Narratives and stories drive investment outcomes in the short run. For the most part, they provide us with shock therapies with complete elasticity. The effect of the story is felt temporarily and over a period of time we are back to business as usual. Yet there are few stories that alter the course of business and cause a structural shift. As an investor with the intent of long term wealth creation, we need to ignore the stories with elasticity as noise and focus only on those few that create a change bringing about a new or an enlarged addressable opportunity.
The Elastic Stories
The year started with a hangover of the Facebook data scandal which had revealed in March 2018, that Cambridge Analytica had harvested data of over 50 million users without their consent. This did not stop the advent of social media consumption in India.
With the rise of nationalism, FY 2019 was also a year marred with geopolitical conflicts. The North Korean drama that had the markets and the world on the edge of their seats, made global VIX (volatility index) a popular trade for a short while. However, it was business as usual post the inter-Korean summit in April.
In the same arena- President Trump’s twitter account- US-China tariff war was fought. Multiple iterations were publicised but it all ended (for the time being) in December, with the White House declaring a postponement on all planned increases on tariffs.’ We are transitioning from a world dominated by only one player post the Cold War era to now a bi-polar (possibly multi-polar world). But the global order has not been reset just yet.
A cold war in its own right brewed in the middle east. Saudi and Iran supported opposing sides in the Syrian and Yemeni Civil War. Saudi applauded as US withdrew from the Nuclear Deal with Iran and for the first time in history said that Israelis have ‘right to their own land.’ Iran hoped that international backlash against Saudi Arabia post the assassination of Jamal Khashoggi (Saudi journalist) would stick. President Trump had other plans. He reaffirmed his support for Saudi Arabia and blamed Iran for the war in Yemen. Crude calmed down.
At home, markets were anything but calm. The exuberance of FY 2018 gave way to jitters of FY 2019. IL&FS with a debt pile of 91000cr, defaulted in June. A AAA bond default created trust issues and hence a liquidity crisis in the capital markets especially for NBFCs; a major engine for driving consumption in the nation. Yet two quarters since, non-food corporate credit growth has sustained its increasing momentum.
Urjit Patel, the ex-RBI governor, and the government faced a standoff over the former’s hawkish stance in the wake of a liquidity crisis and impending national elections. Markets- debt, equity and currency were shocked for a few days but then got along with business as usual.
The outcome of the state elections in Karnataka in May 2018 and Rajasthan, MP and Chattisgarh in December 2018 shocked the markets. A tough fight for the center and a hung parliament in 2019 was talked about. The India-Pak tensions that ensued, however, changed the discourse.
40 of our brave CRPF jawans were killed in a dastardly suicide bomb attack on their vehicle in Pulwama. Airstrikes were carried out, skirmishes followed, a brave soldier captured and returned. The possibility of war had played upon every citizen’s mind. Yet with both sides claiming victory in some aspects, there was enough to achieve detente, for the time being; the smoke cleared.
Story of the Year
Even as the smoke of the battle settled down, China’s focus on turning down the smoke in its cities has set their environmental agencies into action. Nationwide anti-pollution curbs were implemented that impacted chemicals’, Active Pharmaceutical Ingredients’ (API) and Active Ingredients’ (for Agrochemicals) manufacturers. Our centre gave a clarion call for pharma majors to become self sufficient for its API requirements under its Make in India initiative, however with no follow through. In June 2018, China sent 18000 environmental supervisors for fresh reviews of various producing areas. 144 API manufacturers were shut down in just Beijing- Tianjin region alone for effluent violations.
This swung Indian producers into action. Backward integration was witnessed across chemical, pharmaceutical and Agrochemical industry. In our opinion, this is just the beginning. One of India’s largest API manufacturers over the last 30 years of existence, spent 2500cr on its gross block. Now, on the back of China’s war against pollution is investing 1500cr additionally (ex of land costs) on augmenting its capacity. The private capex cycle has commenced in these industries.
Though some of China’s offline capacity will come online, the cost structure of the facility would have increased and the global majors would have realised better than to rely solely on China for their API or AI requirements. The structural shift brought about by China’s war on pollution, makes it our Story of the Year.
Please Note: Tip of the hat to Mr. Navneet Munhot’s annual ‘Person of the Year’ letter as the CIO of SBI Mutual Funds for inspiring the idea for this annual letter.
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