Among investment and business professionals that I meet, the last three weeks have been the beginning of yet another cycle of severe mood swings that started as far back as November 2010. Of course, these mood swings follow the fortunes of the stock markets but lately they have come and gone less on actual externalities and actual justification. Of course, severe mood swings without any justification are sometimes a precursor to some sort of mental illness. Not to be facetious, but equities are looking decidedly unhinged in some ways.
For one, this so called recovery or green shoots or what have you is about the most narrow even by the standards of the last few years. From the time this year started, the large cap indices--Sensex and Nifty--are about even, having gained back whatever they had lost in the early part of the year. And that’s the good news. Mid-sized and small companies are the ones where the bad news is coming from. Since the beginning of the year, the BSE Midcap index is down 11 per cent while the BSE Smallcap index is down 19 per cent. And these are the indices themselves--there is a large diversity of stocks within the indices and theworst performing ones are doing very poorly indeed.
Like it has happened more than once since the 2008 crisis, the mood swings do not happen in sequence, the opposing moods are actually held simultaneously. There are two distinct sides to the story today, the (cautiously) optimistic one and the (blatantly) pessimistic one. The pessimists, in whose ranks most businessmen seem to be there, see no great improvement ahead. The root cause of the business crisis in India--issues related to governance, infrastructure, land, cost of funding, energy availability and cost, labour quality and the many more similar things on the list are all there to stay. Here and there, some individual businesses or sectors might be immune to some of them but as a trend, businessmen don’t see any great room for optimism. As more and more people seem to be realising, the long term has caught up with us.
However, there are still plenty of optimists out there. But the funny thing is that almost everyone on the happy side of the divide is an investment professional. From mediocre to the best, all the investment managers are optimists today. They see the problems that the businessmen see but almost to a man, they claim that in a year or so, things will start working out and business prospects will be better. Why is this so? Why are investment types so much more optimistic compared to actual businessmen. Your guess is as good as mine but I suppose most of them are professional optimists anyway. That sounds like I’m saying that they are faking it. Some of them surely are but even in the worst of times investment managers are a congenitally optimistic lot. Perhaps only people naturally predisposed to optimism become investment managers.
Moreover, investment types’ living will go on quite comfortably if a reasonable trickle of foreign money keeps flowing into a set of stocks, no matter how narrow and overvalued that set gets. Till the music stops, they’re all fine. How a broad, secular selection of businesses might do fundamentally seems less of a concern to those who make their living from the markets. If the next cycle is OK, then they’re all OK.
The whole thing is like being in the middle of a conversation where many people are speakingsimultaneously. I’m thinking of one of those so-called debates on the TV channels, I guess. A lot of people are talking, loudly and incessantly about what they believe in. None of the listeners can make head or tail of what is being said, but then they don’t need to. Each one has chosen one side as the right one, and is going to stick to it, come what may.
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