Behind the Curve

Stock markets across the world pride themselves as being models of perfect market. They provide a platform for large number of buyers and sellers, abundant liquidity, minimal transaction costs and diversified investment opportunities. All the ingredients of a perfect market, except a mechanism for uniform distribution of information. And this ingredient is privy to a few ‘informed’ participants before it is available to the world at large. This problem exists the world over, and though authorities try to crack down on it, it is very difficult to prove.

Let’s take the case of the Indian stock markets. It has given spectacular returns to investors over a period of time. However, the focus has been only on the top 100 liquid companies. The general perception is that they are safer. Liquidity does provide a safety net, and larger companies are scrutinized to a greater degree. Thus retail investor interest is justified.

Historically, retail investors have always been the last to latch on to any up move. The ‘smart money’ with the professional research moves in first. Let me not question the quality of research or raise any flags on the means in which these investments are made. The general perception of retail investors has been that they have been behind the curve in spotting an opportunity. This could be true for a host of reasons, lack of risk appetite, liquidity, investment horizon, low information availability etc. An important element to this feeling is that information always seems to trickle to retail last. I am not suggesting that having insider information is the only way to make money, but it certainly is the easiest. The average individual on the street only reads about corporate actions on the news, well after the impact of the action is built into the price. This only aggravates that feeling of missing out. This is compounded when he discovers someone known has capitalized on price movement due to news. It is a sentiment one cannot avoid.

The key here would be focus on your own investment strategy, detach yourself emotionally from news driven activity and do some research. Obviously, this is easier said than done.

Large Denominator Effect

India has been termed as one of the leading growth engines by many an economist. Rightly so, over the last decade India has witnessed strong economic growth. Fast growing economies attract business and capital seeking higher returns.  An unexpected benefit of this growth has been economic research done on the country. The spotlight has brought a whole host of economists, financial analysts, business leaders and politicians writing/talking about India. I find this very fascinating as it is always interesting to read about different view. You can always compare and contrast views between Indian authors and foreigners, between the optimists and pessimists, between the story tellers and the number crunching analyst.

A lot of these economic publications and analysts talk about low penetration of products thus implying even a slight increase in penetration would lead to explosive growth in the sector. Some of the charts below are rather interesting.

 

 

 

Let’s revisit the basic tenets of division. If the denominator is larger than the numerator, the resultant number is less than one (tiny is an accurate word to describe it in the context of India’s population being the denominator).

As the graphs above prove, on every parameter involving population, India will always have a low per capita number. And the reason is purely because of the large denominator effect.

To look at this number and then say that India has a large way to catch up with other countries, thus concluding that demand for the underlying product / service is bound to grow exponential is fool hardy. Yes, demand for products and services will rise as consumption and demand rises due to the growth in the economy. But the rate of growth for each product will follow a hierarchy of needs of the consumer.

To examine the potential for growth for each of these products we need to understand the income and expenditure pattern of Indians. The table below provides an indicative spending habit of an employed individual in an Indian metro city

Breakup of Expenses:

Total Income	100
Savings	30
Rent (Metro)	25
Food and Living expenses	30
Miscellaneous	5
Free Income	10

I have started with Savings first, because that’s the first thing an Indian thinks of. Over the past decade the savings rate has been between 30-40%. Save for a rainy day, is the clear mantra.

I have broadly tried to account for other elements of cost of living, resulting in a free income of around 10%. I tend to believe, that any reduction in other heads, usual creeps into savings.  

Let’s assume the above percentages are accurate, we are now talking of about a 10% figure. What this essentially means, is that all these products which do not fall under the necessary requirements of an individual are competing for a share of this 10% of the individual’s income.

Trust me there are a huge number of products competing for a share of that wallet. If an ice cream manufacturer is under the impression that he is competing with other ice cream manufacturer or even broadens his ‘competition’ horizon to desserts as a segment, he is mistaken. The positive though is that there is still a large denominator.

P.S: Just because you can use excel, doesn’t mean you pass of numbers as analysis

Theme 2013 – “Keep Calm”

In the last five years, the world has survived the financial crises, European debt crisis, fiscal cliff, recessions and the Mayan doomsday prediction. Maybe, just maybe the world is not going to end just yet. Yes, we have panicked, behaved irrationally even, but ultimately survived the onslaught. Of course there has been damage, pain and a bit of suffering. But the important thing has been that we are making it through. The pessimists will insist that a calamity is impending and the end is that much closer. Let’s ignore them for now, and try and be positive. The theme for this is year is to ‘Keep Calm’.

I think we can now believe that Mother Earth is not going to collapse just yet.  Look around now; there are more than a few positives. The Middle East has witnessed revolutions overthrowing tyrant dictators. Starting from Tunisia to Libya and Egypt have begun a new chapter in their destinies. Syria is in the throes of a civil war. Palestine and Israel have agreed to some semblance of peace. One can only hope for a better year for these countries and the hopefully the start of many more.

Now, let’s focus on the economic outlook for different regions. Things largely look stagnant across the globe. The fast growing countries (read Asia and Africa) will moderate this year. The laggards (read Europe) will continue to chug along till they find some more stability. The basic problem of excess leverage remains. Economist and politicians are searching for the magic pill to cure the malaise. But borrowing further is definitely not the solution. Neither is a whimsical quick fix remedy fix the issue. (Read: Trillion dollar coin). It is going to take time to resolve, but we now have the confidence that we will not fall further.

Let’s be positive for a change. And in face of adversity, let ‘Keep Calm”