As with many other years, the last 12- 14 months have had their fair share of highlights which have impacted the equity markets in general. As opposed to events, we think that the resulting trends/themes that emerge from these events and in some cases the trends which in fact led to the events unfolding are more relevant as they have a more long term bearing on the broader economy and the equity markets.

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Greater accountability is being sought from founders/promoters

One of the striking features of the last year has been how promoters have ended up losing control of their businesses through bad governance, excessive leverage among other factors. The recent cases of a reputed media house and one of the faster growing private banks stand out as 2 examples of promoters who have been held accountable and have seen them lose control of their businesses.

Though not comparable, the number of CEO ousters in the US for example has also been one of the highest in recent years.

The cleansing of the system is likely to have long term positive effects

A large part of the slowdown effect to our mind has been on account of the massive balance sheet deleveraging that is taking place coupled with the crisis in the NBFC system (switching off of incremental lending) as also the extreme risk aversion that we are seeing from banks. It is our view that the cleansing of the system though painful in the near term will end up strengthening the system in the future and this weeding out of the weak/bad players is a long term positive.

Availability of credit is NOT an issue for stronger, well run non-banks

While the crisis in the non-banking financial services space is real and has affected other parts of the larger economy, per se, the stronger players are able to borrow from the system at very attractive rates given their exemplary governance and underwriting standards. Therefore it is not that liquidity is not abundant, for good (great) businesses, their ability to dictate borrowing terms is an interesting fall-out of the events of the last 18 months. Bajaj Finance’s cost of funds in Sep 2019 was at pretty much the same level as it was in March 2018.

The quality conundrum- quality at what price

The narrow breadth of the current rally that commenced in September following the tax cuts has confounded many and has made most investors wary. Though the reasons for this may be many, ultimately it is the quality aspect that stands out. Good businesses with prudent capital allocation, good governance norms and dominant competitive advantages are those that seem to have performed relatively better that the broader market.

The dichotomy being displayed between the index performance and the state of the economy with the recent 4.3 % GDP print is stark to say the least. Investors will need to give deep thought and calibrate their views to answer the question of whether the market is right and is forward looking and the economy will start to bottom out OR that the index is rising on the back of the excessive glut of liquidity and other technical factors (after effects of the SEBI ruling on the re-classification of mutual fund holdings) leading to the narrow movement and that this will revert to reflect the slowdown that seems to be more pronounced that most people expected.

As the proverb goes – “May you live in interesting times” - could indeed be the curse that India faces as we look out into 2020 and beyond. However, to the intrepid investor, the interesting times might indeed end up being an opportunity and investors must find ways to navigate to profit from these opportunities.

The author is Siddharth Mehta, Founder and CIO of Bay Capital

Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions.

First Published:Mar 5, 2020 11:36 AM IST