As I sit down to write this editorial, news has just come in about the rating agency Standard & Poor changing the outlook on India from stable to negative. This is not a downgrade of the country’s rating, which stays on BBB-, but a statement of concern that the rating may be downgraded at some point during the next 12 to 18 months if the major concerns that S&P points out are not addressed.
Now, I am not a great fan of the rating agencies. Whether in the Asian crisis of the 90s, or in the global financial crisis of 2008-2010, or in their ongoing valuation of businesses, I don’t think they’ve covered themselves with glory in any way. As an aside, I must point out that although I’m a huge fan of legendary investor Warren Buffett, I think his investment in the Moody’s rating agency is a blot on the old man’s portfolio of companies.
Rating agencies are lagging indicators of what has been happening in the real world. S&P has pointed out in its outlook change that their main concerns are that they do not believe the government’s estimate of 7.5 per cent growth or 5.1 per cent fiscal deficit. But guess what, you and I and everyone else already knew that. The S&P’s outlook change holds no new information that is not already available to us. The only information is that if (when?) the downgrade actually happens, then foreign money is going to become significantly more expensive but all that is still some time away in the future. Many international funds use the ratings as an external gatekeeper and simply won’t keep money in an economy that’s below investment grade.
At the moment, what the S&P’s statement does is to add to the tremendous negative environment that has been becoming sharper for some months and has accelerated since the Budget. The rating agency identifies political pressures on the government as a factor in why it believes that it won’t be able to deliver on the deficit. Generally, this is taken as a reflection on the ‘coalition compulsions’ theme that we keep hearing. I, for one, don’t believe in the coalition theory even for a moment. There’s a huge leadership deficit at the top of our government. Had the leadership have been of a higher calibre, the coalition problems would have been managed – that’s what leadership is all about.
Having said all this, I can’t help reverting to my basic instinct that there’s way too much pessimism around today. The old saying goes (I think it was one of Rothschilds who said it) that the time to make a fortune is when there’s blood on the streets. He didn’t literally mean blood but meant financial stress. I believe that this is a great time for bottom-up value investing. If there are any potential multi-baggers out there, then this is the time when you are likeliest to be able to buy into them at the kind of price that will make it a multi-bagger deal.
No fortunes are made when the markets are in a frenzy. To see a proof of this statement, read our cover story on page 28. Stocks that appeared to be great buys in the heady days of 2008 turned out be wealth destroyers of the worst kind. In hindsight, some of these look like obvious cases but when the going was good and money was cheap then they looked world beaters.
And that’s why it would make sense for the investors not to pay attention to macro issues while investing. We may talk about larger issues in this editorial, but the focus of Wealth Insight is unrelentingly on identifying the right stocks to buy and hold on to. Which is why the investment that will make your investments worthwhile is a subscription to this magazine.
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