How we landed up here.

It was 2013, the Year of the Snake according to Chinese Zodiac. In India though, Investors were running away from the markets like they had seen a snake. Between mid 2009 when UPA came to power for the second time to October of 2013, Investors in total withdrew more than  37 thousand crores from Equity Mutual Funds.

Then again, why wouldn’t they. The government seem embroiled in scams that seem to be growing bigger than one’s own imagination of how large numbers can be. In Europe, countries were going through a meltdown with talk of countries may be forced to exit the Euro. 

Stocks were cheap, but you don’t buy when they are cheap for who knows, they can become even cheaper. Add to it, when your neighbour is buying properties like no tomorrow with prices on a never ending incline, why take the risk of buying a business that maybe there today, gone tomorrow.

Sentiments couldn’t have been more worse when the news started to trickle in that a messiah who had made his state proud was thinking of running the nation. In the United States, 17 of the 45 Presidents had served as Governors of state. 

In India, Morarji Desai was the first Prime Minister to take office post being Chief Minister of a state (State of Bombay), P.V Narasimha Rao and Deve Gowda being the other politicians who ascended the high office after being Chief Ministers of states.  

When one is drowning, even a tender grass offers hope and for the markets which were lacking any real hope, caught it like the savior it seemed to be. After a brief confrontation with the old war horses who refused to give space to the new, the preparations for the coronation began even before the voter had decided on whom they shall vote into power.

Markets were enthused that this finally was the real deal they had been waiting for so long. Small Cap Index doubled in the space of 9 months. India was seemingly shining once again.

Much of the run-up was justified for the base was low and more importantly macro winds were flowing in India’s favor. While bull runs of the past was interrupted by violent reactions and this run was no different with markets going through much of 2015 in a steady state of decline.

Factors this time were not related only to India, Chinese markets were taking a beating too with talks of a global slowdown. Interesting side note, China as been the case with many other countries has never seen its index climb above the highs of 2008. 

In the meantime, Real Estate had begun to show signs of weakness and money destined there came to the stock markets. Equity Mutual Funds saw a reversal of flows with inflow of Rs.47,509 Crores in 2014 and Rs.84,697 in 2015.

For Equity Mutual Funds, 2016 was a bit of a dampener. They could collect only Forty Five thousand crores. So, in 2017, they came up with a brilliant campaign – Mutual Funds Sahi Hai. 

2018 marked the peak of the bull run for the majority of investors. While Nifty has continued to gallop higher, thanks to the steady inflow of funds (Mutual Funds collected an unprecedented 1.36 Lakh Crores in 2017, came close to beating it in 2018 when total equity mutual fund collections accumulated to 1.12 Lakh Crores. Year to date, Equity Mutual Funds have seen a inflow of 43 thousand crores.

Capital Markets are the bedrock of Capitalism for they allow money to be moved from small savers to companies on the lookout for funds. Yet, that model has been dead for a while. Mutual Funds having amassed thousands of crores have kept pumping the same into a few number of stocks.

This moved up valuations into territory which makes no sense if you were to think of buying a stock to be similar to buying a business. High valuations make sense when companies are growing rapidly and the valuations in a way showcase how investors perceive the future growth of the company.

Yet, Mutual Funds are hampered by the fact that Indian markets aren’t really deep. Almost all funds are concentrated in the top 400 stocks and continued flows has led to a frenzy in an attempt to deploy it without bothering about valuations.

Is this the new Normal?

In 2000, in the midst of the Dot Com bubble, select stocks achieved levels of valuations that seemed incomprehensible before and 20 years later, seems incomprehensible today. But at that point of time, you were either a player or not.

Depending on whom you ask, Nifty Price to Earnings Ratio is either an indicator of future returns or its not. But what most will agree is that this has been the first time in ages that we have remained at substantially elevated levels even as sector after sector seems to crumble beneath.

The markets is no longer in the aura of the messiah delivering the goods. It’s now more a question of whether he even wants the same thing as the markets want.

The Indian story wasn’t built on manufacturing for the world as China did or greasing the world’s engines as the Middle East did. Much of the story was about how the large population would enable us to sell more of the stuff to us than others.

India doesn’t have the kind of data that the US has, but based on larger trends it seems that people have either run out of money to spend or aren’t willing to spend and rather save for a rainy day.

Other than in a few countries, economic downturns haven’t been short-lived. The longer the economy spirals downwards, the more self-perpetuating it becomes. We prayed for low inflation and we got it, now we are praying for low interest rates and chances are we shall get that too. 

But low inflation and low interest rates don’t come in a silo, they impact on the economy in ways we may not have imagined. Low Inflation, much of which is due to flat trends in agricultural prices have impacted rural demand. While low interest rates helps companies that are heavy on debt, it impacts the other side of the balance sheet – savers who are now forced to save more to get the same income.

What history tells us though is that even this will pass. Yet, history conveniently ignores the collateral damage caused and moves on. No one today remembers those who lost their savings and homes in the 2008 financial crisis, for why would they. Markets have moved on, people unfortunately may not.