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Long Lung Game; Slowing Consumption

MOHIT SATYANAND/SubStack | 30/01/2024

Courtesy: Mohit Satyanand

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Investing taught me to play the long game. You buy into well-run companies whose businesses seem to have a future. As long as your view doesn’t change, you hold your shares through the ups and downs of market sentiment. 

Over time, measured in decades, rather than years, you build a substantial nest egg. Itchy fingers, which hit the ‘Sell’ button at the first hint of trouble, and try to time the market, rarely produce the kind of returns that steady, composed investors do.

Returning to Delhi after 10 weeks in Goa, I’m playing a different kind of long game, against air pollution. By any standards, the quality of winter air in Delhi is inimical to health. For weeks on end, the Air Quality Index (AQI) registers numbers over 300. My heart goes out to those constrained to breathe unfiltered air for months on end - security guards and bus drivers, vendors and construction workers, and the millions of north Indian homes that simply can’t afford air purifiers. Clean air has become a private good, available only to those living and working in spaces with doors and windows that can be sealed against the smog, and gadgets that filter out the finest particulate matter - PM 2.5 - that does the greatest harm.

But even in these privileged homes, I often run into the response - the air quality doesn’t really bother me. Teenagers don’t get lung cancer or emphysema from smoking cigarettes. It usually takes decades for the ill effects of tobacco smoke to cause serious health issues. And not every regular smoker will die of lung disease. Health, like much of life, is a game of probabilities - driving way over the speed limit increases the chance that you will get into a serious crash; most people who bet against the casino will lose money; being overweight increases your risk of cardiac disease.

Breathing polluted air increases your risk of, among others:

  • Respiratory disease

  • Cardiovascular disease

  • Their conjoint, COPD, or chronic obstructive pulmonary disorder

  • Nervous disorders, and even

  • Digestive ailments.

The risks mount as you grow older, and are heightened by physical activity. A chart put out by the US government’s Environment Protection Agency, EPA, prescribes how different folks should respond to bad air. The most severe category they address is AQI between 201 and 300. As I write this, Delhi’s AQI is 400 in most parts, and the gym I visited on Wednesday morning had not even bothered to turn on the air purifiers!

Please, please play the long game for your lungs.

Slowing Consumption

When consumer goods giant Hindustan Unilever reported its quarterly results last week, I tweeted (‘X-ed’?) that the Indian consumption story is going to get derated - investor jargon for downgraded. HUL populates Indian retail shelves with everything from dishwashing soap to skin serum, and its sales are widely regarded as an index for the spending of the Indian consumer.

Between October and December 2023, HUL’s sales had registered no sales increase over the same period in 2022. HUL may be losing some growth to new age players who sell beauty products directly to consumers (D2C) on the internet. Some commentators believe that a downturn in commodity prices may have created elbow room for small regional players to re-enter the markets. To the extent of these developments, the overall demand for consumer goods could be better than HUL’s grim numbers.

However, official statistics, which are posted with a lag, show that private consumption expenditure is growing at just over 4%, which is very anaemic for a country widely believed to 

be growing at over 7% per annum. The business consultancy, Bizom, which conducts market surveys on a regular basis, reports* that Indian consumer goods sales for the last quarter were down 4.5%. For the entire year of 2023, consumer goods sales were up only 2%, with urban sales virtually flat, and a mild rural recovery of 2.3%.

For the stock market investor, this creates a huge pricing anomaly. Leading consumer-facing companies like HUL and Nestle, inner-wear player Page Industries, and paints market leader, Asian Paints, have long been valued at a massive premium to the shares of other leading Indian companies. While the average price of the fifty shares on the Nifty is 23 times annual earnings, the consumer facing companies are priced between 50 and 80 times earnings. The belief is that their long-term growth is secured by the ‘moat’, or competitive advantage, of brand image and consumer connect. An entire cult has formed around the belief that these shares can be Bought At Any Price (BAAP).

There is a strong parallel in the US, where the leading tech stocks, the Super Seven**, sell at a premium to the rest of the market, and have a combined market value ahead of the entire stock markets of China, Japan, UK, France and Canada. This premium is widely justified by their continuing dominance over emerging tech trends, and their scorching growth. Similarly, the BAAP cult was formed in a time when Indian consumer goods companies were growing at 20 per cent or more a year. 

But when growth slackens, this premium will - eventually - fade, as money shifts to businesses which have a clear path to growth. The charts of many Indian blue-chip stocks are beginning to sag. If the narrative continues to shift, as it must in the face of reality, the drop can be long and deep.

Beyond stock markets, the much bigger issue is how to restore growth in Indian consumption. I don’t think it is anybody’s case that the average Indian home has a surfeit of consumer goods, or that its unplastered walls don’t need a coat of paint. After the growth shocks of demonetisation, GST and COVID, the government has sought to pump vigor into the economy by way of public spending, on food distribution, and infrastructure.

The first is welfare at its most basic; the second is much needed, and is accompanied by the belief that public investment will ‘crowd in’, or encourage, private investment - where roads and bridges are built, trucks and factories will follow. But that’s not happening yet, and if the economy doesn’t grow in response to government spending, tax collections will not keep pace. Government deficits have a way of piling up till they become a dead-weight on a nation, and much of the discussion around the forthcoming budget is about finding the right path to a lower annual deficit.

The larger question in my mind is how to create a policy path to sustained growth. We will have to leave that to the policy makers to think that through; on your part, do question the logic of over-priced stocks in your portfolio. 

Long term value can not be blind to price. BAAP is a prescription for myopia, while investing requires a sharp eye for long-term value.



(This article was first published on SubStack.)

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