Ground Hog Day

COVID Economics by Rahul Ramesh | Part 2

May 23, 2020

“Well, what if there is no tomorrow? There wasn’t one today”
– Phil Connors, Groundhog Day

The Problem of Predictions

We unfortunately (or fortunately) do not possess the ability to live the same day again and again. Events are shaped alongside the concurrent movement of our conscience (time as a fourth dimension) daily and we seek assistance from those who could provide us a frame of reference to make the so called “right” decision.

Remember that frameworks may sound fundamentally sound, but the outcomes can never guarantee the efficacy of your actions.

The fourth estate and the talking heads in the media sure do sound knowledgeable enough for one to make investing decisions. I’d like to draw a parallel to the weather forecast system followed by Phil the Groundhog in the United States, whose track record isn’t all that bad.

Unfortunately for mankind, availing his services to pore over the daily financial market charts or commentary in order to see bull (spring) or bear (winter) markets doesn’t seem logical. It would be downright inane and laughable to suggest that the results and advice provided by sophisticated and qualified market commentators can be determined in such a binary fashion.

Animals have demonstrated an incredible track record in binary outcomes such as Paul the Octopus in 2010 prophesying a victory of Spain and earning quite a few enemies of the culinary sort. Opposed to football analytics run by Goldman Sachs in 2018, predicting a victory for Germany.

I am part of the crowd that is obsessively predisposed in terms of tweaking my financial planning and hoping to achieve a nest egg for retirement. The importance of making small decisions at the right time has never been more urgent, as evident with the events of the COVID-19 pandemic.

With over 125,000 cases and counting in India, there are those who would wish that the nationwide lock-down ends on May 31st and are praying to see Some shoots of green in their portfolio.

The RBI’s announcement to extend the moratorium for loan by another 3 months to August 31st paints a bleak picture for Indian corporates looking at a revival of the debt capital markets.

The laws of corporate finance naturally extends to the equity markets which reacted negatively to the announcement, as expectations for a 75-100bps were left unfulfilled. Interestingly the stock market rebound has been predicated on the back of hopeful revival in consumption and bets remain squarely placed on MNC names in the space owing to the “safety” premium attached to corporate governance and market practices, which may lead to anchor bias.

Against the Gods by Peter Bernstein is a must read for first time investors – not because of any emphasis on trading tips or secrets or waxing poetic about the need for a buy and hold outlook. But due to its focus on the importance of risk management in portfolio management and asset allocation decisions.

Seeing deep reds and loss of capital does drive one to feel more pain. Understanding what you are willing to preserve and what you are willing to discard is crucial.

Not solely from a monetary perspective, but as a first principles approach to your time and effort. Securing capital for your future is the added benefit of a disciplined approach to risk management.

It keeps on going… and going… and going.

The old Energizer bunny and its adage continues to be more relevant today.

Pitched as a far better product and more durable vs. its competition, the need to constantly benchmark and compare oneself to others is not something unbeknownst to most people in India.

It’s often a powerful stimulus that drives the narrative across the social fabric and ironically even the capital markets.

The same is applicable in the game of credit ratings and the bedrock of debt mutual fund investment decisions - higher the credit rating as ascertained by the analysts, more favorable are the terms of borrowing and more channels of funding available to the corporate.

In short, lets add that in to the portfolio. Who wouldn’t want to lend to a “sound financial institution” and to the “men who are separated from the boys”?

Chances are that one needs to dig further than just the narrative to understand what truly lies beneath.

As anecdotal evidence suggests that what were once behemoths of the economy, during a particular decade may not weather all the storms that market cycles usually throw at them (For instance in 1988, the Sensex had 26 companies in the manufacturing sector vs. 13 in 2018 and only 2 MNC’s in 2018 vs. 7 in 1999).

Interesting to see how history and stock market composition are usually correlated. And right now, the large concentration of BFSI in our indices resulted in a down day on 22nd May with the market sell-off post the 40bps rate cut adding to the subdued sentiments reflecting the inefficacy of stimulus package.

Are the growth engines of our economy, long viewed as the underlying catalyst of liquidity needs for our burgeoning manufacturing industries and our rapidly growing population, in need of new batteries?

The Supposed Experts

The Franklin debt mutual fund crisis harkens back to events from the yesteryears (Amtek Auto and JPMorgan Asset Management, Ballarpur Industries and Taurus Mutual Fund) and raises fundamental questions for debt investors regarding the viability of the product as an investment option and who are truly sophisticated and qualified advisors.

A standard response preferred is that the decision to wind up or close fresh investments is in the best interest of investors and that liquidity constraints had forced such a decision.

An all too familiar rhetoric which belies a simple fact – the strategy hasn’t worked and the people you entrusted your hard earned money aren’t weathermen (or groundhogs like Phil) to have seen these events unfold.

But That’s not what you paid them for, right?

(To Be Continued)

Read Part 1 here - In Time

The author is a Senior Associate, Fund Management with Logos Group, based out of Mumbai. He enjoys reading, writing, watching sports and rambling on about financial markets and economic issues. His love for finance is matched only by his love for fantasy fiction.

In fact, this post is his secret attempt to make you watch the movie - Groundhog Day.

Say hi to him on his LinkedIn page - Rahul Ramesh

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