Springboard of setbacks

 

Crises such as freezing of debt schemes and misuse of PoA by brokers have resulted in a safer trading space

 

What can move and shake the equity market is uncertain. The covid-19 outbreak was a health emergency, but the policy interventions of slashing interest rates and fiscal incentives mimicked those in a cyclical downturn. As is the norm, export-oriented sectors led the revival. Profit-booking in the tech and pharma counters trickled to commodities, infrastructure, and real estate. In a departure, domestic consumption, too, was happening alongside. A good southwest monsoon and cheap credit boosted offtake of fertilizers, insecticides, tractors, and housing products. Another divergence was the varying performance of segments within the industry. Health and hygiene products of FMCG companies sold briskly but not personal-care solutions. Entry-level passenger vehicles were favored for mobility, but commercial vehicles ignored due to movement restrictions. The rebound was quick, unlike the four to five years of zigzag trajectory during the transition from a bearish period into a bull run. The Nifty climbed up 21% in five months after wiping out the loss on the way to the bottom in less than 11 months. The benchmark expended 22 months to regain the January peak and 76 months to top it with 21% wealth creation after the 2008 liquidity squeeze. Big-bracket investors did not follow a secular strategy last year. After being overall buyers in CY 2018 and CY 2019, local institutions dumped shares even as FPIs net pumped Rs 2.42 lakh crore in the 15 months till March 2021. The unabated Rs 93000-crore 10-month selloff in the 14 months to February 2021, with the intensity tapering in March, by mutual funds was sparked by redemption pressure from corporate and individual unitholders to conserve reserves. In contrast, overseas accounts had access to ample no-cost cash searching for higher yields. 

 

What has been left unsaid but inferred is the disenchantment with money managers. The restlessness is despite the Securities and Exchange Board of India taking steps to instill confidence in pooled investments. Spreading the distributors’ commission replaced upfront payment to encourage long-term investing. A 1% advance fee per annum for three years is only for SIPs of Rs 3000 or more per month to ensure enlisting of serious investors. Inversely linking the total expense ratio to the growth in assets under management aims to discourage proliferation of copy-cat schemes. It took a series of crises for the realization that there are no risk-free returns. The seizing of the credit market following the collapse of IL&FS in 2018 resulted in side-pocketing of paper the day it is downgraded to insulate the NAV of the rest of the scheme. After the freezing of six debt schemes by Franklin Templeton AMC in April 2020 due to the pandemic-induced rush to exit, the portfolio and yields of the underlying instruments need to be disclosed fortnightly, and not monthly. Amortizing the coupon daily can be done only for fixed income instruments of 30-day maturity. Those of a longer duration are to be marked to market to know the realizable value. A fund house’s exposure to a single issuer is 10% of the corpus. 

 

Sloppy governance is part of the problem. The other is the uninspiring track record. The median one-year returns of the 10 best performing large-cap schemes at the close of March 2021 were 40%, the highest being 49%. The NSE’s mainline index improved 68%.  The top 10 performing multi-cap schemes’ mid-range was 8%, with the upper end appreciating 17%. The BSE 500 climbed up 73%. Besides ease of online trading, the near doubling of growth rate of demat accounts to 5.15 crore in the 10 months from end FY 2020 as against 14% increase from FY 2019 is in no small measure contributed by the desire of the ordinary investor for control due to the mismatch between expected and earned gains, particularly after the cleaning up undertaken by the market regulator to create a safe environment. The blowout in 2019 of Karvy Stock Broking, which quietly sold members’ securities to fund real estate arm Karvy Realty, was a turning point that led to reviewing the use of power of attorney given by subscribers. Now securities will remain with the clearing house and not transferred to the broker’s account. Since 1 September 2020, 20% upfront margin is required from the client for every intra-day order as against the practice of the platform provider often putting up the margin on the squared-up position at the end of the day. Buyers and sellers will now have to wait till settlement before executing a fresh trade. These reforms have emboldened the marginal player. It is a triumph of David over Goliath.

