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December 23, 1999
Fads and fancies of the 21st century investor
It's been almost a decade since a man named Harshad Mehta set the imagination of middle-class India afire with his get-rich-quick dreams. Since then we have seen almost unimaginable changes in the structure of the market. We have also seen fads and fancies come and go. With the millennium upon us, this might be a good time to sit back and take stock.
None of it would have happened without the Balance of Payments crisis in 1991. Only the fear of default forced India's administration into considering economic liberalisation that has gradually unshackled market forces. Of course, the liberalisation itself is not more than 30 per cent complete but in specific sectors like the financial economy it has gone a lot further.
Consider, in 1991, that India had an antique paper share system with a floor-trading mechanism. Quotes were opaque and one-way. You never knew how much you were paying as commission. You never knew whether you were getting the best rate available. What's more, you never knew whether your order would get serviced. Transfer took months, and bad deliveries were endemic. Shares often got stolen in the post. The carry-forward mechanism was equally opaque and subject to regular default. Price-rigging was rampant. The lottery system of allotment in the primary market was open to abuse by people using multiple addresses and accounts.
Now, circa 2000, India has the most modern screen-trading mechanisms. You can make a trade and have it confirmed instantly and know exactly how much commission you are paying. Commission rates have dropped to a tenth of earlier levels. The gradual dematerialisation of the market has seen several glitches and proceeded rather slowly but it is making delivery a much quicker and a safer process.
The carry-forward procedure has been better regulated, making default a rarer phenomenon. The primary market still has problems and I personally disagree with the specific avatar of book-building which is being introduced here. But proportional allotment is less open to abuse than the earlier lottery system. We do need a good derivatives system coupled to both a stock-lending mechanism and a procedure for quickly lending money for shares.
But it's undeniable that the stock exchanges are now a much more transparent and user-friendly place with both BSE and NSE extending their reach to semi-rural areas. This has resulted in a retail explosion. Trading volumes on the changes started to rise after the advent of the foreign institutional investor. But the numbers of trades made have also risen consistently and this is a function of a strong retail investing culture. It's a fact of life: people trade more if it is made more convenient for them to trade. A lot of them will lose money but then that is their lookout.
On the information side, things have also got a lot better. Apart from healthy competition between pink papers and business magazines, the advent of online databases has levelled the ground for researchers. Access to company information has increased sharply. If you want annual, quarterly or half-yearly results and basic research reports, all you have to do is get on the net.
Many companies also have websites, which provide more detailed information and a feel of how the company likes to project itself. It is possible to track market quotes in real-time as well as look up historic trading records and credit rating assignments. The bigger companies have also started to reveal more than the statutory info on their balance-sheets as they aspire to list abroad on exchanges with more stringent GAAP. Brand-valuation exercises and human resource accounting may be fads that are often executed with questionable methods but they do provide extra information as well.
The mutual fund industry has also got much bigger and far user-friendlier. That also appears to be a function of greater competition. Instant redemption and cheque-writing facilities apart, the basic information of a daily NAV announcement and a quarterly portfolio publication is more than what the PSU mutuals used to provide. We still don't have index funds or sector-specific funds. But we do have a mixture of income, growth and mixed funds that ought to satisfy most requirements. One good fallout of the US-64 mess is the tax-benefits, which have made mutuals more attractive.
As to investment fashions, for the last three years, the focus has been very narrow. It's been a steady diet of infotech, pharmaceuticals and FMCGs. The picture one gets is of a couch potato investor who surfs constantly, pops pills, bathes and brushes his teeth a lot and eats convenience food! But it isn't all like that.
The FMCGs have gained because of their defensive strength during a recession and also because the markets of semi-rural and small town India are still gradually opening up. Pharma stocks have gained because of speculative action as mergers and acquisitions took off. Also because they have started to invest in R&D as the WTO patent regime gets closer. IT has gained simply because it has registered awesome growth rates.
But I remember the various growth industry mantras that have been chanted by various analysts during this decade. First there was ACC and the cement industry boom in 1991-92 as Harshad talked about the replacement cost of assets. There is currently some merger action starting in that industry again but the mid-90's was blighted by over-capacity.
Then there were the twin forex earners of aquaculture and tourism. Hotel stocks have been hit by a combination of high tariffs, industrial recession that led to fewer business visitors and the Asian Flu that led to cheaper destinations in Thailand and Indonesia. But at least, the hotels are still around. Aquaculture was nuked by environmental concerns and then the remnants of the new industry were flattened by the collapse of East Asian markets because of the Flu. Who knows, maybe the survivors will slowly raise their heads now that Asia is recovering and they have cleaned up their environmental act?
Environment itself provided buzz industries. First it was alternate power generation with NEPC Micon leading the charge into windmill generation. Then it was pollution control equipment with Western Paques projected as the blue-chip of the future. Both these industries got tax rebates and these two companies went bust by following precisely the opposite financial strategies. NEPC stayed zero-debt, raised money through repeated equity issues and chucked it into unrelated businesses like airlines. Eventually investors proved unwilling to watch further dilution. Western Paques went for excessive debt and then found itself in legal trouble in the Gulf when it couldn't meet obligations. Both stocks were multi-baggers during the early 1990's. That seems ironic now. Other PC companies such as Ion exchange have done well, however, although alternate energy doesn't seem to have taken off. But both industries are no longer buzz-words.
Several other industries have stumbled on the verge of take-off. For a while, airlines were hot until it became obvious how unlikely a level playing field was. Then telecom equipment and tele-cables companies had a big boom in 1994-96 when it was expected that they would get more business with the industry being supposedly opened up. Again, the lack of a level playing field seems to have killed these aspirations. The auto-ancillary industry was supposed to benefit from the car-explosion but it hasn't had such a major feedback effect yet. Possibly 2000 will be different because the auto-industry sales are just starting to pick up this year after a long recession.
I wonder what the fads and fancies of the 21st century investor will be? Will we continue to see action restricted to the Golden Triad of IT, FMCG and pharma? Probably for a while yet. But if the economy takes off and insurance in particular starts to mop up middle-class savings, we may see a whole host of smokestack, core-sector, infrastructure industries as well as healthcare services zooming. At any rate, the 21st century investor will have a much easier trading environment than his predecessor will.
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