Tuesday 12 May 2020
Why the coming emerging markets debt crisis will be messy
Colby Smith and Robin Wigglesworth in The Financial Times
The Maldives’ coral-encrusted islands have long been irresistible to tourists. But today its secluded luxury resorts are deserted, except those converted into makeshift quarantine facilities for stranded coronavirus patients.
The virus has shattered global tourism and devastated the Maldivian economy. The IMF has gone from projecting a 6 per cent expansion in gross domestic product this year to an 8 per cent contraction. The risk is that this brutal, abrupt recession could translate into the Maldives becoming the latest country to sink into sovereign bankruptcy.
Zambia, Ecuador and Rwanda have all announced in recent weeks that they are struggling to repay their debts. Lebanon has already kicked off its restructuring process, while Argentina, which was already battling its creditors even before the pandemic struck, appears to be heading for its ninth sovereign default since independence in 1816. Investors believe many other developing countries are not too far behind.
The Maldives is hardly the biggest country likely to succumb, but given its debt burden to creditors such as China and the severity of its recession, it is the “poster child of how easily the dominoes will fall”, warns Mitu Gulati, a sovereign debt expert at Duke University.
The IMF has already lent the country $29m to tide it over, but warned that the loss of tourism has “severely weakened” the economy and that additional financial support would be needed. The country’s $250m bond due in 2022 has tumbled to trade at just 81 cents on the dollar, indicating that investors are increasingly concerned about the Maldives’ capacity to make good on its obligations.
The kindling for another big emerging markets debt crisis has been accumulating for years. The investor thirst for higher returns has allowed smaller, lesser-developed and more vulnerable “frontier” countries to tap bond markets (Editor's note - this refers to bond markets not denominated in the country's own currency) at a record pace in the past decade. Their debt burden has climbed from less than $1tn in 2005 to $3.2tn, according to the Institute of International Finance, equal to 114 per cent of gross domestic product for frontier markets. Emerging markets as a whole owe a total of $71tn.
“The challenge is enormous,” says Ramin Toloui, a former head of emerging market debt at bond manager Pimco and assistant secretary for international finance at the US Treasury, who now teaches at Stanford University. “The withdrawal of money [from EM funds] is greater and more sudden than in 2008, the economic shock is huge and the path to recovery more uncertain than it was after the last crisis.”
The G20 has agreed to temporarily freeze about $20bn-worth of bilateral loan repayments for 76 poorer countries. It has urged private sector creditors to do the same, but few analysts believe that is feasible, and predict the result will probably instead be a series of ad hoc debt standstills and restructurings for swaths of the developing world.
Resolving the coming debt crises may be even tougher than in the past, however. Rather than the banks and governments — the primary creditors in the mammoth debt crisis that racked the developing world in the 1980s and 1990s — creditors are nowadays largely a multitude of bond funds. They are trickier to co-ordinate and corral into restructuring agreements.
Although the need for financial relief is stark in many cases, there are indications that some investment groups may break with the custom of reluctantly accepting financially painful compromises to achieve a restructuring, and instead fight for a better deal.
“Normally these guys would get out of Dodge City at the first sign of trouble in the debtor country. They're not set up to deal with prolonged debt restructurings and don't like the reputational risk that would result from an aggressive campaign against a country in deep economic and social distress,” says Lee Buchheit, a prominent lawyer in the field. “But having watched some holdout creditors extract rich payouts, even some of the traditional institutional investors appear to be reconsidering the virtues of passivity.”
Holdout strategy
In the past, such aggression has been the preserve of what critics call “vulture funds” — investors who seek to profit from government debt crises through obstinacy and legal threats.
Their basic strategy is to act as a “holdout”. Sovereign debt restructurings amount to exchanging a country’s old bonds for new ones, often worth less, with a lower interest rate or longer repayment times. Holdouts refuse to join in, and instead threaten to sue for the full amount. As long as the number of holdouts is tiny, countries have often elected to simply pay them off rather than deal with the nuisance of a potentially lengthy courtroom battle.
For example, when Greece restructured most of its debts in 2012, it grudgingly chose to repay in full a smattering of overseas bonds where hedge funds had congregated. Others, like Argentina, have chosen to fight. The uncertainty of the outcome — and how hard it can be to compel a country to pay through legal means — long ensured a delicate but functional balance to the sovereign debt restructuring process.
However, in 2016 Elliott Management’s Jay Newman etched his name in the annals of big hedge fund hauls by extracting $2.4bn from Argentina for the firm after a decade-long legal battle.
“[Holding out] long seemed like a cat-and-mouse game that was costly and uncertain, but now it has shifted to a more promising strategy,” says Christoph Trebesch, an academic at the Kiel Institute for the World Economy in Germany. Although still daunting, Elliott’s success could inspire more copycats and complicate the looming spate of EM debt crises, some experts fear.
Moreover, there are signs that traditional investment groups are also toughening up, which could turn a difficult process into a more protracted nightmare for government lenders and borrowers alike.
One lawyer who has worked with creditors points out that many investment funds have piled into EM bonds in recent years, and the prospect of deep and broad losses could be ruinous to some heavily-exposed funds. “Before, the holdouts were the main problem, but now it could be the traditional funds,” he says. “If your back is against the wall, you’re going to fight.”
After the IMF’s failed attempt to set up a quasi-sovereign bankruptcy court in the early 2000s, the main response by governments has been to introduce “collective action clauses” into their bonds. These dictate that if a large majority of bondholders vote for a restructuring, typically 75 per cent, the agreement is imposed on all holders.
But investors have wised up, buying bigger chunks of specific bonds in an attempt to amass such a large position that they enjoy a de facto veto over the restructuring terms of the instruments. And some older bonds have no such clauses.
So far there are only a few examples of larger investment firms taking a tougher stance, but they are notable for how successful they have been. The first was Franklin Templeton, which managed to extract what some analysts say were surprisingly favourable terms in Ukraine’s 2015 debt restructuring, having snapped up enough bonds to become the country’s largest private creditor.
More recently, Ashmore has built up a huge stake in Lebanon’s debt that in practice gives it a veto over how the country will restructure some of its bonds. And this year, Fidelity successfully played hardball with Buenos Aires, calling the Argentine province’s bluff that it was unable to make a $250m payment due in January. Buenos Aires ended up paying in full.
Fidelity is also part of a larger creditor group that has pushed back on Argentina’s plans to restructure its $65bn foreign debt burden. The group includes some of the world’s largest institutional investors, including BlackRock and T Rowe Price, and together with the two other main bondholder groups, wields enough power to make or break any deal.
Franklin Templeton and Ashmore declined to comment. Fidelity declined to comment on its Argentine bust-up, but said in a statement that its policies on sovereign restructurings had not changed.
“When it becomes necessary to negotiate with those who have borrowed our investors’ money, we do so in good faith and in a reasonable, professional manner,” the investment group said. “The interests we represent are those of the millions of individuals, and thousands of financial advisers and institutions who have entrusted their money to us to invest on their behalf.”
Debtor advantage
Fidelity’s nod to the fiduciary duty money managers owe clients is telling. Traditional asset managers are unlikely to be quite as stubborn or litigious as Elliott. But with a spate of examples that a tougher approach can be successful, more may feel compelled to follow suit — no matter how severe the coronavirus crisis proves for many countries.
“They don’t want to be Elliott, but they have a fiduciary duty and for some of them it will be existential, so they might as well fight to the death,” says the creditor lawyer. “It doesn’t take many of them to change their attitudes and this will become very difficult.”
Clinching a victory, however, is another story, says one holdout investor. Amassing a blocking stake “gets you a seat at the table, but it doesn’t tell you when you will be eating”, the person adds.
These dynamics are why many investors believe the G20’s call for private-sector creditors to copy their blanket debt “standstill” will probably prove futile. Absent some kind of extraordinary legal mechanism — such as the UN Security Council resolution that shielded Iraq’s assets from seizure from creditors after the US invasion in 2003 — investors warn it will be challenging to come to a collective and voluntary agreement. Instead, they say the coming wave of debt crises will have to be handled on a case-by-case basis.
