Chart Fun | Bacon’s Chicken
2013: When bacon was available at chicken’s price. 2018: When chicken was available at bacon’s price…
Hope is a good breakfast, but it is a bad supper.
Truth is so hard to tell, it sometimes needs fiction to make it plausible.
- Francis Bacon
The English philosopher, scientist and author Francis Bacon is one of my intellectual heroes. He was instrumental in developing the process of experimental scientific enquiry. Bacon was also a proponent of scientific questioning through the falsification of established ideas. In so doing, he fueled humankind’s journey into the scientific age.
However, like Abraham de Moivre, it is Bacon’s death that makes for a fascinating tale.
On a cold London winter day, Bacon felt an urge to experiment with refrigeration and cold storage. He found an unfortunate chicken, killed it, and stuffed it with snow; to check if the snow could preserve the meat. Hunger called, and Bacon promptly ate the ‘preserved’ chicken.
The chicken had its revenge. Bacon contracted pneumonia, perhaps as an unintended consequence of the experiment, and succumbed to the summons of death.
Refrigeration would become mainstream only after 300 years. The visionary had stumbled upon a wonderful idea, through the blissful pursuit of experimentation driven by curiosity.
But paid with his life.
Bacon had found that hope made for a good breakfast, but (quite literally) a bad supper.
It appears that hope is making good breakfast for Indian investors.
August is an opportune moment to take stock of Indian equity markets. Over the 5-year period ending August, broad equity markets bottomed in August 2013. August 2018 welcomed a 5-year high.
What has happened in this timeframe?
Across market size, valuations have jumped over the past 5 years. Most prominent increases have been in the small and midcap pockets.
Back in 2013, dark clouds hung over Indian markets. The Rupee and Indian equity markets had rapidly depreciated, as India found itself in a liquidity unwind triggered by the Taper Tantrum storm. Mega caps were safe haven.
Cut to today. Much hope floats around. The sky appears a pristine blue. Capital flows into equity have been robust. Stock prices, and valuation, have zoomed across the board. SME segment has witnessed an almighty rush to public markets. Suppliers of capital are betting on a rosy future. Users of capital have found themselves in a purple patch.
Small and midcap are now more expensive than megacap and largecap. Driven in no small measure by hope capital flowing in, following demonetisation.
Liquidity is the fuel that powers this hope train.
The heatmaps captures movement in the distibution of India equity universe across market size and P/E multiple.
Only 12% of the universe in 2013 commanded a multiple of over 30x. The proportion is now 34%. 1 in 3 stocks are asking investors to shell out at least 30x for the privilege of gaining access to future stream of earnings and cash flows.
Unless earnings record a magnificent acceleration, several pockets of the market landscape are likely to experience a turbulent future.
Liquidity has been the drug that has suppressed operating wounds from festering so far. The argument of a regime change post-demonetisation in savings patterns is well received. Over the long-term. Liquidity, like volatility, exhibits cyclical behaviour. Market participants exhibit similar cylicality in thinking.
Truth is so hard to tell, it sometimes needs fiction to make it plausible.
- What gives when markets hurtle into a liquidity contraction regime?
- Will earnings accelerate soon enough to hold the floor for prices when (1) materialises?
2013: When bacon was available at chicken’s price.
2018: When chicken was available at bacon’s price.
I’m keen to hear about opportunities that remind me of 2013.
Pass me the bacon…
