Two weeks ago, I wrote in this column about the Sensex getting back to the previous highs. At that time, I pointed out how some Sensex stocks had lagged far behind the general recovery.
Since that weekend, news headlines have been devoted to an astonishing variety of scams and scandals that have risen to the surface. As an investment analyst, I can’t help but note that the clear connection between the worst scandals and the Sensex stocks that have underperformed the most.
Since the market hit its peak in January 2008, the worst underperformers have been telecom and realty stocks. And as we can see now, in both these sectors, nothing is as it seems. Is it just a coincidence that scandals and stock performance coincide? I don’t think so.
In telecom, for example, the severe erosion in value of the older companies has taken place because the erstwhile telecom minister drastically changed the competitive landscape almost overnight by bringing in a flood of operators. As an investor, whatever you could have projected was turned on its head because UPA coalition partner DMK’s goals and priorities took the telecom sector in an entirely unforeseen direction.
Something similar seems to have happened in real estate. Although the loan scandal is still unfolding as I am writing this, it is clear that the financing of realty companies was determined not by business considerations but their proficiency at bribing officials in banks and finance companies.
Basically, these companies were able to hold on to the absurdly inflated housing prices because they had free access to a pool of capital from government banks and finance companies.
As an investor, or as an investment analyst, it becomes that much harder to pick the winners from the losers when they are being picked not by market forces but in secret by politicians and officials. Of course, you could say that this is the way it always has been. As the promoter of one of the new ‘first-come first-served’ telecom companies told me recently, “X ab bahut sahreef banta hai. Dus saal pahle isne kitna khila-pila ke licence liya tha,” where X stood for the well-known promoter of one of the established telecom companies.
How will this ever end? I am not sure, but perhaps the answer lies not in the headlines of the scams that are breaking, but in the headlines from Bihar over these last few days.
This column first appeared in The Economic Times on December 29, 2010