A false sense of exuberance

India’s stock market has given the Union Budget a spectacular thumbs up, far different from what many commentators and most households (according to a CMIE survey) have had to say. Since the presentation of the Budget, in one week the stock market indices have gone up by around 10 per cent. Irrespective of what happens thereafter, this needs explaining.

Since the Budget did not set out to impart a stimulus to economic activity, and instead concentrated on upping investment, foremost in infrastructure which takes time to have an impact, what can be the reason for stock market enthusiasm?

Was the market behaving rational or was it in the grip of irrational exuberance? Or was it simply putting the excess liquidity created by the central bank to fight the lockdown-induced downturn into stocks?

Several rational explanations have been put forward. Post lockdown, the economy has quickly picked up steam and government sources are foreseeing a V-shaped recovery in moving from a GDP contraction of around 7 per cent in the current fiscal (2020-21) to a growth of 11 per cent in the coming year (2021-22).

There is a clear decline in coronavirus infections, with no sign of a national second wave. Plus, the population is being rapidly vaccinated. That, and a degree of immunity given to a significant section of the population by the virus are causing some experts to foresee the entire population acquiring herd immunity.

The global economic outlook also seems positive with a sensible US President Biden replacing unpredictable President Trump. Nearer home, the other Asian economies seem buoyant after having weathered the pandemic better than most western countries.

But a rational explanation (as opposed to irrational exuberance) is available if we look at not just the behaviour of the indices in the immediate past but take a longer-term view. If we look at where the market was a year ago, then the broad trend would take it close to where it was at the end of the post Budget first week. May be a bit over the top but by only a little.

A shorter-term view gives us the same picture. There was a big rise in the latter part of January, around the third week, after which there was a big fall till the end of the month. So we can argue that the market is simply correcting itself and more or less getting back to trend.

The overall impression that we get out of all this is that the economy is not passing through an inflection point on its way to graduating to a new superior growth phase. The most recent indices rise is merely episodic or an attempt to self-correct.

If the market is not in the grip of irrationality, where does it leave the average investor who, as a rule, seeks to put say a fifth of his savings in stocks in order to take a slight bearable risk for a higher return than what assured fixed income channels offer?

The cardinal rule that holds for all time is, don’t be swayed by the immediate and, most importantly, don’t try to second-guess the market, don’t try to get in at a trough and get out at a peak so as to maximise gains. High stock values may be tempting but there is no knowing that they will go higher still. In fact, they may go any which way at a time of slight volatility, like the present.

The answer to the question, when does one get in, is to change the question to, where does one get in. Don’t look at the current value so much as the stock itself. Is the company widely considered by the analysts’ community to be steadily turning in healthy numbers?

Perhaps most importantly, seek to find an answer to the question as to where the company will be in five to 10 years. The answer lies all around us. Which are the most solid items of popular consumption? Does it look as if the public is satisfied with the value it is getting and there is considerable likelihood that it will continue to deliver that value for a good bit of time to come? Do Maruti Suzuki cars, Titan watches and wearables look likely to enjoy the consumer’s support for quite some time to come? If so, get into that stock and don’t look at its price for a good year or so. Don’t buy or sell at close intervals if you are not a professional investor.

All rules about investing have exceptions. Around a decade and a half ago, consumers and investors would have given the Tata Steel stock a resounding thumbs up as it was going places internationally, buying up a bit of what was British Steel, the global grandfather of the industry. But look at what kind of returns it has given since then.

Or look at ITC. It is going great guns in successfully diversifying — its Aashirvaad atta is everywhere. But most of ITC’s profits come from cigarettes and what if governments start banning smoking for simply being too injurious to health. Or ethically, should you make money out of people’s bad habits?

To get back to where we started, does one get into buying stocks right now or does one start selling? My personal sense is the Budget is a disappointment. Many poor people remain hungry and many among them are still without a job. It will take the economy quite some time to settle down to pre-demonetisation growth rates. So despite the indices’ uptick, a new growth phase is not round the corner. If time tells you I was wrong, then you will know why I never became a professional investment adviser!