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What matters and what does not

What will drive investment returns for Indian equity investors in the years to come?

What matters and what does not

I've often written against the idea of news being an input on which one can invest. Once you understand that, it's an obvious idea that every event that's there in the newspapers or TV news (or even any of them) is such that investors have to react. However, the obvious question then follows is what external news should one react to. After all, it cannot be anyone's case that stock investments can exist in a vacuum, unaffected by the outside world. So let's try and figure out what kind of externalities should an investor be paying attention to.

At this point of time, what are likely to be dominant factors that will affect the fortunes of Indian equity investors over the next few years? The first that comes to mind (and no it's not COVID) is that corporate profits are surging across sectors and companies, while corporate indebtedness is lower than it has been for years. These are the most direct drivers for stock prices in the coming months and yet, these are unlikely to be the hot take on any given day on any professional or social source of news.

What else? Despite inflation worries in the west, global interest rates are staying low and foreign capital flows into India are basically unabated. This is helped along in no small measure by the huge volume of startup activity. While I'm sceptical of many aspects of the modern digital startup, capital investments into such companies by foreign funds is most welcome. The only worry is domestic investors stepping into those shoes but that's a separate story.

There's more, a lot more. Have you noticed that somewhere along the line, you sort of forgot seeing all those headlines about the underlying regulatory dysfunction? No headlines about coal mines, power plant agreements, bank NPAs, massive court cases about taxation etcetera etcetera. What used to look like intractable issues for these sectors have just melted away. The infrastructure thrust, the PLI scheme, the stable tax and GST regime, the way manufacturing is taking off - this is the real news. Except that it doesn't fit into the business of news. Of course, all this is the good news. What about the bad news? COVID apart, the bad news will be the reverse of the above factors, if that were to happen.

In any case, these are almost all things that develop and change slowly, over years or at most months. There is no 'news' here. Serious investors have to look at things that are deeply significant but change slowly. If you stand by the seashore for ten minutes, you can't see the tide coming in. You may even mistake a high or a low tide for the normal level of the sea. The idea is not to never read news, but to be aware of the nature of the information you get and what role each piece of information plays in your decision-making.

Getting back to the actual factors that I've discussed above. Those, along with many others were obviously not just examples to illustrate the point about information. Despite COVID, despite many other things that are not optimal, there is a tailwind that the Indian economy and businesses have today. Of course, equity markets work by staying ahead of the curve and it's possible - even likely - that this is happening today but that is not something that is a lasting issue.

For investors, the logical path forward is to avoid the glitter and the hype - for example, of the digital IPOs - see where the basics of the Indian economy are going, and invest steadily and regularly in businesses that make money sustainably. In fact, the avoidance of IPOs is more than an incidental part of the strategy, it is quite central, as recent examples have shown. The simple, time-tested approach works, every time.