The health of the personal vehicle industry is a pretty good way to judge consumption demand in an economy. A vehicle is a big-ticket purchase and higher sales growth is more or less a guarantee of strong demand.
On the supply side, up and down the value chain, the auto industry employs an enormous range of people with a wide array of hard and soft skills. It consumes a large quantity of different materials ranging from metals to plastics and it’s supported by a wide range of component manufacturers. It increasingly absorbs greater degree of infotech as well. Not least, it provides cash flows to the financial industry since most vehicles are bought on hire purchase.
Some interesting auto industry data has just become available. In May 2012, Indian auto sales moderated somewhat. Maruti saw a year-on-year drop of over four per cent in terms of units. Ford and GM also saw falling sales, while Hyundai saw moderate growth. Diesel manufacturers like Mahindra & Mahindra did better. This was actually a fair performance, given that the industry is struggling to deal with twin pressures like high fuel prices and high interest rates as well as post-budget vehicle price hikes.
The May car sales data does suggest that the economy is still slowing in the first quarter of fiscal 2012-13. That’s disturbing. The recent GDP estimates of 5.3 per cent growth for January-March 2012 are the lowest in nine years, since the 3.6 per cent low logged in January-March 2003, during the NDA’s India Shining era. It makes the FY 2012-13 budgetary estimates of 7.5 per cent GDP growth look exceedingly unlikely.
There are a few questions worth asking. One is, when is the economy likely to bottom out? The car sales data offers a warning that it won’t be for some time yet. So on that count, investors will have to continue waiting. Other projections will undoubtedly be revisited after the release of the January-Mach 2012 estimates but the consensus seems to be that recovery won’t start before the second half of 2012-13.
A second question that’s worth asking is, which industries are likely to be outperfomers as the cycle continues to trend down? There aren’t any industries that offer a guarantee of outperformance without additional risk. Heavy industry and anything that’s capital-intensive appears to be out. Big-ticket personal consumption appears to be out. Fast moving consumer goods (FMCG) is still doing well but it’s also available only at valuations that are well above the broader market. Export growth is also slowing. So, despite the falling rupee, investors can’t really look overseas for outperformers.
As and when a recovery starts, the most beaten down stocks and sectors will probably lead the way. However, if you buy into those sectors while they’re still heading down, the emotional stress may be more than you can handle.
So what should the long-term investor do in these circumstances? The only sane strategy I can see is to wait and watch for lower valuations. There is no sense selling into this market. In the worst case scenarios, we’ll see the Nifty climbing back over 6,000 sometime within the next two or three years. That offers some margin of safety and a long-term investor with a systematic approach should be able to eventually generate acceptable returns.
There is also not much sense in being selective about the stocks you buy at the moment. There’s no saying when the market recovery will start. There is also no obvious sector that makes a case for massive outperformance. This is a market for passive broad investment.
There is a fairly good chance that the market will fall further. Actually there is a fairly good chance that the market will fall a lot further before the economy bottoms out. This may be where a background in gambling and stake management is helpful.
While the economy meanders along and the market falls or stagnates, the investor gets a chance to build a war-chest. Averaging down into a falling market is a time-tested strategy and systematic investment plans are designed to do precisely that. If you can increase the amount you buy at lower prices, the averaging works even better. So there’s a strong case for increasing commitments on every fall in the broad indices.
This is somewhat similar to the gambler’s strategy of increasing stakes after every losing bet. There are some key difference in the investors’ favour. Unlike a gambler on a losing streak, an investor won’t have to commit infinite amounts in theory to make the strategy work. Also the investor implements this strategy only at levels where he’s confident that he won’t be a loser in the long run. Those levels have already been hit.