For the investment funds looking to take an aggressive stance in any default talks, the obstacle might not be the potentially bad PR but the perception among some governments that the pandemic gives them more leverage. Given that bond prices have plummeted to distressed levels, countries will probably harden their stance and seek more favourable terms in forthcoming restructurings.
Bill Rhodes, a former top Citi executive who was one of the key figures in the Latin American debt crisis of the 1980s, argues that the threat of fresh outbreaks of coronavirus will strengthen the hand of debtor countries when negotiating repayment terms. “We are looking at just the first wave of Covid-19, so some of these finance ministers are going to feel like they really have to drive a tough bargain,” he says. “The IMF will be very firm on pushing for the countries to get discounts.”
Institutional deal
A group of sovereign debt experts, including Mr Gulati and Mr Buchheit, has come up with a pandemic debt relief proposal. Countries should strike an agreement with creditors to funnel debt payments into credit facilities set up by the World Bank or a regional development bank, which would then be lent back to the countries to pay for essential spending.
Its backers hope this would avoid a technical default and impose a de facto debt standstill. The carrot of the legal protection enjoyed by organisations such as the World Bank — which are considered “super-senior” in debt restructurings — might help sweeten the deal. Once the crisis has faded a decision can then be taken on whether a full but orderly debt restructuring is needed, and any money deposited in the facility would be protected.
It is unclear whether the World Bank, which has not publicly commented on the idea, would go for this proposal, and some heavy-handed coercion from the likes of the US would probably be needed to get many creditors to agree. But Mr Trebesch says the proposal may be acceptable to China, which has edged out the IMF and the World Bank as the largest official creditor to developing economies via its Belt and Road Initiative, according to data he compiled with Harvard’s Carmen Reinhart and economist Sebastian Horn. “If things really blow up, China might prefer this option to an outright default,” he says.
Whatever avenue is eventually taken, it is essential that policymakers start grappling more forcefully with emerging market travails, given the danger that their severity is likely to reverberate across the international financial system, according to Scott Minerd, chief investment officer at investment firm Guggenheim Partners.
“This pandemic will quickly escalate from a health crisis to a humanitarian crisis, and ultimately to a solvency crisis,” Mr Minerd wrote in a recent note to clients. “Political stability will be the last domino to fall. But my biggest concern is that this crisis will be much deeper and more prolonged than people anticipate, which leaves a lot of space for another shoe to drop in the global financial crisis.”
The Maldives’ coral-encrusted islands have long been irresistible to tourists. But today its secluded luxury resorts are deserted, except those converted into makeshift quarantine facilities for stranded coronavirus patients.
The virus has shattered global tourism and devastated the Maldivian economy. The IMF has gone from projecting a 6 per cent expansion in gross domestic product this year to an 8 per cent contraction. The risk is that this brutal, abrupt recession could translate into the Maldives becoming the latest country to sink into sovereign bankruptcy.
Zambia, Ecuador and Rwanda have all announced in recent weeks that they are struggling to repay their debts. Lebanon has already kicked off its restructuring process, while Argentina, which was already battling its creditors even before the pandemic struck, appears to be heading for its ninth sovereign default since independence in 1816. Investors believe many other developing countries are not too far behind.
The Maldives is hardly the biggest country likely to succumb, but given its debt burden to creditors such as China and the severity of its recession, it is the “poster child of how easily the dominoes will fall”, warns Mitu Gulati, a sovereign debt expert at Duke University.
The IMF has already lent the country $29m to tide it over, but warned that the loss of tourism has “severely weakened” the economy and that additional financial support would be needed. The country’s $250m bond due in 2022 has tumbled to trade at just 81 cents on the dollar, indicating that investors are increasingly concerned about the Maldives’ capacity to make good on its obligations.
The kindling for another big emerging markets debt crisis has been accumulating for years. The investor thirst for higher returns has allowed smaller, lesser-developed and more vulnerable “frontier” countries to tap bond markets (Editor's note - this refers to bond markets not denominated in the country's own currency) at a record pace in the past decade. Their debt burden has climbed from less than $1tn in 2005 to $3.2tn, according to the Institute of International Finance, equal to 114 per cent of gross domestic product for frontier markets. Emerging markets as a whole owe a total of $71tn.
“The challenge is enormous,” says Ramin Toloui, a former head of emerging market debt at bond manager Pimco and assistant secretary for international finance at the US Treasury, who now teaches at Stanford University. “The withdrawal of money [from EM funds] is greater and more sudden than in 2008, the economic shock is huge and the path to recovery more uncertain than it was after the last crisis.”
The G20 has agreed to temporarily freeze about $20bn-worth of bilateral loan repayments for 76 poorer countries. It has urged private sector creditors to do the same, but few analysts believe that is feasible, and predict the result will probably instead be a series of ad hoc debt standstills and restructurings for swaths of the developing world.
Resolving the coming debt crises may be even tougher than in the past, however. Rather than the banks and governments — the primary creditors in the mammoth debt crisis that racked the developing world in the 1980s and 1990s — creditors are nowadays largely a multitude of bond funds. They are trickier to co-ordinate and corral into restructuring agreements.
Although the need for financial relief is stark in many cases, there are indications that some investment groups may break with the custom of reluctantly accepting financially painful compromises to achieve a restructuring, and instead fight for a better deal.
“Normally these guys would get out of Dodge City at the first sign of trouble in the debtor country. They're not set up to deal with prolonged debt restructurings and don't like the reputational risk that would result from an aggressive campaign against a country in deep economic and social distress,” says Lee Buchheit, a prominent lawyer in the field. “But having watched some holdout creditors extract rich payouts, even some of the traditional institutional investors appear to be reconsidering the virtues of passivity.”
Holdout strategy
In the past, such aggression has been the preserve of what critics call “vulture funds” — investors who seek to profit from government debt crises through obstinacy and legal threats.
Their basic strategy is to act as a “holdout”. Sovereign debt restructurings amount to exchanging a country’s old bonds for new ones, often worth less, with a lower interest rate or longer repayment times. Holdouts refuse to join in, and instead threaten to sue for the full amount. As long as the number of holdouts is tiny, countries have often elected to simply pay them off rather than deal with the nuisance of a potentially lengthy courtroom battle.
For example, when Greece restructured most of its debts in 2012, it grudgingly chose to repay in full a smattering of overseas bonds where hedge funds had congregated. Others, like Argentina, have chosen to fight. The uncertainty of the outcome — and how hard it can be to compel a country to pay through legal means — long ensured a delicate but functional balance to the sovereign debt restructuring process.
However, in 2016 Elliott Management’s Jay Newman etched his name in the annals of big hedge fund hauls by extracting $2.4bn from Argentina for the firm after a decade-long legal battle.
“[Holding out] long seemed like a cat-and-mouse game that was costly and uncertain, but now it has shifted to a more promising strategy,” says Christoph Trebesch, an academic at the Kiel Institute for the World Economy in Germany. Although still daunting, Elliott’s success could inspire more copycats and complicate the looming spate of EM debt crises, some experts fear.
Moreover, there are signs that traditional investment groups are also toughening up, which could turn a difficult process into a more protracted nightmare for government lenders and borrowers alike.
One lawyer who has worked with creditors points out that many investment funds have piled into EM bonds in recent years, and the prospect of deep and broad losses could be ruinous to some heavily-exposed funds. “Before, the holdouts were the main problem, but now it could be the traditional funds,” he says. “If your back is against the wall, you’re going to fight.”
After the IMF’s failed attempt to set up a quasi-sovereign bankruptcy court in the early 2000s, the main response by governments has been to introduce “collective action clauses” into their bonds. These dictate that if a large majority of bondholders vote for a restructuring, typically 75 per cent, the agreement is imposed on all holders.
But investors have wised up, buying bigger chunks of specific bonds in an attempt to amass such a large position that they enjoy a de facto veto over the restructuring terms of the instruments. And some older bonds have no such clauses.
