Free Press Journal

Keeping Cool: Tides in economic affairs


Financial education concept - adult and child hands holding smiling piggy bank

In order to survive a economic slump, one needs to make smart investments and be calm in such trying times, says Tensing Rodrigues.

As I was entering Chennai last week, I was pleased to see green fields all along the tracks. That usually has not been the scene, particularly at this time of the year, over last two years that I have been shuttling in and out of the southern metropolis. I remember leaving the city towards the end of last December; wide swathes of land all along were under water, with tops of the trees and roofs of the huts poking through. That brings back the scary memories of that fateful night of December 1, when I found myself fighting a losing battle to touch the base camp.

Why am telling you about the flood and the green fields? Because that is the difficult to accept rhythm of nature; the floods seem catastrophic; but then the silt and the water they bring in rejuvenates the land for the next few years. Therefore Shiva’s tandava nrutya has to go on. As in nature, so in economic affairs.

Right now we are told that the corporate assets are severely “stressed”; what it means is that many of those who had borrowed may not be able to repay; many may suffer catastrophic losses; many may go bankrupt, dragging along many others in a domino effect. Kingfisher has gone flat; banks are crying wolf. Depositors are worried; stock markets are in a panic. JSPL has confessed to a “short/medium term cash flow mismatches” leading to a CRISIL downgrade; but the company hopes to bring the business on track with assets sales and strategic collaborations through JVs. The Non-Performing Assets of the Public Sector Banks in the country as a whole have crossed Rs. 4 lakh crores, or one-and-half times their market capitalisation; in other words, a shareholder of these banks carries a burden of Rs. 150 for every Rs. 100 invested in their shares. And so on; the sorry story goes on …

So what do we do? Just give up and say all is lost? As one stock trader did in Chennai some weeks back? That is the point about the floods and the green fields. On that night of December 1, I headed into the darkness of despair as my auto rickshaw sputtered and stopped and re-started through foot deep water never seeming to reach its destination. But a few months later I was enjoying the green fields.

The economy has to necessarily go through these phases of stress to weed out the inefficient; when profits come easy, the efficient, the not so efficient and the inefficient make hay. But when the supernormal profits vanish and covering costs becomes a Herculean task, only those with very sound business models, very lean cost structures and very deep pockets, survive. The rest die, decay and are washed away, becoming fodder for new comers, and letting the economy begin on a new slate. The process is painful, no doubt; we cannot say how long it will last; we cannot say for whom the bell will toll. Obviously, and in the same manner, these difficult times take toll of the investors as well. Only those with sound investment models, risk proof investment strategies and sufficient capacity to remain invested, survive. This is the time to realise that investment is not magic that can be learned by watching CNBC TV18 or some pulp guide to stock market.

It is naïve to believe that some one-off events trigger such downturns. China crash may not happen again. But it was not the first. Just some years back we had the US crash and after that the EU crash. The economic history of the world is punctuated with times of agony and ecstasy. If one takes a distant perspective, one can see the pattern, the rhythm of ebbs and tides. Whatever may be the events that trigger the events, those are only the symptoms. Underlying them are the basic forces that make and break the economies. Post-industrial revolution period saw Europe rising to the fore; WWII took away the economic power from Europe and passed it on to US. The end of the cold war saw the decline of US and the rise of Asia, first Japan, then the Asian Tigers and finally the mighty China. These tectonic shifts in the economic landscape leave the smaller economies scampering for shelter. But they also create the opportunities to snatch the baton.

Investors need to be on their guard always; more so just before, during and immediately after these seismic movements to drop the hot potatoes and grab the burgers. The upheavals will leave the financials of many companies dented; the investors need to discern the lines of distress and exit those companies. They will reveal some windfall opportunities; the investors need the courage to plunge and swim. Check the performance of TVS Motor Company Ltd, for instance. It is easy to make mistakes; but it is also natural; mistakes, as they say, is the stuff success is made of. Attachments of all sorts, to companies, to industries, to countries, to ideas, can be the stumbling blocks; time does not forgive those who refuse to move with it.

Perhaps the good old model of business cycles explains very candidly the dynamics of the process. Pioneers discover a profitable idea. First mover advantage gives them abundant profits. That draws bees to the nectar. But too many of them destroy the flower. Some newcomers find it too hot and quit. Some veterans who do not have the heart to face the competition also quit. The fittest survive, to make a new beginning. A new cycle starts. Or, it starts out of nowhere.  The story repeats. The investor, as I said before, needs to be alert to pick the gains, notwithstanding the risks.

If the horizon looks gloomy, do not despair. Be alert, be smart, be dispassionate – act. Do not aim for windfall gains; the losses may be just round the kerb. Aim for decent profits; be ready for a cloud break.