From the CIO’s Desk

7. May 2022

Markets – kabhi upar, kabhi neeche. Lekin aap apne goals pe focused rahiye.

- Sachin Tendulkar for Mutual Funds Sahi Hai (An AMFI investor education initiative)

Published On: 05-May-2022

Hopefully when Sachin Tendulkar speaks, investors will pay more attention to their goals and less to the events and news flow that drive market fluctuation. I was lucky enough to listen to another of India’s cricketing legends - Kapil Dev this month and one of the gems I picked up from him was not to watch the score board while playing.

For market participants that is hard to do - when you now have a plethora of information and signals headed your way. Glance at a TV screen and it could have the latest breaking news along with colorful and evocative graphics of what is moving higher or lower in the markets at that moment. The apps on your mobile phone could generate alerts on stocks or funds that you own. You can pull up the real time value of your holdings and act on a hunch or worse, in panic or greed, in seconds.

Sometimes it seems to me that we are our own worst enemies when it comes to investing. The ability to watch that score board in real time is not just a distraction; it can be downright harmful. On that momentous day at Tunbridge Wells, when Kapil Dev scored an unbeaten 175, he just played every ball on its merits and did not watch the scoreboard.

The world’s best known Nonagenarian investor, who may not know much about cricket but knows his baseball, had this to say:

“In investing, just as in baseball, to put runs on the scoreboard, one must watch the playing field, not the scoreboard.” - Warren Buffett

This is very hard to do because there is always something going on around the world. The US Federal Reserve met on May 4, 2022 and hiked its key policy rate by 50 bps (basis points). The last time they hiked 50 bps was all the way back in the middle of 2000. Now they appear to be in a haste, with economists and markets discounting a policy rate of 2.25 to 2.50% by Feb-23 versus the current 0.75%. In the time, since the Pandemic hit the US, the total US public debt has increased by US $7 trillion to US $30 trillion. A 100 bps increase in rates amounts to $300 billion in cost which amounts to ~1.25% of GDP. The Fed has committed to raising rates to cool down US demand and their labour market. The score board indicates the tough task they have with inflation at 8.5% and the tightness in the labour market is so extreme that there are now two job postings for every available person in the labor force!

In India the focus has been on the sound health of our own macroeconomic dashboard. The Monetary Policy Committee (MPC) which is responsible for the inflation target of 4% (+ or - 2%); made an unexpected intervention just before the US Federal Reserve was due to post its new score this week. The difficult balancing act was reflected in the MPC’s accompanying statement – ‘The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth’. It is very likely that inflation prints in the next few months will remain above the bounds of comfort. This RBI action is a pivot to anchoring inflation and securing medium to long-term growth prospects. The cost would be higher rates and risk of softening near-term demand.

The message from policy action across the world is that central banks in hindsight have been too slow to withdraw the emergency accommodation made available during the pandemic. Supply disruptions have contributed to the higher inflation prints but central banks, particularly the US Federal Reserve continued its asset buying operation till March 22, even though it retired the term ‘transitory’ inflation in November 2021. As a result, monetary policy has a stiff ask rate to catch-up with surging inflation and pin-down expectations. Not quite what you would wish to see on the scoreboard. This is not to say that every economy finds itself in the same situation - Japan remains committed to its yield curve control policy and China, which is experiencing a Covid induced lockdown, is actually loosening policy. The Yen has dropped over 10% YTD in response to this policy and the Chinese Renminbi (offshore) is down 4% YTD. The Indian Rupee on the other hand is down only 2.4% YTD reflecting the better health of India’s macro-economic parameters.

For the bond market, the pre-emptive move has caused a move higher in yields across the board and a relative flattening in parts of the yield curve. For now, the investors are likely to seek shelter at the short end of the curve to shelter from the RBI’s proactive posture. The MPC’s commitment to the inflation target should eventually anchor the long end of the curve, but that’s a story for another day.

For equities, the challenge is the risk of softening of demand in rate sensitives combined with potential earnings challenges. The earnings estimate for FY23E face risk both from demand and margin compression. There is a likely offset from increased profits of commodity producers but these businesses risk demand headwinds from high prices and do not enjoy high valuations for their earnings. Relative to history, large cap valuations have now slipped down into the comfort zone with equity prices unchanged from Aug-21. In effect the markets have derated by going nowhere even as earnings trajectory has been strong over the past 3 quarters.

Back to cricket or at least the instant version of the game - we are in the midst of the IPL T20 season. Apparently, there has been a significant drop in viewership, though there is a parallel debate that this is overstated due to a change in the methodology of capturing viewership data. This leads to me to wonder what are people watching, if it’s not cricket. This year the media rights to the next 5 years of IPL will come up for bidding. In 2017, the successful network shelled out Rs. 16,348 crores for five years in an auction. This was twice the amount paid by the previous rights owner. The previous owner had the rights for 10 years, so in effect the price paid in 2017 was 4x the previous price if you convert the bid into an annual number. This time around the base price for the media rights to the IPL for the next 5 years is set over 2x the 2017 price. There is now an arguably better understanding of the potential and revenue opportunities available to the successful bidder and a higher degree of competition from local and global bidders. But you do wonder if the auction process eventually leads to a price too high - a clearing price that might induce ‘buyers regret’ subsequently. There is a price (valuation) at which any asset becomes too pricey and will fail to deliver on expectations. That is why asset allocation and rebalancing of portfolios is crucial to investor outcomes over the long-term. As for the market volatility you can’t escape it, but you can keep your focus on your financial goals. That’s what Sachin Tendulkar advises you to do.

Above commentary is published in UTI Fund Watch (monthly factsheet) in the section of Update from CIO’s Desk, click here to refer to the factsheet.

Author Bio

Vetri Subramaniam
Vetri Subramaniam is the Chief Investment Officer of our Company. He holds a B.Com degree from University of Madras and a Post Graduate Diploma in Management from Indian Institute of Management, Bangalore. He joined our Company with effect from January 23, 2017. Prior to joining our Company, he was associated with Invesco Asset Management Private Limited, Motilal Oswal Securities Limited, Kotak Mahindra Asset Management Company Limited, SSKI Investor Service Private Limited and Kotak Mahindra Finance Limited.