So far there are only a few examples of larger investment firms taking a tougher stance, but they are notable for how successful they have been. The first was Franklin Templeton, which managed to extract what some analysts say were surprisingly favourable terms in Ukraine’s 2015 debt restructuring, having snapped up enough bonds to become the country’s largest private creditor.
More recently, Ashmore has built up a huge stake in Lebanon’s debt that in practice gives it a veto over how the country will restructure some of its bonds. And this year, Fidelity successfully played hardball with Buenos Aires, calling the Argentine province’s bluff that it was unable to make a $250m payment due in January. Buenos Aires ended up paying in full.
Fidelity is also part of a larger creditor group that has pushed back on Argentina’s plans to restructure its $65bn foreign debt burden. The group includes some of the world’s largest institutional investors, including BlackRock and T Rowe Price, and together with the two other main bondholder groups, wields enough power to make or break any deal.
Franklin Templeton and Ashmore declined to comment. Fidelity declined to comment on its Argentine bust-up, but said in a statement that its policies on sovereign restructurings had not changed.
“When it becomes necessary to negotiate with those who have borrowed our investors’ money, we do so in good faith and in a reasonable, professional manner,” the investment group said. “The interests we represent are those of the millions of individuals, and thousands of financial advisers and institutions who have entrusted their money to us to invest on their behalf.”
Debtor advantage
Fidelity’s nod to the fiduciary duty money managers owe clients is telling. Traditional asset managers are unlikely to be quite as stubborn or litigious as Elliott. But with a spate of examples that a tougher approach can be successful, more may feel compelled to follow suit — no matter how severe the coronavirus crisis proves for many countries.
“They don’t want to be Elliott, but they have a fiduciary duty and for some of them it will be existential, so they might as well fight to the death,” says the creditor lawyer. “It doesn’t take many of them to change their attitudes and this will become very difficult.”
Clinching a victory, however, is another story, says one holdout investor. Amassing a blocking stake “gets you a seat at the table, but it doesn’t tell you when you will be eating”, the person adds.
These dynamics are why many investors believe the G20’s call for private-sector creditors to copy their blanket debt “standstill” will probably prove futile. Absent some kind of extraordinary legal mechanism — such as the UN Security Council resolution that shielded Iraq’s assets from seizure from creditors after the US invasion in 2003 — investors warn it will be challenging to come to a collective and voluntary agreement. Instead, they say the coming wave of debt crises will have to be handled on a case-by-case basis.
For the investment funds looking to take an aggressive stance in any default talks, the obstacle might not be the potentially bad PR but the perception among some governments that the pandemic gives them more leverage. Given that bond prices have plummeted to distressed levels, countries will probably harden their stance and seek more favourable terms in forthcoming restructurings.
Bill Rhodes, a former top Citi executive who was one of the key figures in the Latin American debt crisis of the 1980s, argues that the threat of fresh outbreaks of coronavirus will strengthen the hand of debtor countries when negotiating repayment terms. “We are looking at just the first wave of Covid-19, so some of these finance ministers are going to feel like they really have to drive a tough bargain,” he says. “The IMF will be very firm on pushing for the countries to get discounts.”
Institutional deal
A group of sovereign debt experts, including Mr Gulati and Mr Buchheit, has come up with a pandemic debt relief proposal. Countries should strike an agreement with creditors to funnel debt payments into credit facilities set up by the World Bank or a regional development bank, which would then be lent back to the countries to pay for essential spending.
Its backers hope this would avoid a technical default and impose a de facto debt standstill. The carrot of the legal protection enjoyed by organisations such as the World Bank — which are considered “super-senior” in debt restructurings — might help sweeten the deal. Once the crisis has faded a decision can then be taken on whether a full but orderly debt restructuring is needed, and any money deposited in the facility would be protected.
It is unclear whether the World Bank, which has not publicly commented on the idea, would go for this proposal, and some heavy-handed coercion from the likes of the US would probably be needed to get many creditors to agree. But Mr Trebesch says the proposal may be acceptable to China, which has edged out the IMF and the World Bank as the largest official creditor to developing economies via its Belt and Road Initiative, according to data he compiled with Harvard’s Carmen Reinhart and economist Sebastian Horn. “If things really blow up, China might prefer this option to an outright default,” he says.
Whatever avenue is eventually taken, it is essential that policymakers start grappling more forcefully with emerging market travails, given the danger that their severity is likely to reverberate across the international financial system, according to Scott Minerd, chief investment officer at investment firm Guggenheim Partners.
“This pandemic will quickly escalate from a health crisis to a humanitarian crisis, and ultimately to a solvency crisis,” Mr Minerd wrote in a recent note to clients. “Political stability will be the last domino to fall. But my biggest concern is that this crisis will be much deeper and more prolonged than people anticipate, which leaves a lot of space for another shoe to drop in the global financial crisis.”
Monday 11 May 2020
India’s heartless capitalists deserve the labour shortages they are about to be hit with
The migrant labour crisis has arisen out of the refusal of businessmen to pay wages during lockdown. This is Indian capitalism’s hour of disgrace writes SHIVAM VIJ in The Print
The wages of sin
No doubt these same entrepreneurs have had it rough thanks to Modinomics since 8 November 2016. But a month’s wages?
What did these capitalists do when they suffered a setback when Modi sent the economy into a tailspin with demonetisation? The sucked it up, bore the losses, called the BJP names in private and hailed Modi in public. Then, what did they do when a confusing GST stalled the economy? They whined about it over their single malts at night and probably bought electoral bonds to donate to the BJP in the morning.
Migrant labour? They don’t fear workers like they fear Modi. Migrant labourers don’t affect the morning mood at 7, Lok Kalyan Marg. Migrant labourers have nothing to do with tax terrorism. It’s not as if any government is going to identify and penalise the employers who fired lakhs of daily wage labourers across India.
News reports tell you how these migrants haven’t had money to recharge their phones and talk to family back home, or money even to buy tickets once the government started special trains. If this is how you treat people, what do you expect in return?
What our heartless capitalists will get in return is an acute labour shortage when they try to finish those half-built buildings, or switch on the machines in the factories. The clock on these walls is going to be stuck on 22 March for a while even after all restrictions have been lifted.
Surely, you ask, this anger will subside and migrant labour will return because they’ve got to feed themselves? Sheer economics will make sure they will swallow their pride, pack themselves like sardines into the general compartments and travel back from Saran to Satara?
At some point, yes, but not anytime soon. The fear and uncertainty of the coronavirus pandemic along with the humiliation of the sub-human treatment is not going to make workers want to take those trains again for a few months. They’re going to make our small and small-minded capitalists beg for their sweat and blood.
We have already seen a trailer of this when Karnataka chief minister B.S. Yeddyurappa wanted trains for migrant labour to be scrapped. “The builders said that the labourers were given all essential facilities,” said Yeddyurappa. All ‘facilities’ except for a small thing called wages. One Karnataka company even went to the Supreme Court to request that the home ministry notice asking for paying full wages to be quashed.
The labourers will give in one day and return, but that day may not come before October, according to Chinmay Tumbe, economist and author of India Moving: A History of Migration. The next few months will see labour shortages in the prosperous industrial hubs and urban growth centres. This is bound to raise the cost of labour. That’s when our capitalist class will realise how they’ve shot themselves in the foot. If demand-supply and economic value is the only language they understand, that’s the language labour will and must reply to them in.
Saving the bribe money
Meanwhile, labour exporting states will have a massive crisis at hand. Already reeling with high unemployment, they will have many more mouths to feed. From Rajasthan in the west to West Bengal in the east, we will see a huge labour surplus.
Seeing the anxiety of state governments over a looming unemployment time bomb, India’s capitalists are pushing for abolition of labour laws. The skulduggery is to be admired. Some people should be in jail for not paying migrant workers. Instead, they are using this opportunity to be allowed greater exploitation of labour.
Yet, it’s not the labour laws that created this crisis. This crisis has taken place because labour laws are not implemented. Had the Migrant Workmen Act of 1979 even been barely implemented, governments would have been in a better position to help the stranded labourers.
The central government, for instance, asked state governments to spend Rs 31,000 crore lying with them for the welfare of construction labourers. State governments don’t even have a database of migrant workers they can reach out to.
