I arrived three days earlier to Delhi. It started well with the airport shuttle to the centre of the city. But then dry and hot Delhi has been prompt in saying “welcome to the extreme climate city”. Distance keeps my love alive for India.
Talking about love, listening or reading news about India from Europe is different from coming here and tuning in. I have never encountered such an anti-state wave before. There was hardly an objective comment about the state. The state was bad, the leaders were corrupt, the laws were poor and “India kabhi change nahin ho sakta”.
Then, there are open forum debates, be it Air India vs its pilots, the state vs telecom majors, finance minister vs. Mauritius, the debate about productive investment in gold or about Kingfisher or even Reliance. The regulators’ recommendations are criticised and labelled as arbitrary, regressive and inconsistent. Thought leaders have started using words like “destroyed” and “collapse”. There are, of course, counter opinions - “seven reasons why India will not collapse”. It seems like a never-ending debate, fitting the description Amartya Sen gave us of the ‘argumentative Indians’.
I don’t have a pro-state stand, neither am I against the state. May be I am judging the state relatively and not absolutely. For me, messing up a pensioner’s life and losing his pension in risky investments is a bigger sin than trying to restrain a kind of laissez-faire economy. We are passing through tough fiscal times and controls have helped India on prior occasions, but maybe it’s poor timing and lack of diplomacy (India has lesser diplomats than New Zealand). And, after a secular fall from November 2010, the negative market sentiment only fuels the debate further.
On diplomacy, Shiller talked about the role of thought leaders and why they should try to calm markets and not excite these. Markets are a bundle of nerves, and using works like “destroyed” and “collapse” is poor choice of words. We should understand the limitation of the state. Just like most of us, even a state is more reactive than proactive. An ideal state is hard to find. Unlike the US, India is still finding its balance between economics and populism. This will take time. Maybe this conflict is a good beginning, which will lead to market maturity, market knowledge and hence reduced volatility.
As an investor, trade or money manager, I can choose between indulging in the blame game or thinking of a solution for risk management. What if these negative sentiments exacerbate and take us 20 per cent lower from here. What then? Nifty is already down 20 per cent since November 2010, another 20 per cent may lead to further pain. Owing to geographical bias or portfolio allocation rules, going cash or cutting out losses is simply not an option. Is there a way of superior stock selection? Is there a way to indentify 10 per cent of the market, which can outperform and sustain, despite any broad market drop and continued negativity.
We have talked about divergence on prior occasions. We have also explained that intra market divergence can be large. Take the top 300 Indian companies and run a return test starting November 2010. The Nifty is down 20 per cent since then. There are about 20 stocks in the group (300 universe), which are up 30 per cent since the Nifty topped.
Also Read
This means that the market is not just a blue chip index. The Nifty does sleep. Intra market divergence always gives long-only opportunities that can not only provide a natural hedge but also deliver absolute gains. This might all seem wishful thinking, but it’s not. Hence, the investing community has the choice - either build better research systems to identify such sectors and components, go on cash, go on vacation, wait for the state to become proactive or remain argumentative.
The author is CMT, and Co-Founder, Orpheus CAPITALS, a global alternative research firm