Most of his foreign institutional (FII) peers think of Bertie as a local, and most of his domestic peers think of him as an FII. Running with the hare and hunting with the hounds suits Bertie just fine as he gets to impress both the groups with his presumed expertise of what the other side is thinking. Until he gets asked tough questions.
Over the past month, the question most fielded by Bertie has been why have FIIs been selling in India. It is mostly followed up with an enquiry into the destination of sale proceeds. The tone of questions ranges from curious to patronising to outright accusatory; as if Bertie personifies the behatted, cigar-chomping foreigner who has sold $12 billion worth of shares in a month.
In hindsight, all events that happen have been waiting to happen. With that opening line, Bertie talks of elevated valuations, retail frenzy, slowing growth, geopolitical tensions, etc. to answer the first question. The second question about destination of proceeds is generally answered by the poser himself with, “And putting it in China, no?”. Bertie just smiles and shrugs at this because he is not sure the answer is so straightforward.
Based on Chinese data, foreigners have bought shares there after a long streak of selling, but the buying is nowhere close to the amount sold in India. Neither has that money found its way into other emerging markets. Bertie surmises that a lot of it is making its way back to the American markets. The S&P has defied all naysayers and continues to defy gravity. With prospects of a Trump re-election brightening, investors seem to be expecting a sizable corporate tax cut that would lead to an earnings lift. Whether this is actually happening, one can never know but for now, Uncle Sam is Bertie’s prime suspect.
Sebi mid-caps
Frustrated by the sea of red on his Bloomberg screen and on Google maps, Bertie decided to pay an uncharacteristic mid-week visit to the Fat Cats Club. He settled in his favourite chair to watch the highlights of the ongoing Test match between India and New Zealand. That only added to the list of red things that were irritating him. He couldn’t believe the ineptitude with which India was playing the red ball. When Bertie watches cricket, he curses in Marathi; probably something that got ingrained in the maidans of Mumbai. He hurled one at the screen and was about to leave, when he heard a voice behind him “Nakkamo che aa log!” (These people are useless.) The sentiment was the same but expressed in mild Gujarati.
Bertie turned to face Govind bhai, the astute stock-picker who had discovered several small caps and seen them become multi-baggers. They both agreed that the TV should be switched off and Bertie began with question that had been asked a million times to Govind bhai “Levama su?” (What to buy?)
Govind bhai is a man of few words and whenever he speaks it sounds like a telegram. “Sebi mid-cap” he said. Bertie’s blank stare told him that he would have to explain. “A lot of retail money chasing small caps. It can turn anytime. Very risky.” Govind bhai spoke as if there was a word limit. “But aren’t midcaps overvalued as well?” asked Bertie. “Yes” said Govind bhai “But Sebi has defined midcap. Stock number 101-250. All mutual funds with mid-cap allocation must invest in these 150 stocks. Mutual fund flows are steady. No panicky sellers there. As of now, only buyers.” Bertie nodded. The man who became a legend by swimming in open waters was opting to swim in a five-foot-deep swimming pool. That must mean something.
Truth lies in the middle
A typical initiating coverage report on a consumer stock will have a bar chart that shows that the per capita consumption of whatever is being peddled is quite low in India. That metric will then be compared to other emerging markets, notably China, and then the developed world. With 1.4 billion in the denominator, such charts can paint a ‘happily ever after’ story for just about anything – from beer to cement. A variation of this approach is to calculate a total addressable market (TAM) for the goods or services in question. Add sections on benefits of formalisation of the economy and per capita inflection points when consumption of certain categories takes off. The whole idea of this endeavour is to make the reader think of consumption like interest on fixed deposit; a smooth line from the bottom left to top right.
But one has to just look at the uniformly limp results of consumer companies that sell wares as diverse as burgers, soaps and alcohol to wonder about the promised upward sloping line. Bertie posed this to a retired consumer analyst who can now speak freely and without an eight-page disclaimer. “It’s not wrong, Bertie. That smooth line exists,” he said. “But what they don’t tell you is that around that line is a snaking line that depicts the short-term cycles. Consumer income cycles, competitive cycles and even commodity prices.” That made sense to Bertie. “The initiating notes will tell you about the straight line; quarterly results about the snaking one and the truth, as always, will lie somewhere in the middle.”
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.