Surveys show migrant workers don’t even know the name of their employers, letting the shady labour contractors disappear with the money. For example, Chennai Metro workers say they haven’t been paid but the Metro authorities say they’ve been paying the labour contractors on time. Who will catch these labour contractors and bring them to justice?
It is a myth that labour laws have held back the Indian industry. They’ve, at best, held back formalisation. Some in our business class have managed to do well despite labour laws by simply bribing labour inspectors. If our labour laws worked, we wouldn’t have had this crisis. Let’s see how many millions of jobs are created now that the much-maligned and un-implemented labour laws are put aside.
PM Garib Vinash Package
This is not to put all the blame on the business community and give the Narendra Modi government a clean chit. Yet, the Modi government’s biggest failure is not the refusal to let migrant workers go home, or to be cruel enough to make them pay for tickets when they don’t have money to buy food.
Narendra Modi and Nirmala Sitharaman failed in their duty to work with MSMEs to make sure wages are paid. When activist Harsh Mander asked the Supreme Court to order the government to pay minimum wages, the SC said it didn’t want to interfere. The government told the Supreme Court it was taking good care of migrant labourers, of course.
Many countries are shelling out money for workers. Some have been directly giving money or rebates to companies, unemployment allowance or direct benefit transfers. And not just rich Western countries. Even a developing country like Brazil is giving informal workers $120 a month. Narendra Modi is putting a princely sum of Rs 500 in Jan Dhan accounts — a baksheesh of $6.6. Meanwhile, he is unwilling to suspend the government’s plan to spend thousands of crores to rebuild the Central Vista.
This also exposes the fraud called the ‘PM Garib Kalyan package’. So wonderful has been this plan to do ‘kalyan’ (welfare) of the ‘gareeb’ (poor) that they’re dying walking on the highways after having been paid zilch by employers. The truth about this so-called Rs 1.7 lakh crore package is that most of it was existing schemes, throwing not even peanuts into the pockets of migrant labour.
Between the government and our small companies, no one has been willing to pay lakhs of migrant labourers. They’re just happy to pass the buck on to each other. The government is being called out for this, but our business community must also be called out. This is Indian capitalism’s hour of disgrace.
The great labour crisis of 2020 will not leave politics untouched. Remember that it was migrant labourers in Gujarat who went back home to their villages and spread the word about heaven-like Gujarat for the Modi campaign in 2014. These are the crores of rural poor whom the BJP will have to assuage now.
The result will be more socialism and greater populism. We have already seen how the pro-poor rhetoric helped Modi despite the failure of demonetisation. In the years to come, we will likely see a lot more of it, and our Seth-jis could thus suffer even greater apathy from the government. Modinomics is exactly what they deserve.
File photo | Migrant labourers wave from a train as they leave for Barauni in UP from Amritsar, during the nationwide lockdown, 10 May | PTI
The Indian public discourse around migrant labour largely ignores the main reason why the labourers have been so desperate to go back home: their employers stopped paying them wages.
One survey in May found that almost 8 out of 10 migrant labourers had not been paid at all during the lockdown.
No wonder they’ve come to hate the cities and factories because of the way they’ve been treated by their employers. Migrant labourers across India have told reporters they won’t return to see such humiliation again. “We’ll live on salt,” they say.
In the prosperous western and southern states, labour contractors, factories and small companies washed their hands off migrant labour the moment India went into lockdown.
On 29 March, the home ministry made it legally compulsory for salaries and wages to be paid even during the lockdown period. Yet, many of our disgraceful capitalists didn’t even pay wages or the month of March, not even for the days the labourers had worked. In Tamil Nadu, for instance, a survey found 63 per cent labourers hadn’t been paid wages they were owed from before the lockdown. In Gujarat, the diamond industry hasn’t been paying workers despite repeated government orders.
Governments, NGOs, middle-class volunteers, political parties and even the police have been busy feeding migrant workers meals. Yet this charity, this munificence, would not have been needed if employers hadn’t abdicated their responsibility.
These employers are mostly small businessmen and they also seem to be rather small-minded. They are your ‘micro, small and medium enterprises’ or MSMEs. These capitalists have refused to bear the cost of paying even a month’s wages to migrant labourers who are the engine of their economic enterprises.
The Indian public discourse around migrant labour largely ignores the main reason why the labourers have been so desperate to go back home: their employers stopped paying them wages.
One survey in May found that almost 8 out of 10 migrant labourers had not been paid at all during the lockdown.
No wonder they’ve come to hate the cities and factories because of the way they’ve been treated by their employers. Migrant labourers across India have told reporters they won’t return to see such humiliation again. “We’ll live on salt,” they say.
In the prosperous western and southern states, labour contractors, factories and small companies washed their hands off migrant labour the moment India went into lockdown.
On 29 March, the home ministry made it legally compulsory for salaries and wages to be paid even during the lockdown period. Yet, many of our disgraceful capitalists didn’t even pay wages or the month of March, not even for the days the labourers had worked. In Tamil Nadu, for instance, a survey found 63 per cent labourers hadn’t been paid wages they were owed from before the lockdown. In Gujarat, the diamond industry hasn’t been paying workers despite repeated government orders.
Governments, NGOs, middle-class volunteers, political parties and even the police have been busy feeding migrant workers meals. Yet this charity, this munificence, would not have been needed if employers hadn’t abdicated their responsibility.
These employers are mostly small businessmen and they also seem to be rather small-minded. They are your ‘micro, small and medium enterprises’ or MSMEs. These capitalists have refused to bear the cost of paying even a month’s wages to migrant labourers who are the engine of their economic enterprises.
The wages of sin
No doubt these same entrepreneurs have had it rough thanks to Modinomics since 8 November 2016. But a month’s wages?
What did these capitalists do when they suffered a setback when Modi sent the economy into a tailspin with demonetisation? The sucked it up, bore the losses, called the BJP names in private and hailed Modi in public. Then, what did they do when a confusing GST stalled the economy? They whined about it over their single malts at night and probably bought electoral bonds to donate to the BJP in the morning.
Migrant labour? They don’t fear workers like they fear Modi. Migrant labourers don’t affect the morning mood at 7, Lok Kalyan Marg. Migrant labourers have nothing to do with tax terrorism. It’s not as if any government is going to identify and penalise the employers who fired lakhs of daily wage labourers across India.
News reports tell you how these migrants haven’t had money to recharge their phones and talk to family back home, or money even to buy tickets once the government started special trains. If this is how you treat people, what do you expect in return?
What our heartless capitalists will get in return is an acute labour shortage when they try to finish those half-built buildings, or switch on the machines in the factories. The clock on these walls is going to be stuck on 22 March for a while even after all restrictions have been lifted.
Surely, you ask, this anger will subside and migrant labour will return because they’ve got to feed themselves? Sheer economics will make sure they will swallow their pride, pack themselves like sardines into the general compartments and travel back from Saran to Satara?
At some point, yes, but not anytime soon. The fear and uncertainty of the coronavirus pandemic along with the humiliation of the sub-human treatment is not going to make workers want to take those trains again for a few months. They’re going to make our small and small-minded capitalists beg for their sweat and blood.
We have already seen a trailer of this when Karnataka chief minister B.S. Yeddyurappa wanted trains for migrant labour to be scrapped. “The builders said that the labourers were given all essential facilities,” said Yeddyurappa. All ‘facilities’ except for a small thing called wages. One Karnataka company even went to the Supreme Court to request that the home ministry notice asking for paying full wages to be quashed.
The labourers will give in one day and return, but that day may not come before October, according to Chinmay Tumbe, economist and author of India Moving: A History of Migration. The next few months will see labour shortages in the prosperous industrial hubs and urban growth centres. This is bound to raise the cost of labour. That’s when our capitalist class will realise how they’ve shot themselves in the foot. If demand-supply and economic value is the only language they understand, that’s the language labour will and must reply to them in.
Saving the bribe money
Meanwhile, labour exporting states will have a massive crisis at hand. Already reeling with high unemployment, they will have many more mouths to feed. From Rajasthan in the west to West Bengal in the east, we will see a huge labour surplus.