  

 -Mohan Sule

 

 

Face-off

 

The strange ties of stocks and bonds, New and Old Economy, oil and demand, and the US dollar with recovery

 

The tussle for supremacy between stocks and bonds is one of the many paradoxes of investing. Both are dependent on each other for survival but feed on each other’s misery. Equities and fixed income securities are chased on signs of the economy blooming but for contrasting reasons: one for capital appreciation and the second to capture the prevalent rate-bearing instruments on expectation of borrowing costs sliding further. The mark-to-market value of a portfolio comprising loans taken by the private sector and the Union government and the central bank improves as lending cost looks set to tumble. A rate-hike cycle to pull back assets from entering bubble territory caps consumption. The valuations assigned to companies based on their projected north-bound trajectory on low-cost money go over the top. There is exodus from debentures and government securities in anticipation of future issuances at higher coupons and yields. The playbook is becoming increasingly visible of late. The rapid rollout of vaccines and a third fiscal stimulus in the US even as interest rates are near zero are sending yields soaring and correcting shares. The return of demand is triggering commodity inflation. Producers are ramping prices, setting the stage for a lingering inflation unlike the flare-up caused by the temporary bottlenecks in getting food and non-food supplies. Snapping up the diving counters is fraught with risks. They might turn dud if the drop continues. Locking funds in NCDs and treasuries might be lost opportunity for higher returns going ahead.

 

The ties of sustenance and destruction are not only between two types of investment vehicles. They exist even between opposing segments and within a grouping with similar characteristics. The shift of inflows from tech stars to Old Economy scrips is a reaffirmation that the regime of soft borrowing is beginning to end. The bout between growth stocks, requiring cash infusion to take off, and value stocks, languishing due to slump in usage during a period of pessimism, is yet another irony. The two categories thrive at the expense of each other. In the absence of opportunities for higher earnings in a low-cost environment, funds gravitate towards emerging areas because of their ability to expand rapidly in short periods. Traditional sectors start attracting attention only when they can reclaim their pricing power. Oil sprang 175% from a bottom a year ago as global economies clawed back to normalcy. The commodity has become a proxy to gauge the health of the global economy. After plunging in April last year as nations hunkered down, prices scaled back after a rapid rise due to renewed shutdowns in the European Union on resurgence of covid-19 infections.  Fall in upstream sales indicates trouble for both the explorer-refiner and consumer. Softness at pumps at the height of the pandemic provided no solace to the grounded aviation players. Prices rebounded when airlines were permitted to undertake flights with certain limitations. 

Industries with low raw material and intermediary expenditure should be a cause for alarm rather than satisfaction because of the transitory nature of the benefit. The initial bounce-back of polymers and paints was based on rural markets, buoyed by good monsoon and cheap credit. These sectors might not be able to maintain their margins with the bubbling of input costs. The recent upward direction of petrol and diesel inhibiting buying of automobiles is one side of the story. The other is the disruption in transport affecting delivery of semiconductors. The problem will resolve as soon as the threat of coronavirus is under control. The smooth resumption of transport will no doubt enable acceleration in output. The outcome will be higher prices of chips as logistic providers re-work their bill. Another confounding benchmark is the US dollar. It weakens, rather than strengthening, during a bullish phase in the US economy, coinciding with loose monetary and fiscal policies. Inflows into the world’s convertible suggest a difficult period ahead.  Investors departed from risky assets for a safe harbor in the greenback during the initial periods of the lockdowns. A strong currency complicates US recovery as its exports become uncompetitive. The Federal Reserve had to pull down lending rates to near zero to diminish the appeal. Those who prefer to stick to their comfort zone, own rather than lend to businesses, or have a long-term horizon usually sit out during one of the alternate phases. Institutional investors, who face redemption pressure at the slightest souring of the mood, rebalance their portfolio to make the best of the two cycles. Volatility is the consequence of such transition.  

 

 --Mohan Sule