The Stress Test Is On

Expectation is the root cause of all heartache. Shakespeare’s words ring true timelessly. We almost always have trouble managing expectations. So, we fault our kids who scored ninety percent because their class mates scored more. We deride performance when we feel that someone else has done better. We don’t measure performance in isolation and always feel compelled to compare. But, when our choices fail , we get a heightened sense of loss. This is the current state of mind of most investors. Today, the investors in debt and equity seem to have lost hope. The trouble started with comparing debt and equity returns shoulder to shoulder. For a year or two, we were deriding equity when debt investments like bond funds were doing well. Equity didn’t do too much. Today, both debt and equity are in a state of flux. Investors clearly don’t know what to expect. This seems like a very good time to re-calibrate expectations. One must know what to expect, learn to expect less and be happy to see one’s expectations surpassed. The battle has shifted from the markets into the investors’ mind. That is a place which you control. Taking control now and making expectations work is not a choice. It is a compulsion. Laissez faire simply won’t work now. Markets always reward character that stands out in the worst of times.

“What makes the desert beautiful is that somewhere it hides a well.- Antoine de Saint-Exupery”

Invest speak:

The last time PSUs achieved matching valuations to their private peers was over 10 years ago. The decade that has passed as virtually been a lost decade. why did this happen? Firstly, the promoters of businesses must be seen as committed to their growth and evolution. They must be seen as fitting custodians of stakeholder interest. They must commit capital to companies when they need it and raise money from investors at fair valuations. The promoter must ensure they leave enough on the table for investors in IPO’s and FPO’s. UPA in both its editions has been a very poor custodian as the promoter government. Actually, they have acted like cold mercenaries in the way they handled investment, disinvestment and policy. The damage to the reputation of PSU’s is clearly a reflection of the deficit in governance and equity. It has been a long ride downhill for the PSU’s and one perceives the worst is round the corner. While the fundamentals of several PSU’s still remain robust, they have a strong perception bias against them. This bias will reverse only when there is a regime change. Interestingly, the valuations seem poised to hit a nadir well before the current regime ends. When the perception bias eventually changes, we will see these companies return to favour. For that a regime change is a clear precondition.

The markets may capitulate. Be a contrarian.

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