Seeing the anxiety of state governments over a looming unemployment time bomb, India’s capitalists are pushing for abolition of labour laws. The skulduggery is to be admired. Some people should be in jail for not paying migrant workers. Instead, they are using this opportunity to be allowed greater exploitation of labour.
Yet, it’s not the labour laws that created this crisis. This crisis has taken place because labour laws are not implemented. Had the Migrant Workmen Act of 1979 even been barely implemented, governments would have been in a better position to help the stranded labourers.
The central government, for instance, asked state governments to spend Rs 31,000 crore lying with them for the welfare of construction labourers. State governments don’t even have a database of migrant workers they can reach out to.
Surveys show migrant workers don’t even know the name of their employers, letting the shady labour contractors disappear with the money. For example, Chennai Metro workers say they haven’t been paid but the Metro authorities say they’ve been paying the labour contractors on time. Who will catch these labour contractors and bring them to justice?
It is a myth that labour laws have held back the Indian industry. They’ve, at best, held back formalisation. Some in our business class have managed to do well despite labour laws by simply bribing labour inspectors. If our labour laws worked, we wouldn’t have had this crisis. Let’s see how many millions of jobs are created now that the much-maligned and un-implemented labour laws are put aside.
PM Garib Vinash Package
This is not to put all the blame on the business community and give the Narendra Modi government a clean chit. Yet, the Modi government’s biggest failure is not the refusal to let migrant workers go home, or to be cruel enough to make them pay for tickets when they don’t have money to buy food.
Narendra Modi and Nirmala Sitharaman failed in their duty to work with MSMEs to make sure wages are paid. When activist Harsh Mander asked the Supreme Court to order the government to pay minimum wages, the SC said it didn’t want to interfere. The government told the Supreme Court it was taking good care of migrant labourers, of course.
Many countries are shelling out money for workers. Some have been directly giving money or rebates to companies, unemployment allowance or direct benefit transfers. And not just rich Western countries. Even a developing country like Brazil is giving informal workers $120 a month. Narendra Modi is putting a princely sum of Rs 500 in Jan Dhan accounts — a baksheesh of $6.6. Meanwhile, he is unwilling to suspend the government’s plan to spend thousands of crores to rebuild the Central Vista.
This also exposes the fraud called the ‘PM Garib Kalyan package’. So wonderful has been this plan to do ‘kalyan’ (welfare) of the ‘gareeb’ (poor) that they’re dying walking on the highways after having been paid zilch by employers. The truth about this so-called Rs 1.7 lakh crore package is that most of it was existing schemes, throwing not even peanuts into the pockets of migrant labour.
Between the government and our small companies, no one has been willing to pay lakhs of migrant labourers. They’re just happy to pass the buck on to each other. The government is being called out for this, but our business community must also be called out. This is Indian capitalism’s hour of disgrace.
The great labour crisis of 2020 will not leave politics untouched. Remember that it was migrant labourers in Gujarat who went back home to their villages and spread the word about heaven-like Gujarat for the Modi campaign in 2014. These are the crores of rural poor whom the BJP will have to assuage now.
The result will be more socialism and greater populism. We have already seen how the pro-poor rhetoric helped Modi despite the failure of demonetisation. In the years to come, we will likely see a lot more of it, and our Seth-jis could thus suffer even greater apathy from the government. Modinomics is exactly what they deserve.
Coronavirus crisis: does value investing still make sense?
The strategy that once worked for Keynes and Buffett has performed badly writes Robin Wigglesworth in The Financial Times
When Joel Greenblatt went to Wharton Business School in the late 1970s, the theory of “efficient markets” was in full bloom, approaching the point of becoming dogma among the financial cognoscenti. To the young student, it all felt bogus.
Mr Greenblatt had already developed a taste for calculated gambles at the dog racing tracks. Reading the wildly fluctuating stock prices listed in newspapers also made him deeply sceptical of the supposed rationality of markets. One day he stumbled over a Fortune article on stockpicking, and everything suddenly fell into place.
“A lightbulb went off. It just made sense to me that prices aren’t necessarily correct,” recalls Mr Greenblatt, whose hedge fund Gotham Capital clocked up one of the industry’s greatest ever winning streaks until it was closed to outside investors in 1994. “Buying cheap stocks is great, but buying good companies cheaply is even better. That’s a potent combination.”
The article became his gateway drug into a school of money management known as “value investing”, which consists of trying to identify good, solid businesses that are trading below their fair value. The piece was written by Benjamin Graham, a financier who in the 1930s first articulated the core principles of value investing and turned it into a phenomenon.
One of Graham’s protégés was a young money manager called Warren Buffett, who brought the value investing gospel to the masses. But he isn't the only one to play a role in popularising the approach. Since 1996, Mr Greenblatt has taught the same value investing course started by Graham at Columbia Business School nearly a century ago, inculcating generations of aspiring stock jocks with its core principles.
Mr Greenblatt compares value investing to carefully examining the merits of a house purchase by looking at the foundation, construction quality, rental yields, potential improvements and price comparisons on the street, neighbourhood or other cities.
“You’d look funny at people who just bought the houses that have gone up the most in price,” he points out. “All investing is value investing, the rest is speculation.”
However, the faith of many disciples has been sorely tested over the past decade. What constitutes a value stock can be defined in myriad ways, but by almost any measure the approach has suffered an awful stretch of performance since the 2008 financial crisis.
Many proponents had predicted value investing would regain its lustre once a new bear market beckoned and inevitably hammered the glamorous but pricey technology stocks that dominated the post-2008 bull run. This would make dowdier, cheaper companies more attractive, value investors hoped.
Instead, value stocks have been pummelled even more than the broader market in the coronavirus-triggered sell-off, agonising supporters of the investment strategy.
“One more big down leg and I’m dousing my internal organs in Lysol,” Clifford Asness, a hedge fund manager, groused in April.
Value investing has gone through several bouts of existential angst over the past century, and always comes back strongly. But its poor performance during the coronavirus crisis has only added to the crisis of confidence. The strength and length of the recent woes raises some thorny questions. Why has value lost its mojo and is it gone forever?
Search for ‘American magic’
Berkshire Hathaway’s annual meeting is usually a party. Every year, thousands of fans have flocked to Omaha to lap up the wisdom of Mr Buffett and his partner Charlie Munger, the acerbic, terse sidekick to the conglomerate’s avuncular, loquacious chairman. Last weekend’s gathering was a more downbeat affair.
A shaggy-haired Mr Buffett sat alone on stage without his usual companion, who was stranded in California. Instead of Mr Munger, Greg Abel, another lieutenant, sat at a table some distance away from Berkshire’s chairman. Rather than the 40,000 people that normally fill the cavernous CHI Health Center for the occasion, he faced nothing but a bunch of video cameras. It was an eerie example of just how much the coronavirus crisis has altered the world, but the “Oracle of Omaha” tried to lift spirits.
“I was convinced of this in World War II. I was convinced of it during the Cuban missile crisis, 9/11, the financial crisis, that nothing can basically stop America,” he said. “The American magic has always prevailed, and it will do so again.”
Berkshire’s results, however, underscored the scale of the US economy’s woes. The conglomerate — originally a textile manufacturer before Mr Buffett turned it into a vehicle for his wide-ranging investments — slumped to a loss of nearly $50bn in the first three months of the year, as a slight increase in operating profits was swamped by massive hits on its portfolio of stocks.
A part of those losses will already have been reversed by the recent stock market rally triggered by an extraordinary bout of central bank stimulus, and Mr Buffett’s approach has over the decades evolved significantly from his core roots in value investing. Nonetheless, the worst results in Berkshire’s history underscore just how challenging the environment has been for this approach to picking stocks. After a long golden run that burnished Mr Buffett’s reputation as the greatest investor in history, Berkshire’s stock has now marginally underperformed the S&P 500 over the past year, five years and 10 years.
