Investing is linked to Politics

2 APRIL 2016

Some believe that investing is a stand-alone activity and is devoid of any interaction with the external world and, specifically, has nothing to do with the social or political climate.

Some believe that investing is only about focusing on what the government says or does. Hence, the fast-talking, rapid-breathing coverage of the budget every year and of the monetary policy action planned by the Fed, the ECB and - in India's case - of the RBI. (Yes, I still hold the view that the RBI can reduce interest rates by 1% ON April 5th - and, yes, I am way out on a limb by saying this!)

Some readers of The Honest Truth reprimand me by saying that 'they do not subscribe to The Honest Truth to get my social views'. Fair enough. That is your view. That is not my view.


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My view of investments is that it is a part of many things in the world and you need to be aware of the various things happening that can influence the environment in which companies will operate.

In a comic book published in 1987, I presented a chart similar to the one below. Look at it carefully.


As John Donne, the English poet wrote:
"No man is an island,
Entire of itself,
Every man is a piece of the continent,
A part of the main"

And, in a similar vein, I would state that: No company can be an island entire of itself. What it does - or cannot do - is influenced by the environment in which it operates.

Reading the tea leaves?

There are many ways to figure out the outermost circle of what Society wants and how that could impact Politics and the eventual Policy that influences what is likely to happen in any economy.

Some ways to guess this are logical, some behavioural, and some plain idiotic.

When Alan Greenspan (probably vying for the spot of one of the worst central bankers in the history of modern finance with his protege Ben Bernanke) was being projected as a rock star, the media used to analyse how he held his briefcase to see what he was about to say! Absurd.

During Mrs. Gandhi later years as a Prime Minister, what she said was a function of what her fiery son, Sanjay Gandhi, probably wanted her to say and do! The Emergency - a blot on India's democracy that the Congress should always be reminded of - was supposed to be an idea that popped up from the kitchen cabinet and the coterie of Sanjay Gandhi. Sad!

After the terrorist attacks on September 11, 2001 many Americans showed their sympathy, empathy, and desire for revenge by having USA flags on the dashboards and windows of their cars as they zipped across their interstate highways - like a posse in an old Western movie going after the bad guys. Society wanted to hit back. They got what they wanted. President Bush and Vice President Dick Cheney probably could not distinguish Iraq from Iran, but they gave America the war they wanted by launching the occupation of Afghanistan (October 7, 2001) and Iraq (March 20, 2003).

Closer to home - and more recently - we have seen how a society that tolerates and actively participates in corruption got the UPA-1 and UPA-2 versions of hyper-corruption. From coal to gas to iron ore to real estate to spectrum, corruption was a way of life at the top echelons of society while at the lower end the deals were smaller. The bribe you pay for the birth certificate and the death certificate are just bookends in a fat encyclopedia of corruption that you live in and participate in throughout your life. The wipe out of the Congress was actually an attempt to change that. The win of the BJP was for a mandate to kick start development and to build a less corrupt India.

The BJP began to think that they were elected to monitor the dress code of women (no bikinis on beaches), the activity of women (no visiting bars), and to step into our kitchen (no beef).

What the BJP is doing is different from the mandate it was given: a smaller more vocal minority within the BJP had decided to make Hindutva their main focus. That has backfired and - hopefully - the BJP is back on the drawing board and starting the process of focusing on what they were elected for. A few losses in the state elections in New Delhi and Bihar may also make them stay focused on the work that needs to be done.

Impact on sectors.

Let me give you an extreme example of how the Society/Politics/Policy can play out and have an impact on different sectors.

Let's assume that Donald Trump becomes the President of the United States and takes the oath as the 45th President on January 20th 2017. (That may not be an 'extreme view'! 😊)
In addition to building a wall to prevent more people from Mexico getting into the US, President Trump decides to reward those who support him: mostly white men, who hold or held white collar jobs and are from the middle class to lower middle class strata of society.
President Trump decides that all clothes, cars, steel, and aluminum must be made in USA and no components must be imported.
All software code must be written by Americans working in America.

If this were to happen, would you - as an investor in Indian stocks - buy into companies that:

  1. Exports textiles to the US,
  2. Exports steel to the US,
  3. Exports cars to the US,
  4. Sends software engineers to the US?

What society wishes for, influences the politics of the country.
And determines the policies that will be adopted.
And this can have a significant impact on the various sectors of the economy.

Good managements navigate their businesses.

In the above example of Donald Trump being sworn in as the 45th President of the United States of America, we have a sense of the sectors and businesses in India that can be hurt by such an eventuality. Good managements running businesses in these sectors would have thought of a revised business plan and started implementing it.

The textile company could have bought out moth-balled plants in USA with a view that it already has customers in the USA and can change its sourcing of products from imports (from India, Bangladesh or Indonesia) to manufacturing locally, closer to its customers. Or it may decide to sell its business unit and not take any 'election risk'.

The software company could be busy seeking new markets and new customers. Or, like the textile company above, buy something within USA or sell its business unit that has USA exposure and risk.

I know that a lot of my colleagues in Quantum Mutual Fund and at Equitymaster spend a lot of their time studying and analyzing the core of this smallest circle: the Management of a Company. This is crucial to long term investment success. A company in a great business sector but with a chor or poor management will not be good for your portfolio returns! A good management can work hard and build a great business even when it is surrounded by bad policy and unethical competitors.

While the 'Management of a Company' is the smallest circle in terms of size in the chart above, it deserves the most attention.

But never ignore the larger circles which can have a significant impact on the fortunes of a company and, therefore, the potential long term value of the underlying business and its long term share price.

So, whether some like it or not, I will need to keep airing my views on the characters that strut across the world political, religious, and social stages because - somewhere in their midst - are some good folks who can support the way we think about investing and some pretty awful folks that can mess up the way we think about investing and result in losses to the portfolio! Your returns as an investor depend on our continued thinking and writing about these larger circles!


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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

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1 Responses to "Investing is linked to Politics"

DKapur

Apr 6, 2016

Very well said Mr. Dayal. A good recent example is the introduction of prohibition in Bihar from 1 April 2016. Society or rather the ladies of Bihar want it so the politicians have delivered, with enough evidence in our own country suggesting that bans and prohibitions do not work.

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