven months after the 23 March dive in contrast to the two years it took from the January 2008 milestone. The journey from the brink to back was not easy. There were restrictions on movements. Supply and distribution chains were disrupted. In the post-covid-19 world, certain ways of living had altered, either permanently or drastically. In the process, new stars were born, some got a fresh lease of life and others a second coming. The steps leading to the re-emergence from the turmoil comprised fear, rescue, differentiation, search for the next big idea and return of risk-taking. The conditions leading to the seizing up of liquidity can be mismatch between revenue inflows and valuations of Internet properties at the turn of the century, miscalculation of the direction of asset prices during the period of low interest rates in 2007, or disarray in production and reach of goods and services last year. The redeeming feature of the latest scary event was the exemption of essential services such as pharmaceuticals, polymers and fertilizers and the discovery of the indispensability of tech. These sectors attracted idle money and rekindled investor interest.

 

With the wisdom of how keeping the lending pipeline de-clogged aided recovery post the financial sector meltdown over a decade ago, central banks quickly loosened supply of no-cost money. Without any too-big-too-fail institutions to rescue to limit the contagion from infecting other healthy parts of the economy, governments resorted to direct cash transfer. In India, vulnerable sections, with the power of lifting other segments of the economy, were identified for support. Assured of a safety net, companies, on their part, cut costs and concentrated on keeping production running. The search for better returns during a period of negative interest rates had two consequences. Picks were not based on headline numbers. The scrutiny turned to niches and specialties. Makers of two-wheelers and farm equipment, insecticides, and health and hygiene products found fancy within their industry. The confidence to embark on the next risky bet, with the comfort of liquidity limiting the downside, resulted in a shift of attention from growth counters to value stocks, temporarily thrown out of gear. Renewal of buying in metals, infrastructure, capital goods and real estate coincided with the phase-wise lifting of lockdowns. If proof is required that the wheel has completed its rotation is crude more than doubling in 10 months to cross US$ 60 a barrel after hitting a bottom and estimates that central banks will likely tighten money flow as early as in H2 of 2021 instead of 2022. It had taken Federal Reserve seven years to lift interest rates from zero after September 2008.

 

-Mohan Sule