Hello,
Happy New Year! A new year and the start of this year’s first Saptah edition. This year starts with a gratitude - I thank you for every second of your time reading Saptah.
Today I bring to you an interview with a friend of mine of 15 years - Aashish Singh. Aashish is that generation of Indian kids who have been blessed (read cursed) with two A’s in their name - guaranteed a first placed trophy in all kinds of lists (basically Arsenal of the EPL). But he took sweet sweet vengeance on the alphabetical order by showing up fashionably late for almost everything, with explanations as clear as the theory of relativity. Aashish also realised the commoditisation of a BE degree long before the rest of us mortals could spell MBA. So hope you enjoy this short interview:
Question 1 - A brief overview of your experience to provide context to the readers?
»A Finance professional with about 10 years experience in Finance department of various banks supporting their derivatives trading business. Currently living in Sydney, work at ANZ bank.
Question 2 - Lets go back to "First principles". Explain to me as if I am Michael Scott from The Office. How is inflation, interest rate, Treasury yield, consumption, etc. linked to the stock market?
»So Michael - there are many assets classes to invest in - such as real estate, equities, fixed income, etc.Certain asset classes are more risky than others. So equities has more risk than fixed income (bonds). It has more return potential but also more downside risk.
Investors often take a diversified approach to allocating their funds. When their risk appetite is larger they are more likely to invest in equities and when its lower they are more likely to invest in bonds.
Inflation - usually this means bond investors will demand more return (interest rate). With higher rates they may choose to invest in bonds rather than equities. Equities fare well when there is mild inflation (2%) as companies can pass on increased costs to consumers. Above that it starts to hurt their earnings and is not good for the share price.
Treasury yield - higher yields on government (treasury) bonds means investors are happy to be invested there rather than invest in stock market.
Interest rate - this is presumably the bank lending rate. Low rates stimulate growth and risk appetite, so are good for the stock market.
Consumption - assuming this refers to consumer buying. Higher consumption usually means fatter margins for corporates. So good for stocks.
Question 3 - Why should a person like me ("retail investor") care about stock market valuations when Tesla stock is going to the moooooon?
»Value based investing is a concept introduced by Benjamin Graham in 1930's and popularised by legendary investor Warren Buffet (who Graham mentored). This has become a bedrock of modern day investing, or was, until a lot of money started to be pumped into the system by central banks post the Global Financial crisis in ‘08 and exacerbated during the Pandemic in ‘19.
These days there is too much free money - from stimulus and record low interest rates. So people have started to buy into companies at very high valuations.
Tesla has a P/E of 111 based of 2022 estimated earnings. In other words, the share price is equal to 111 times its estimated annual earning per share. If Tesla earned the same amount each year for the next 111 years you would break even. The investors are obviously hoping earnings grow exponentially.
Question 4 - When I don't remember my mama's real name (dear Dablu Mama), why do I know who the Fed's chairperson is (Jerome Powell)? In other words why does everyone care about the Fed?
»The Fed (and other central banks) control money supply. They are meant to be independent. Pre the Global Financial crisis in 2008 the Fed had a largely obscure role in Financial markets. In the crisis, to bail out the banks and the economy the Fed printed large sums of money. Total money supply that was relatively unchanged in the decade preceding Global Financial Crisis, has since grown over 8 fold. The Fed has bought a lot of distressed assets and is in effect a “Market whale” - someone whose buying or selling moves the entire market. This is probably why you know the name of chairperson of the Fed better than your dear mama.
Question 5 - Final question - do you really think Varun Dhawan is SRK's successor in Bollywood?
»There is only one King Khan, but Varun is great too. :)
P.S. - Judwaa 2 is rated 3.6 on IMDB.
Aashish writes regularly on key market events in his weekly blog - The Random Walk.
Hope you enjoyed this Saptah! Stay Safe and take care!