But the Nebraskan is not alone. The Russell 3000 Value index — the broadest measure of value stocks in the US — is down more than 20 per cent so far this year, and over the past decade it has only climbed 80 per cent. In contrast, the S&P 500 index is down 9 per cent in 2020, and has returned over 150 per cent over the past 10 years.
Racier “growth” stocks of faster-expanding companies have returned over 240 per cent over the same period.
Ben Inker of value-centric investment house GMO describes the experience as like being slowly but repeatedly bashed in the head. “It’s less extreme than in the late 1990s, when every day felt like being hit with a bat,” he says of the dotcom bubble period when value investors suffered. “But this has been a slow drip of pain over a long time. It’s less memorable, but in aggregate the pain has been fairly similar.”
Underrated stocks
Value investing has a long and rich history, which even predates the formal concept. One of the first successful value investors was arguably the economist John Maynard Keynes. Between 1921 and 1946 he managed the endowment of Cambridge university’s King’s College, and beat the UK stock market by an average of 8 percentage points a year over that period.
In a 1938 internal memorandum to his investment committee, Keynes attributed his success to the “careful selection of a few investments” according to their “intrinsic value” — a nod to a seminal book on investing published a few years earlier by Graham and his partner David Dodd, called Security Analysis. This tome — along with the subsequent The Intelligent Investor, which Mr Buffett has called “the best book about investing ever written” — are the gospel for value investors to this day.
There are ways to define a value stock, but it is most simply defined as one that is trading at a low price relative to the value of a company’s assets, the strength of its earnings or steadiness of its cash flows. They are often unfairly undervalued because they are in unfashionable industries and growing at a steadier clip than more glamorous stocks, which — the theory goes — irrational investors overpay for in the hope of supercharged returns.
Value stocks can go through long fallow periods, most notably in the 1960s — when investors fell in love with the fast-growing, modern companies like Xerox, IBM and Eastman Kodak, dubbed the “Nifty Fifty” — and in the late 1990s dotcom boom. But each time, they have roared back and rewarded investors that kept the faith.
“The one lesson we’ve learnt over the decades is that one should never give up on value investing. It’s been declared dead before,” says Bob Wyckoff, a managing director of money manager Tweedy Browne. “You go through some uncomfortably long periods where it is not working. But this is almost a precondition for value to work.”
The belief that periodic bouts of suffering are not only unavoidable but in fact necessary for value to work is entrenched among its adherents. It is therefore a field that tends to attract more than its fair share of iconoclastic contrarians, says Chris Davis of Davis Funds, a third-generation value investor after following in the footsteps of his father Shelby MC Davis and grandfather Shelby Cullom Davis.
“If you look at the characteristics of value investors they don’t have a lot in common,” he says. “But they all tend to be individualistic in that they aren’t generally the type who have played team sports. They weren’t often president of their sororities or fraternities. And you don’t succeed without a fairly high willingness to appear wrong.”
But why have they now been so wrong for so long? Most value investors attribute the length of the underperformance to a mix of the changing investment environment and shifts in the fabric of the economy.
The ascent of more systematic, “quantitative” investing over the past decade — whether a simple exchange-traded fund that just buys cheap stocks, or more sophisticated, algorithmic hedge funds — has weighed on performance by warping normal market dynamics, according to Matthew McLennan of First Eagle Investment Management. This is particularly the case for the financial sector, which generally makes more money when rates are higher.
The usual price discount enjoyed by value stocks was also unusually small at the end of the financial crisis, setting them up for a poorer performance, according to Mr Inker. Some industries, especially technology, are also becoming oligopolies that ensure extraordinary profit margins and continued growth. Moreover, traditional value measures — such as price-to-book value — are becoming obsolete, he points out. The intellectual property, brands and often dominant market positioning of many of the new technology companies do not show up on a corporate balance sheet in the same way as hard, tangible assets.
“Accounting has not kept up with how companies actually use their cash,” he says. “If a company spends a lot of money building factories it affects the book value. But if you spend that on intellectual property it doesn’t show up the same way.”
As a result, GMO and many value-oriented investors have had to adapt their approach, and focus more on alternative metrics and more intangible aspects of its operations. “We want to buy stocks we think are undervalued, but we no longer care whether it looks like a traditional value stock,” Mr Inker says.
Mr McLennan points out that while the core principles won’t change, value investing has always evolved with the times. “It’s not a cult-like commitment to buying the cheapest decile [of stocks]. We invest business-by-business,” he says. “I don’t know what the alternative is to buying businesses you like, at prices you like.”
Bargain hunt
Can value investing stage a comeback, as it did in when the dotcom bubble burst in the early 2000s, or the “Nifty Fifty” failed to justify investor optimism and fell to earth in the 1970s?
There has clearly been a shift in the corporate landscape over the past few decades that could be neutering its historical power as an investing approach. It is telling that the recent stock market rebound has been powered primarily by big US technology companies, despite value investors having confidently predicted for a long time that their approach would shine in the next downturn. Value stocks tend to be in more economically-sensitive industries, and given the likelihood of the biggest global recession since the Depression, their outlook is exceptionally murky, according to an AQR paper published last week.
“If value investing was like driving my four kids on a long car ride, we’d be very deep into the ‘are we there yet?’ stage of the ride, and value investors are justifiably in a world of pain,” Mr Asness wrote. However, the odds are now “rather dramatically” on the side of value.
Redemption could be at hand. there has in recent days been a cautious renaissance for value stocks, indicating that coronavirus may yet upend the market trends of the past decade. This stockpicking approach often does well as economies exit a recession and investors hunt for bargains.
Devotees of value investing certainly remain unshakeable in their faith that past patterns will eventually reassert themselves. Citing a common saying among adherents, Mr Wyckoff argues that “asking whether value is still relevant is like asking whether Shakespeare is still relevant. It’s all about human nature”.
Mr Greenblatt, who founded Gotham Asset Management in 2008, says that his students will occasionally quiz him on whether value investing is dead, arguing that computers can systematically take advantage of undervaluation far more efficiently than any human stockpicker can. He tells them that human irrationality remains constant, which will always lead to opportunities for those willing to go against the crowd.
“If you have a disciplined strategy to value companies, and buy companies when they’re below fair value you will still do well,” he says. “The market throws us pitches all the time, as there are so many behavioural biases . . . You can watch 20 pitches go by, but you only need to try to hit a few of them.”
When Joel Greenblatt went to Wharton Business School in the late 1970s, the theory of “efficient markets” was in full bloom, approaching the point of becoming dogma among the financial cognoscenti. To the young student, it all felt bogus.
Mr Greenblatt had already developed a taste for calculated gambles at the dog racing tracks. Reading the wildly fluctuating stock prices listed in newspapers also made him deeply sceptical of the supposed rationality of markets. One day he stumbled over a Fortune article on stockpicking, and everything suddenly fell into place.
“A lightbulb went off. It just made sense to me that prices aren’t necessarily correct,” recalls Mr Greenblatt, whose hedge fund Gotham Capital clocked up one of the industry’s greatest ever winning streaks until it was closed to outside investors in 1994. “Buying cheap stocks is great, but buying good companies cheaply is even better. That’s a potent combination.”
The article became his gateway drug into a school of money management known as “value investing”, which consists of trying to identify good, solid businesses that are trading below their fair value. The piece was written by Benjamin Graham, a financier who in the 1930s first articulated the core principles of value investing and turned it into a phenomenon.
One of Graham’s protégés was a young money manager called Warren Buffett, who brought the value investing gospel to the masses. But he isn't the only one to play a role in popularising the approach. Since 1996, Mr Greenblatt has taught the same value investing course started by Graham at Columbia Business School nearly a century ago, inculcating generations of aspiring stock jocks with its core principles.
Mr Greenblatt compares value investing to carefully examining the merits of a house purchase by looking at the foundation, construction quality, rental yields, potential improvements and price comparisons on the street, neighbourhood or other cities.
“You’d look funny at people who just bought the houses that have gone up the most in price,” he points out. “All investing is value investing, the rest is speculation.”
However, the faith of many disciples has been sorely tested over the past decade. What constitutes a value stock can be defined in myriad ways, but by almost any measure the approach has suffered an awful stretch of performance since the 2008 financial crisis.
