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No time for wishful thinking

Investors should stay focussed on the real and pay no attention to the false optimism

No time for wishful thinking

In an newspaper interview published a few days ago, the SEBI Chairman expressed puzzlement and worry over what is happening in the equity markets in the country. Normally, regulators as well as many others express some degree of worry when the equity markets are either booming or crashing. However, it's a measure of the strangeness of our current situation that they are worried that the markets are NOT crashing.

Because that's exactly what's wrong with equity markets today. By any rational measure, they should have kept going lower ever since the coronavirus laid waste to the worlds' economy. We should not have had these mini revivals that we keep intermittently having since the beginning of May. Obviously, I can't put a number to it but hypothetically, to take a big round number, if the broad equity markets were today down 50 per cent from the peak towards the middle of February, I would have been less disturbed than I am today when they are down around 15 per cent. I think I speak for a lot of people when I say that. Obviously, many individual stocks have fared much better than that average and some are at or above where they were in February.

Certainly the SEBI chief seems to think this to be a strange situation. There's something else he points out which is even more worrying, which is that there is a sharp increase in retail investors' activity on the equity markets since the crisis began. Maybe people are just sitting at home and it's a case of idle minds or maybe there's heightened marketing activity from brokers and intermediaries--I don't know the reason. However, normally a volatile phase in the equity markets should drive away small investors for a while. This time around, it seems that it hasn't.

What could be the reason? Perhaps it's the mental reversal of expecting bad times to continue but then finding that they didn't. Obviously, as I've pointed out earlier, relative to where we could have been, this looks like good times. There is this widespread talk since around mid-April that there will be a quick and sharp revival of the economy, not just in India but around the world. Some of this talk will no doubt turn out to be correct. Some basic products and services are not affected much by virus while others may indeed have a quick uptick. Indeed, helped by a couple of months of pent-up demand, there are businesses that have picked up sharply in July. There's also the whole rural economy story that's been doing the rounds.

Notwithstanding all this, it is beyond any reasonable doubt that we are in the middle of an unprecedented shrinking of the economy. Note that I'm not using the word 'slowdown', but shrinking. The SEBI Chief said something that's quite alarming. It appears that some companies want to be absolved from having to announce results for the April-June quarter. They'd like to jump straight to six monthly results after September. This is a ridiculous idea. If there was ever a time when we need more information rather than less then that time is now. The whole problem is that very few people have a sense of what is going on. To hide the reality for three more months would be really counterproductive.

As business and economic numbers come out, one will get a sense of the damage. For example, just a day back, Singapore said that it's economy will shrink by 40 percent in the first quarter. Since GDP calculations depend on a lot of conventions and assumptions, I don't even know whether we will have a real idea of what is happening at that scale. Given that, business numbers are of the utmost importance because they are certain to be close to reality.

Investors--and everyone else--should pay a great deal of attention to them and not fall prey to the temptation of wishful thinking.