It's different this time. This phrase has long been the butt of jokes as well as the subject matter of aphorisms in the world of investments. Whenever the investment markets are unusually healthy, there is no dearth of optimists trying to prove that they'll keep moving up because, you know, it's different this time. They use the phrase to suggest that the normal rules of caution shouldn't apply. Again, there are many realists (among whom I count myself) pointing out that the appearance of this phrase itself should be seen as a warning sign.
However, it's really different this time ' what I mean here is that the circumstances of using the phrase are themselves different. This time around, everything about the financial and investment markets looks different from what they are supposed to be. However, now it's the pessimists who are pointing out that the things are different.
Deviation from norm
Departures from the normal are sometimes hard to recognise, but for Indian investors they have become so widespread that they are hard to ignore. In mutual fund investments, which is what I track closely, practically every asset class now has a strange anomaly at its heart.
Equity hasn't turned in any decent return for four years. Generally, even conservative advisers would say that investing in equity for above three years is safe.
Today, this period could get extended indefinitely. Even more strangely, in recent market declines, mid-cap funds have fared better than large-cap funds. This is the reverse of what is supposed to happen.
From an investment perspective, one major difference between large-cap and mid-cap stocks is that the former is supposed to be safer. When the markets weaken, large-caps are expected to decline less and the hot mid-caps more.
Investors rush to sell mid-caps in large numbers, precipitating a decline. Thus, large-caps are said to be a more safe bet in bad times. This principle appears to have been comprehensively violated in India in recent times.
Again, debt funds have their own anomaly. Generally, these funds adhere to the pattern of the shorter term funds, having the least (and the most stable) returns, while the longer term funds vary according to the current interest rate outlook. However, in actual practice, there has recently been an almost complete convergence of returns among maturities of widely different time horizons.
From ultra short-term funds to what are supposed to be longer term income funds, everything gives a return of around 8 per cent a year, give or take a little.
More pertinently, every type of debt fund have maturity and risk profiles within a very tight band.
Moreover, the only type of fund that appears to have got investors excited are gold funds; but of course, these are not mutual funds at all but merely a more convenient way of buying gold. It's the Diwali and Dhanteras fund category, which has nothing to do with investment management in any conventional sense.
Controlling factors
So, things are different, right? Well, not quite. When we examine each of these phenomena in isolation, things do seem to go awry.
However, each of these are actually transient situations. Let's take them one by one. Equities in general may not have been rising for four years, but they are certainly getting more and more attractive. Despite all sorts of gloom and doom and fits and starts, company toplines and bottomlines are better than when the markets were last at current levels. If one isolates the handful of problem industries and business groups (real estate and ADAG being the foremost examples), things haven't gone so badly.
As for large-caps declining more than mid-caps, that's an inevitable side effect of the way FIIs invest in India. Most FIIs invest only in big companies. They have a small positive list, sometimes limited just to Sensex-Nifty companies and they won't step outside that.
This is fine in normal times but when there's panic selling by FIIs, large-caps tend to fall more than mid-caps because FIIs hardly own any mid-cap stocks. This has nothing to do with the inherent long-term stability of larger companies. In a way, this is sort of a circular impact ' the negative comes out of the FIIs' wish to avoid negatives, but it's something that just has to be expected. In the medium and the long term, it has to be put up with.
As far as the flatness and the lack of choice in debt funds is concerned, it is a side effect of the unusually predictable phase that the interest rate situation has been going through. Normally, there's an ebb and flow of money in and out of different types of funds as interest rates shift.
There's also a normal distribution of the different outlook that different fund managers have. But the sheer predictability of the interest rate scenario has put paid to all that. Every bond investor and bond fund manager has the same view of what's going to happen and so far they've been right. The result is that over time, a large proportion of debt funds have become clones of each other. Once the predictability vanishes, so will this sameness. It's just a matter of time.
Normality to prevail
Still, I guess one should be grateful for whatever little bit of unpredictability that is there, no matter where. We definitely need some antidotes to the flood of uncertainty that blows our way daily from Europe. I won't pretend to say anything about the European situation because there will be a few days between my writing and your reading this. The way things are, even a gap of hours is too much.
However, as a realistic investor, I'd be confident of one thing ' it's not different this time. There's a lot of light and sound appearance of action, but one way or another, normalcy will assert itself.
Equities will stay the best long-term asset class, large-caps will be more stable than mid-caps, and the sun will rise in the east.
The author is CEO of Value Research Online
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