Dear Reader,
There aren’t any economists on the list of great investors. Most economists have made their money by lecturing about the economy, not by investing in it. But there have been honourable exceptions. For instance, David Ricardo, the nineteenth century British economist whose theory of comparative advantage underpins free trade, began working as an assistant to his stockbroker father at the age of 14. There’s a story that he made millions by betting on the outcome of the battle of Waterloo, but that turned out be only half right—he sold half his stock before the result of the fight was known in London, thus missing out on half the rise. But he did make the bulk of his fortune by financing the government.
Karl Marx, the father of communism, speculated in English stocks and wrote in a letter to his uncle that he had made GBP 400 from his trades. In the letter, he further elaborated on his views on stock trading: “It’s a type of operation that makes demands on one’s time, [but] it’s worthwhile running some risk in order to relieve the enemy of his money."
Marx’s communist factory-owner friend Friedrich Engels was a savvy investor who owned shares in the London and Northern Railway Co., South Metropolitan Gas Co., Channel Tunnel Corp. and Foreign and Colonial Government Trust Co. and he retired rich.
John Maynard Keynes, who changed the course of economics with his ground-breaking book, ‘The General Theory of Employment, Interest and Money’ in 1936, was not just an investor, but also speculated in commodities and currencies. We wrote about Keynes’ investment strategies and methods, from which he amassed a sizeable fortune.
While on the topic of economist investors, how can we forget Irving Fisher, author of the celebrated debt deflation theory, who unfortunately said, just nine days before the Great Crash of 1929, that stock prices had “reached what looks like a permanently high plateau”. Needless to add, his stock investments were badly hit by the crash.
There’s probably a quote for every occasion by Keynes, but perhaps the one most appropriate for today’s markets is this one: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
Stock markets continue to race ahead, recovering rapidly from the slight hiccup caused by Fed chair Powell’s remarks last week. The Indian economy’s recovery, though, is still tepid. Our economic recovery tracker shows that after rapid gains, the recovery is sending mixed signals. Global inflationary signals are clouding the picture, with China turning from an exporter of deflation to inflation. The Chinese authorities, however, are doing their best to cool down commodity prices and we pondered the pros and cons whether they would succeed. We published FT articles analysing the three main variables — growth, liquidity and inflation — and their impact on markets. In India, an analysis of the impact of the first COVID wave on household finances suggests that precautionary savings may hold back a swift return of consumption demand. That appears to be the case for auto companies. And while yarn mills are set to spin a profitable story, surging cotton prices could play spoilsport.
Foremost among the positive signals are the rising number of vaccinations -- our herd immunity tracker shows that 26 per cent of India’s adult population is partially vaccinated. March quarter earnings have raced ahead of expectations. Corporate concalls are cautiously optimistic for the rest of the fiscal year. And then there has been the remarkable and ambitious pivot of RIL to green energy, which is not just a beacon of hope for the company, but also for India.
Given all-time-high markets, it’s no wonder that we advised investors to be cautious. The predominant theme in picking stocks in the current markets has been value. Transport Corporation of India, for instance, has been among our top value picks in logistics. Indostar Capital Finance’s valuations seem compelling to us, although the near-term could be challenging. Karur Vysya Bank’s valuations warrant a closer look. Nazara Tech may be expensive, but it shows the way to new opportunities for investors. We also spotted a refuge in Associated Alcohols and not just for tipplers.
The current market environment calls for patience, as we noted in our analysis of Zensar, where a turnaround road map is in place. We considered the case for BEL twice this week. We asked whether DFM Foods is well placed to resume high growth. For Indiamart, we took into account its growth opportunity, given the size of the market. We looked at GAIL’s near-monopoly business as a long-term bet on India’s natural gas needs. We asked whether this is the time to include tyre stocks in your core portfolio. We said a combination of factors should result in better earnings for NTPC this fiscal. We looked for outliers in distressed sectors.
For NMDC and Bandhan Bank, we explicitly advised investors to wait on the sidelines. And we advised both short and long-term strategies for the Indian Pesticides IPO.
During the week, we also took a closer look at El Salvador’s adoption of Bitcoin as legal tender; at SEBI’s interference in the Carlyle-PNB Housing Finance deal from an investor point of view; at the PMC Bank rescue; at the new e-commerce policy and at the pandemic’s newly minted millionaires.
Growth in the advanced economies continues to strengthen as their populations get vaccinated, according to the Flash Purchasing Managers Indices for June. But so does inflation. Japan is the odd man out, with continuing contraction in private sector activity.
Commenting on the Eurozone Flash PMI data, Chris Williamson, chief business economist at HIS Markit, said, “The strength of the upturn – both within Europe and globally – means firms are struggling to meet demand, suffering shortages of both raw materials and staff. Under these conditions, firms’ pricing power will continue to build, inevitably putting further upward pressure on inflation in the coming months.”
Under the extraordinary circumstances, we find ourselves today, what would be a good Keynes quote? It’s probably this one: “[People] will do the rational thing, but only after exploring all other alternatives.” Should we wait for more rationality then? Keynes had a rejoinder to that too: “Markets can remain irrational longer than you can remain solvent.”
Cheers,
Manas Chakravarty