Many proponents had predicted value investing would regain its lustre once a new bear market beckoned and inevitably hammered the glamorous but pricey technology stocks that dominated the post-2008 bull run. This would make dowdier, cheaper companies more attractive, value investors hoped.
Instead, value stocks have been pummelled even more than the broader market in the coronavirus-triggered sell-off, agonising supporters of the investment strategy.
“One more big down leg and I’m dousing my internal organs in Lysol,” Clifford Asness, a hedge fund manager, groused in April.
Value investing has gone through several bouts of existential angst over the past century, and always comes back strongly. But its poor performance during the coronavirus crisis has only added to the crisis of confidence. The strength and length of the recent woes raises some thorny questions. Why has value lost its mojo and is it gone forever?
Search for ‘American magic’
Berkshire Hathaway’s annual meeting is usually a party. Every year, thousands of fans have flocked to Omaha to lap up the wisdom of Mr Buffett and his partner Charlie Munger, the acerbic, terse sidekick to the conglomerate’s avuncular, loquacious chairman. Last weekend’s gathering was a more downbeat affair.
A shaggy-haired Mr Buffett sat alone on stage without his usual companion, who was stranded in California. Instead of Mr Munger, Greg Abel, another lieutenant, sat at a table some distance away from Berkshire’s chairman. Rather than the 40,000 people that normally fill the cavernous CHI Health Center for the occasion, he faced nothing but a bunch of video cameras. It was an eerie example of just how much the coronavirus crisis has altered the world, but the “Oracle of Omaha” tried to lift spirits.
“I was convinced of this in World War II. I was convinced of it during the Cuban missile crisis, 9/11, the financial crisis, that nothing can basically stop America,” he said. “The American magic has always prevailed, and it will do so again.”
Berkshire’s results, however, underscored the scale of the US economy’s woes. The conglomerate — originally a textile manufacturer before Mr Buffett turned it into a vehicle for his wide-ranging investments — slumped to a loss of nearly $50bn in the first three months of the year, as a slight increase in operating profits was swamped by massive hits on its portfolio of stocks.
A part of those losses will already have been reversed by the recent stock market rally triggered by an extraordinary bout of central bank stimulus, and Mr Buffett’s approach has over the decades evolved significantly from his core roots in value investing. Nonetheless, the worst results in Berkshire’s history underscore just how challenging the environment has been for this approach to picking stocks. After a long golden run that burnished Mr Buffett’s reputation as the greatest investor in history, Berkshire’s stock has now marginally underperformed the S&P 500 over the past year, five years and 10 years.
But the Nebraskan is not alone. The Russell 3000 Value index — the broadest measure of value stocks in the US — is down more than 20 per cent so far this year, and over the past decade it has only climbed 80 per cent. In contrast, the S&P 500 index is down 9 per cent in 2020, and has returned over 150 per cent over the past 10 years.
Racier “growth” stocks of faster-expanding companies have returned over 240 per cent over the same period.
Ben Inker of value-centric investment house GMO describes the experience as like being slowly but repeatedly bashed in the head. “It’s less extreme than in the late 1990s, when every day felt like being hit with a bat,” he says of the dotcom bubble period when value investors suffered. “But this has been a slow drip of pain over a long time. It’s less memorable, but in aggregate the pain has been fairly similar.”
Underrated stocks
Value investing has a long and rich history, which even predates the formal concept. One of the first successful value investors was arguably the economist John Maynard Keynes. Between 1921 and 1946 he managed the endowment of Cambridge university’s King’s College, and beat the UK stock market by an average of 8 percentage points a year over that period.
In a 1938 internal memorandum to his investment committee, Keynes attributed his success to the “careful selection of a few investments” according to their “intrinsic value” — a nod to a seminal book on investing published a few years earlier by Graham and his partner David Dodd, called Security Analysis. This tome — along with the subsequent The Intelligent Investor, which Mr Buffett has called “the best book about investing ever written” — are the gospel for value investors to this day.
There are ways to define a value stock, but it is most simply defined as one that is trading at a low price relative to the value of a company’s assets, the strength of its earnings or steadiness of its cash flows. They are often unfairly undervalued because they are in unfashionable industries and growing at a steadier clip than more glamorous stocks, which — the theory goes — irrational investors overpay for in the hope of supercharged returns.
Value stocks can go through long fallow periods, most notably in the 1960s — when investors fell in love with the fast-growing, modern companies like Xerox, IBM and Eastman Kodak, dubbed the “Nifty Fifty” — and in the late 1990s dotcom boom. But each time, they have roared back and rewarded investors that kept the faith.
“The one lesson we’ve learnt over the decades is that one should never give up on value investing. It’s been declared dead before,” says Bob Wyckoff, a managing director of money manager Tweedy Browne. “You go through some uncomfortably long periods where it is not working. But this is almost a precondition for value to work.”
The belief that periodic bouts of suffering are not only unavoidable but in fact necessary for value to work is entrenched among its adherents. It is therefore a field that tends to attract more than its fair share of iconoclastic contrarians, says Chris Davis of Davis Funds, a third-generation value investor after following in the footsteps of his father Shelby MC Davis and grandfather Shelby Cullom Davis.
“If you look at the characteristics of value investors they don’t have a lot in common,” he says. “But they all tend to be individualistic in that they aren’t generally the type who have played team sports. They weren’t often president of their sororities or fraternities. And you don’t succeed without a fairly high willingness to appear wrong.”
But why have they now been so wrong for so long? Most value investors attribute the length of the underperformance to a mix of the changing investment environment and shifts in the fabric of the economy.
The ascent of more systematic, “quantitative” investing over the past decade — whether a simple exchange-traded fund that just buys cheap stocks, or more sophisticated, algorithmic hedge funds — has weighed on performance by warping normal market dynamics, according to Matthew McLennan of First Eagle Investment Management. This is particularly the case for the financial sector, which generally makes more money when rates are higher.
The usual price discount enjoyed by value stocks was also unusually small at the end of the financial crisis, setting them up for a poorer performance, according to Mr Inker. Some industries, especially technology, are also becoming oligopolies that ensure extraordinary profit margins and continued growth. Moreover, traditional value measures — such as price-to-book value — are becoming obsolete, he points out. The intellectual property, brands and often dominant market positioning of many of the new technology companies do not show up on a corporate balance sheet in the same way as hard, tangible assets.
“Accounting has not kept up with how companies actually use their cash,” he says. “If a company spends a lot of money building factories it affects the book value. But if you spend that on intellectual property it doesn’t show up the same way.”
As a result, GMO and many value-oriented investors have had to adapt their approach, and focus more on alternative metrics and more intangible aspects of its operations. “We want to buy stocks we think are undervalued, but we no longer care whether it looks like a traditional value stock,” Mr Inker says.
Mr McLennan points out that while the core principles won’t change, value investing has always evolved with the times. “It’s not a cult-like commitment to buying the cheapest decile [of stocks]. We invest business-by-business,” he says. “I don’t know what the alternative is to buying businesses you like, at prices you like.”
Bargain hunt
Can value investing stage a comeback, as it did in when the dotcom bubble burst in the early 2000s, or the “Nifty Fifty” failed to justify investor optimism and fell to earth in the 1970s?
There has clearly been a shift in the corporate landscape over the past few decades that could be neutering its historical power as an investing approach. It is telling that the recent stock market rebound has been powered primarily by big US technology companies, despite value investors having confidently predicted for a long time that their approach would shine in the next downturn. Value stocks tend to be in more economically-sensitive industries, and given the likelihood of the biggest global recession since the Depression, their outlook is exceptionally murky, according to an AQR paper published last week.
“If value investing was like driving my four kids on a long car ride, we’d be very deep into the ‘are we there yet?’ stage of the ride, and value investors are justifiably in a world of pain,” Mr Asness wrote. However, the odds are now “rather dramatically” on the side of value.
Redemption could be at hand. there has in recent days been a cautious renaissance for value stocks, indicating that coronavirus may yet upend the market trends of the past decade. This stockpicking approach often does well as economies exit a recession and investors hunt for bargains.
