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