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| No recovery in business cycle | | Despite the current market rally, maintain status quo and continue with your normal investment plans |
| Devangshu Datta / New Delhi Feb 12, 2012, 20:57 IST |
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“When you see an unsolicited investment opportunity, assume it’s a scam.” This is an adage that smart investors have followed since the South Sea Bubble in the early 18th century. It is especially applicable in the era of SMS marketing.
Despite being on the phone DND list and using blacklisting phone software, I still receive about half-a-dozen texts per day urging me to invest in all sorts of things (quite apart from the weight loss, organ enhancement and cheap holiday offers). These messages offer a sort of index of desperation for the concerned industries.
In good times, the real estate industry put up hoardings and left the customer to find his own way. Ditto for the auto industry and the guys selling financial services and products. As the slowdown has become more pronounced, the attempts to reach potential customers have become more desperate.
The desperation is also reflected in the profit and loss accounts of listed concerns in those industries. In the past three quarters, India Inc has broadly managed to grow sales volumes while seeing shrinking profitability, rising expenses and interest costs.
But real estate has actually seen a fall in the topline in the past quarter (Q3, 2011-12) and four-wheeler auto sales are close to flat. The financial services industry has also come under huge pressure. Equity traders have cut back on transaction volumes. Mutual funds have suffered from puny inflows. The sheen has also come off Ulips.
These industries are all heavily driven by individual consumer activity though they aren’t all consumption industries. Through most of last year, the optimists among the financial community were hoping that activity from Indian consumers would keep the pot boiling. Now it appears that those hopes are being belied.
None of India’s macro-economic data is in itself, very reliable. But it all points in the same direction at the moment, and has done so for a while. Inflation is high, industrial activity is low, deficits are high. What is worse is that there is no apparent policy action being undertaken to try and nudge indicators in a different direction. This means we just have to wait for the cycle to turn naturally, without active counter-cyclical measures to accelerate the reversal. A natural turnaround could take two or three quarters.
However, the sentiment in the market seems to have become a little more positive despite the gloomy fundamentals. There appears to be some light at the end of the tunnel. Globally, it appears that the Greek crisis has been contained. The low Indian index of industrial production numbers could help to put a ceiling on interest rates even if the RBI won’t indulge in immediate cuts.
There were some anomalous outperformers across sectors as well. The cement industry for instance, is heavily dependent on the construction and real estate industry and activity in both those end-users is down. But the cement industry itself seems to have consolidated and that has translated into better realisations and an apparent turnaround.
Among other industries, telecom services now face big question marks. Obviously, the 2G license scandal leaves many service providers hanging after license cancellations. There will undoubtedly be further legal repercussions from this issue. As and when new licenses are issued, they will also clearly cost a great deal more. At the same time, the operators still in play will also need to find resources to continue their 3G rollouts and perhaps, to move to 4G.
There is a large subscriber base but most of it is concentrated in low average revenue per user 2G services, which is precisely the segment that has been hit in the scam. Profitability is likely to dip and operations may be cash-flow negative for a while. In the current post-scam scenario, it will be difficult to fund rollouts easily, either through debt or equity stake sales.
This picture is very confusing for an investor. The business cycle is clearly not yet in recovery mode and at best, it may have bottomed out. Most industrial sectors are reporting disappointing growth and earnings numbers. There are policy action or rather, inaction issues putting the brakes on quicker recovery. The government balance sheet is messed up with large and growing deficits.
Yet, the market is going up. Under the circumstances, the best the investor can do is to more or less maintain status quo. Continue your normal investment plans. Add some weight to the cement sector in your portfolio perhaps.
Watch developments in telecom. Stay far away from any sectors which are texting you about attractive investments.
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