I did not realise that quietly another fortnight+ has gone by since I blogged last. These days, it is hard to sustain enthusiasm and comment on the charade that goes on, in financial markets. The Dow-Jones Index is up nearly at 18000 and the S&P 500 index is ensconced at above 2000 and India’s Sensex index is above 28000 points.
I just began reading Dr. William Bernstein’s ‘The Four Pillars of Investing’ – in his first chapter, he repeats several times the iron law of asset returns: high returns in the past will beget low returns later. We have experienced it repeatedly in the last three decades when most of us grew up. But, we refuse to internalise the lessons.
Take a look at these stories that get little attention these days:
… amount of debt on balance sheets climbs back to levels seen in early 2008 before the financial crisis. To make matters worse, their ability to make interest payments is about where it was in 2007…
Even with historically low borrowing costs, the ability of companies to make interest payments is about the same as before the global financial crisis. Coverage ratios, a measure of earnings to interest expense, average about 4 times for U.S. high-yield companies, compared with an average of 3.8 times in 2007 and early 2008, according to Deutsche Bank. Companies with lower ratios have higher debt burdens.
Investors have piled into junk bonds for their relatively high yields amid the suppressed rates. That has allowed the least creditworthy borrowers to raise $1.64 trillion in the bond market since the end of 2008, according to data compiled by Bloomberg. [Link]
The indifference to risk is universal, it seems. Look at the opening paragraphs from the MINT story:
Easy global liquidity conditions, juxtaposed with optimism surrounding the India story, is allowing a larger number of Indian companies, many of them rated below investment grade, to raise capital in the international bond markets. Much of this borrowing has come via overseas subsidiaries of Indian firms, allowing them to raise capital without having to adhere to the Reserve Bank of India’s (RBI’s) stringent external commercial borrowing (ECB) norms that restrict the cost at which such money can be raised and also the end-use of such funds. [Link]
This news-story in MINT followed my MINT column where I had queried if hubris was raising its head in India once again. The story answers my headline query in the affirmative, I guess. I find it hard to believe that corporations in India and investors worldwide could so easily forget lessons of such a big crisis such as erupted in 2007-09.
Perhaps, the wise words of H.R. Khan, one of the deputy Governors in the Reserve Bank of India appear to be a tad too late. In any case, it would not have mattered even if he had uttered them a year or two earlier. Such is the power of instant gratification and greed. For what it is worth, let me repeat his words:
Khan warned against “too much complacency” due to the stability of the rupee against the dollar. “People are now so comfortable with the rupee that there are issues of hedging. Too much of complacency is happening due to the stability syndrome,” said Khan. In a speech last month, Khan had said the hedge ratio for external commercial borrowings (ECBs)/foreign currency convertible bonds (FCCBs) declined sharply from about 34 per cent in fiscal 2013-14 to 24 per cent during April-August 2014 with a very low ratio of about 15 per cent in July-August 2014. Khan said excess leverage, excessive unhedged currency exposure and not-well-thought-out outward foreign direct investment were the three things that added to vulnerability. Stating that he was “chastened” by the massive jump in foreign investments by Indian companies, Khan chided corporations for not doing enough research before taking their decisions, as many had to exit such investments in distress. “You’ve gone without proper research, due diligence and adequate planning. So, you now see large-scale disinvestment of such assets,” Khan said. [Link]