Expert View: Waiting for Godot? Don't despair

For those compounding wealth at a healthy pace over time, the market remains rewarding

In what now feels like another life, I came across the play “Waiting for Godot”, an account of two people who wait for a character called Godot, who never comes. As time passes, the two get increasingly anxious, confused and frustrated.

There is a nice corollary to that feeling of despair, confusion and loneliness to be found in markets at certain times. A feeling that would have been shared by the likes of Julian Robertson, Druckenmiller and Buffett at the height of the tech bubble. This is a feeling that the early birds get a few months/years after having spotted some massive mispricing in an asset class, which they then take a position on; and go on to see the market moving against them continuously for an extended period, throwing all rationality to the wind. A feeling that Michael Burry and other early shorters of CDS would have shared. A feeling (not so massive, though) that the domestic liquidity deluge is creating in many investors in Indian equities today.

Indeed, 2017 has largely been a story of that. A few signs of the mismatch between fundamentals and valuations are as follows: (A) Nifty 500 trades at a very long term high of 27X PE. (B) Earnings growth refuses to bounce back, belying the collective wishes of the analyst community for the 5th year running! This is fast turning into a comedy of farces. But no surprises there, for yours truly. (C) Exports and private sector capex, the most potent drivers of economic growth, remain stagnated. The IT services industry (India’s signature export story) is undergoing massive value migration – away – eroding its famed cost arbitrage-led competitive advantage. (D) Major tailwind for global equities with 13 straight months of positive returns from the global market Index (MSCI All Country World), another unprecedented event.

Meanwhile, another round of money, chutzpah and talent fuelled tech bubble in California (technically Washington state too, where Seattle lies and Amazon is headquartered) promises the mother of all disruptions. “Anything that can be disrupted, will be” seems the new maxim. As investors, we will take a long time to come to terms with the implications of these changes. My biggest takeaway from this year’s trip to Omaha, US, remains that the sages themselves are trying to figure and remain anxiously mindful of the same.

But despair not

Hope springs eternal, especially in markets. My personal experience of investing has taught me one critical thing. And that is in markets, as in life, hope truly springs eternal. In times of change can be found the hidden opportunities. As the rest of the world focuses singularly on the coming disruptions and on some imagined cataclysmic change locally and globally, the keen eye looks for the obvious yet ignored. We, in India, continue to be a $2 trillion plus GDP, one billion plus people and equally importantly an economy with per capita GDP less than $2,000, which is chugging along nicely on a 6 per cent plus real GDP growth trajectory.

We continue to be a story of huge under-penetration in many financial and other services as well as potential premiumisation in many consumer goods. This happens as tens of millions of people come off the bottom of the economic pyramid and move from “subsistence” to “consumption”.

Yes the market remains expensive, quite irritatingly so. It should see some normalisation in PE ratios sooner or later. Yes the broader stocks’ earnings growth trajectory is weak. But the good part is that it is improving and there are always pockets of opportunities where one can buy growth with the potential of reasonable (though less than historical) returns over a three-year period. This is probably not a market for the faint-hearted. This is definitely not a market for “get rick quick” brigade, though this is the segment, which (true to character) remains the most excited in this phase of the market. But for the patient investor, who is happy to have his wealth compound at a healthy pace over the long term, the market remains rewarding, as it most often does!

Happy investing and wish you a very happy 2018 in advance.

The writer is Senior VP & Fund Manager, Motilal Oswal AMC

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