Every new crisis forces us to generalise the sentiment into simplistic statements. Facts, nevertheless, often tend to be very different. In today’s article, I share some facts, a very distinguished opinion, and cap it with how we think about the current situation.
During the dotcom bust, the Nasdaq crashed from over 5,000 in March 2000 to below 1,200 by October 2002. The investment community and the world at large interpreted the market collapse as a kind of divine judgment against the technological optimism of the 1990s.
Peter Thiel writes in
Zero to One that the entrepreneurs who stuck with Silicon Valley after the dotcom bubble learned the following four big lessons:
- Make incremental advances: Grand visions inflated by bubbles should not be indulged
- Stay lean and flexible: All companies must be “lean”, which is code for “unplanned”. Planning is arrogant and inflexible
- Don’t try to create a new market prematurely. The only “real” business is one where the customer already exists
- Focus on product, not sales: If the product is good, you don’t need sales
Thiel, who was the first external investor in Facebook, says these lessons had become a dogma for the start-up world. And yet, the opposite principles have driven the technological evolution as:
- For the overall ecosystem, it is better to be bold than trivial
- A bad plan is better than no plan at all, and
- Sales matter just as much as the product
While the “golden rules” were built for the next dotcom crash, the next market crash wasn’t related to “clicks”, but “bricks”, i.e., the subprime housing bubble. We created a new set of rules. And the next market crash wasn’t related to clicks or bricks but the Covid pandemic.
I believe that an exuberant market often builds excesses, and that gets taken out eventually. Markets operate on self-organised criticality (the ability of a complex system to evolve without a central direction in a way that eventually helps the system improve). Whatever is not sustainable will find a way to not sustain. We can keep creating rules, but the “next time” will be different from “this time”.
And this time, the Indian equity markets — already under pressure from sustained foreign investor outflows — nosedived last week triggered by the Russia-Ukraine conflict. It has many moving parts.
Here are some thoughts on how we are dealing with it. We break down the whole argument into two large parts — the unknowables and how to address them and the knowns.
The unknowable largely centres on these points:
- Russia-Ukraine conflict
- Continued foreign outflows, and
- Domestic liquidity situation
The knowns, on the other hand, are related to India’s economy. After multiple rounds of being put through fire (bank asset quality review in 2015, demonetisation in 2016, GST implementation in 2017, NBFC crisis and relevant clean-up in 2018 and two rounds of the pandemic), India’s economy is now in the best health it has been in more than a decade.
Corporate profitability, albeit struggling against input cost inflation, is resilient and improving.
Now, when one juxtaposes this with the unknowable, we can surmise a few things. One, the issues that Russia is trying to resolve will likely take longer than what we have traditionally considered long term for equity investors.
The good part is that we don’t need to know the timelines. India’s direct exposure to the conflict is manageable (sunflower oil imports from Ukraine and defence and fertiliser imports from Russia). Yes, higher crude oil prices hurt, but they are not material enough to create the large-scale collapse that we witnessed last Thursday.
The conflict could also make emerging markets (India included) riskier for foreign investors. However, in the long term, we see “fundamentals” as a driver of “flows” and not the other way round. Given that India’s fundamentals are strong, flows will follow — eventually.
Lastly, the domestic flow situation will likely get tricky. The Securities and Exchange Board of India (Sebi), after the market collapse last Thursday, delayed the implementation of new rules that required higher cash margins in the futures and options market. This has been pushed back by a month.
But many investors, according to our understanding, pay capital gains tax on stock earnings only in March. Given high capital gains this year, it might entail some selling in the market to pay taxes. Coupled with the upcoming LIC IPO, it could further suck liquidity away from the market, potentially at a time when FII selling continues.
I have previously argued that in this millennium, there have not been seven consecutive calendar years of positive market closing. Currently, we are in the seventh year. So, historical odds are against 2022 being a year with great returns. Nevertheless, that said, a look at previous market collapses indicates that things are seldom as bad as we fear them at the time. While the noise will take its course, it is time we focus on the fundamentals.
(The author, Jigar Mistry, is Co-Founder & Director, Buoyant Capital. Views are his own)
