Don’t write me off just yet

Seventeenth century Dutch physicist Christiaan Huygens, noticed that two unconnected pendulum clocks hung side by side, no matter where they started initially, after sometime they started swinging towards and away from each other in unison. Although neither clock drives the other, they transmit impulses that bring about synchronization. This phenomena referred by Huygens as Odd Sympathy is now explained by the term mode-locking. Such spontaneous synchronization is found throughout nature. Stock markets, though not a natural system, represent the aggregate behaviour of its participants. In a recent research paper by Filer and Selover, it is observed that often for reasons not fully explained by capital flows or fundamentals, we find synchronized behaviour of markets, almost like musicians performing a symphony in an orchestra. No wonder then that traders wake up every morning to see the latest trends in Asia, only to go to sleep late evening after checking on how markets are faring in the West. While this may seem like an attempt to stay ahead of markets, one often just plays catch-up to the global synchronous trade.

Correlations across markets zoom even higher during episodes of high volatility, as was observed during the taper tantrum of mid-2013. Even sectoral trends reinforce this trend. Take the case of the healthcare sector this year. It has been a strong performer in global and emerging indices, and a similar trend is observed in India as well. If you analyse the performance attribution it is quite evident that globally the performance has been driven by a re-rating rather than an upward revision of earnings forecasts. Several such instances observed across sectors and markets reinforce the belief that global trends drive synchronous market behaviour. The tempting conclusion therefore is that if global trends dominate market behaviour, the only trick to managing money is to get the macro trade right.

In our overseas marketing trips our investment in a regional newspaper franchise raises the most eyebrows. Western investors scoff at the idea of buying newspaper companies, assuming that with the rise of Internet, the newspaper is yesterday’s business model. However, circulation numbers in India continue to grow well, more so in the regional languages and it takes an understanding of the local context to bet against the pervasive bearishness about newspapers.

In this maze of synchronicity what often gets overlooked are purely unique local trends. Local business models that are unique to a particular economy or market. In our recent visit to South Korea, we were amazed to see that there is a thriving company called Coway that has created a business model out of renting home appliances such as water purifiers, bidets and mattresses. Who would have thought South Korea with a per capita income of $26,000 that boasts of savvy consumers buying the latest electronic products and appliances, would have a thriving business out of renting appliances? In a country with 16 million households it is interesting to note that Coway has about 4.5 million rental contracts for home appliances and a market capitalization in excess of $5.5 billion. It is the regular maintenance and servicing proposition bundled with the rental contract that appeals to the customers.

Examples of such local quirks abound in India. Five years ago if you were asked to choose between hair oil and liquor—which one would outpace the other, you might not be faulted for going with the latter. Hair oil appeared to be a mature product that would be taken over by hair conditioners, gels and serums whereas in a young country with growing income levels and aspirations, it was assumed that liquor consumption would naturally rise. As per industry data, liquor volume growth has fallen from 12.7% in 2010 to 1.2% in 2013 whereas coconut oil volumes have held up relatively better with ~10% annual growth. As a sharp entrepreneur once told us, for every person that pops a Disprin to cure a headache, there are probably four who would rather apply a pain relief balm on their foreheads. For an observer who has not seen or used a pain balm for headache, it is easy to predict the demise of the product and assume that synchronous with the experience elsewhere, everyone would move over to Disprin-equivalents and yet Amrutanjan thrives and flourishes.

Or consider a product such as the air cooler. Last fiscal year six million air coolers were sold in India, a growth of 20% over the previous year. Air coolers outsell air conditioners that sold ~3.4 million last year, a growth of low-single digit over the previous year. In a country that sells more than 13 million two wheelers annually, the potential for air coolers and air conditioners will likely remain robust for many years to come. However any extrapolation of global trends to suggest that air coolers will die a natural death in favour of air conditioners will be premature. Not surprisingly Symphony, the market leader in the organiezd air cooler market, has seen its market capitalization zoom a 100 times in the last five years!

In a deeply connected, globalized world, it is not surprising that synchronous behaviour is widely prevalent. However, investors as well as business owners need to be aware that local context can lead to outcomes that are totally divergent from the prevalent synchronous view. The popular opinion about the imminent demise of some of these traditional products or business models is no doubt premature, and reminds us of a quote often attributed to Mark Twain—“The reports of my death are highly exaggerated”.

Amay Hattangadi and Swanand Kelkar work with Morgan Stanley Investment Management. These are their personal views.

Comments are welcome at theirview@livemint.com

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