Sizing the Big Picture

This Article was originally published in The Global Analyst

Sizing the big picture is essentially to see where the country is headed ten, twenty years from now in terms of various economic metrics.

India, as an emerging market, is piped for strong growth in the next several decades and this provides opportunities for investors if they get various aspects of the big picture right. The forecast for big numbers looks very promising as we can notice from the table:

The current market cap represents an increase of nearly 80 times since 1994 in rupee terms and 30 times in dollar terms and is more than the size of the banking system in India. One in every three households relate to stock market either directly or indirectly. While the market cap is expected to touch $7.5 trillion by 2030, it is expected to surpass $20 trillion by 2050.

I read a twitter thread by Sam Lawhon (@lawhon_sam) which presents some good thoughts on market moment. Brief excerpts from the tweet are reproduced below:

“There should be no head-scratching as to why the market rallied in the way that it did. So now the market is thinking, awesome! We have a strong economy, an accommodative Fed, and inflation is showing signs of moderating. Soft landing, right? Right? Amid this great drama, it seems the market has largely forgotten about the things that drive the real economy”.

It is quite common to see the reference “market” in many analyses implying that it is a homogeneous concept that one can visualize as a person. But the term market refers to interactions of millions of views every second and is as heterogeneous as it gets. It does well to simplify all of this into one term and keep referring to them as “the market” more so when it is also reflected as an index. Looking at the term market in retrospect is easy and intuitive but such visualization hardly serves any futuristic purpose as there is no one entity or person called “Mr. Market”. If everyone is buying, the market is bullish and vice-versa. But the market incorporates several data – both structured and unstructured. People buy or sell in anticipation and when millions of such anticipations collide through stock prices, it becomes almost impossible to use it, though elegantly presented in one unified form.

Technically the market is composed of buyers and sellers in a zero-sum game where each buy transaction is matched by a sell transaction. But beyond this simple logic lies the interactions of so many stakeholders that primarily defines the price-discovery function of the so-called market. Hence, it keeps changing every second and the game is to correctly anticipate the change. Here again it is a zero-sum game where one correct anticipation is always matched by another incorrect anticipation. The news flow that primarily defines the day-to-day market movement also suffers from significant lags where public availability of such news comes with a lag mostly found in standard reporting formats of stock exchange which can be boring to read. But many other things also influence market movements including resignation of a CEO, arrest of a director, sexual harassment case filed by an employee, etc. Unstructured data plays a larger role than financial statement analysis, especially when the game is to anticipate. In multiple choice questions, among the four or five options presented will be “none of the above” - an option often ignored. Human minds are trained to think and believe that every problem has a solution, and the trick is to find them within the choices given excluding “none of the above”. Given the range of unstructured data that influence corporate behaviour, sometimes a smart thing to do is to opt for “none of the above” which then pushes one to find more answers than restricting to the one given.

Managers routinely miss the waves as the past cannot enable us to see the future. Business cycles are crystal clear in the rear-view mirror but imagining the wave pattern 6 months or 1 year in advance is a task not many managers would love as it is akin to walking in a dark forest blindfolded.

In our long history of the market, we have seen many companies come into the prime index and silently exit as well. Average age of stocks in the index has been coming down over the years. Companies that were once darlings, just vanish from the scene all within a decade for several reasons (including mergers). Market leadership can sometimes be a burden to carry with a cost to pay while the number two or three will silently be making better margins. In addition, there are several investing myths that one must contend with in everyday investing life and one can imagine the size of the problem getting bigger.

In this setting, one must get the macro right before getting the micro right. The 30,000 feet views from an aircraft are always elegant, clear, beautiful, and inspiring. As one gets to the ground, the noise level increases, and the traffic with pollution catches up. The big picture reading can enable a manager to get the broader direction right, narrow down the options and gain better visibility than otherwise. There are several economic influences including geopolitical and gazing the star with these variables at interplay is the biggest challenge for any investor. Big picture observation can be time consuming, all-encompassing, and not easily deducible to logical conclusions. However, like yoga if one starts practicing them bit by bit, there are significant rewards.