Devotees of value investing certainly remain unshakeable in their faith that past patterns will eventually reassert themselves. Citing a common saying among adherents, Mr Wyckoff argues that “asking whether value is still relevant is like asking whether Shakespeare is still relevant. It’s all about human nature”.
Mr Greenblatt, who founded Gotham Asset Management in 2008, says that his students will occasionally quiz him on whether value investing is dead, arguing that computers can systematically take advantage of undervaluation far more efficiently than any human stockpicker can. He tells them that human irrationality remains constant, which will always lead to opportunities for those willing to go against the crowd.
“If you have a disciplined strategy to value companies, and buy companies when they’re below fair value you will still do well,” he says. “The market throws us pitches all the time, as there are so many behavioural biases . . . You can watch 20 pitches go by, but you only need to try to hit a few of them.”
Why some companies will survive this crisis and others will die
Andrew Hill in The Financial Times
The first written document about a Stora operation, a Swedish copper mine, dates back to 1288. Since then, the company — now Finland-based paper, pulp and biomaterials group Stora Enso — has endured through attempts to end its independence, the turmoil of the Reformation and industrial revolution, wars, regional and global, and now a pandemic.
“It would have been catastrophic for [Stora] to concentrate on its business in an introverted fashion, oblivious to politics. Instead the company reshaped its goals and methods to match the demands of the world outside,” writes Arie de Geus, describing one particularly turbulent era in the 15th century in his 1997 book The Living Company, shaped round a study of the world’s oldest companies he conducted for Royal Dutch Shell.
This is wisdom that companies today, wondering how to survive, let alone thrive, could use. Alas, de Geus himself is not around to help them: he died in November last year.
Part of his work lives on through the scenario-planning exercises that I identified last week as one way of advancing through the uncertainty ahead. The multilingual thinker was Shell’s director of scenario planning, where he developed the distinction between potential futures (in French, “les futurs”) and what was inevitably to come (“l’avenir”).
He also lived through the aftermath of the second world war, which destroyed Rotterdam, the city of his birth, and encouraged him and his friends to seek jobs within the safe havens of great corporate institutions, such as Shell, Unilever and Philips.
It is not a given that all the oldest or largest companies will outlive this crisis. Those that do, however, should take a leaf out of de Geus’s book.
Longtime collaborator and friend Göran Carstedt, a former Volvo and Ikea executive, says he discussed with de Geus last year how near-death experiences enhance the appreciation of being alive. “Things come to the fore that we took for granted. You start to see the world through the lens of the living,” he told me. “Arie liked to say, ‘people change and when they do, they change the society in which they live’.” That went for companies as much as for societies. Long-lived groups such as Stora owed their survival to their adaptability as human communities and their tolerance for ideas, as much as to their financial prudence.
These are big ideas for business leaders to ponder at a time when most are desperately trying to keep their heads above the flood or, at best, concentrating on the practicalities of how to restart after lockdown. In her latest update last month, Stora Enso’s chief executive sounded as preoccupied by pressing questions of temporary lay-offs, travel bans and capital expenditure reductions as her peers at companies with a shorter pedigree.
Some groups that meet de Geus’s common attributes for longevity are still likely to go under, simply because they find themselves exposed to the wrong sector at the wrong time.
Others, though, will find they are ill-equipped for the aftermath. What he called “intolerant” companies, which “go for maximum results with minimum resources”, can live for a long time in stable conditions. “Profound disruptions like this will simply reveal the underlying schisms that were already there,” the veteran management thinker Peter Senge, who worked with de Geus, told me via email. “Those who were on a path toward deep change will find ways to use the forces now at play to carry on, and even expand. Those who weren’t, won't.” For him the core question is whether those who interpret the pandemic as a signal that humans need to change how they live will grow to form a critical mass.
For decades after the war, big companies did not change the way they operated. They took advantage of young people who believed material security was “worth the price of submitting to strong central leadership vested in relatively few people”, de Geus wrote. Faced with this crisis, though, de Geus would have placed his confidence in those companies that had evolved a commitment to organisational learning and shared decision-making, according to another close collaborator, Irène Dupoux-Couturier.
The pressure of this crisis is already flattening decision-making hierarchies. Progress out of the pandemic will be founded on technology that reinforces the human community by encouraging rapid cross-company collaboration.
De Geus was adamant that a true “living company” would divest assets and change its activity before sacrificing its people, if its survival was at stake. That optimism is bound to be tested in the coming months but it is worth clinging to.
“Who knows if the characteristics of Arie’s long-lived companies . . . boost resilience in such situations as this?” Mr Senge told me. “But it is hard to see them lessening it.”
The first written document about a Stora operation, a Swedish copper mine, dates back to 1288. Since then, the company — now Finland-based paper, pulp and biomaterials group Stora Enso — has endured through attempts to end its independence, the turmoil of the Reformation and industrial revolution, wars, regional and global, and now a pandemic.
“It would have been catastrophic for [Stora] to concentrate on its business in an introverted fashion, oblivious to politics. Instead the company reshaped its goals and methods to match the demands of the world outside,” writes Arie de Geus, describing one particularly turbulent era in the 15th century in his 1997 book The Living Company, shaped round a study of the world’s oldest companies he conducted for Royal Dutch Shell.
This is wisdom that companies today, wondering how to survive, let alone thrive, could use. Alas, de Geus himself is not around to help them: he died in November last year.
Part of his work lives on through the scenario-planning exercises that I identified last week as one way of advancing through the uncertainty ahead. The multilingual thinker was Shell’s director of scenario planning, where he developed the distinction between potential futures (in French, “les futurs”) and what was inevitably to come (“l’avenir”).
He also lived through the aftermath of the second world war, which destroyed Rotterdam, the city of his birth, and encouraged him and his friends to seek jobs within the safe havens of great corporate institutions, such as Shell, Unilever and Philips.
It is not a given that all the oldest or largest companies will outlive this crisis. Those that do, however, should take a leaf out of de Geus’s book.
Longtime collaborator and friend Göran Carstedt, a former Volvo and Ikea executive, says he discussed with de Geus last year how near-death experiences enhance the appreciation of being alive. “Things come to the fore that we took for granted. You start to see the world through the lens of the living,” he told me. “Arie liked to say, ‘people change and when they do, they change the society in which they live’.” That went for companies as much as for societies. Long-lived groups such as Stora owed their survival to their adaptability as human communities and their tolerance for ideas, as much as to their financial prudence.
These are big ideas for business leaders to ponder at a time when most are desperately trying to keep their heads above the flood or, at best, concentrating on the practicalities of how to restart after lockdown. In her latest update last month, Stora Enso’s chief executive sounded as preoccupied by pressing questions of temporary lay-offs, travel bans and capital expenditure reductions as her peers at companies with a shorter pedigree.
Some groups that meet de Geus’s common attributes for longevity are still likely to go under, simply because they find themselves exposed to the wrong sector at the wrong time.
Others, though, will find they are ill-equipped for the aftermath. What he called “intolerant” companies, which “go for maximum results with minimum resources”, can live for a long time in stable conditions. “Profound disruptions like this will simply reveal the underlying schisms that were already there,” the veteran management thinker Peter Senge, who worked with de Geus, told me via email. “Those who were on a path toward deep change will find ways to use the forces now at play to carry on, and even expand. Those who weren’t, won't.” For him the core question is whether those who interpret the pandemic as a signal that humans need to change how they live will grow to form a critical mass.
For decades after the war, big companies did not change the way they operated. They took advantage of young people who believed material security was “worth the price of submitting to strong central leadership vested in relatively few people”, de Geus wrote. Faced with this crisis, though, de Geus would have placed his confidence in those companies that had evolved a commitment to organisational learning and shared decision-making, according to another close collaborator, Irène Dupoux-Couturier.
The pressure of this crisis is already flattening decision-making hierarchies. Progress out of the pandemic will be founded on technology that reinforces the human community by encouraging rapid cross-company collaboration.
De Geus was adamant that a true “living company” would divest assets and change its activity before sacrificing its people, if its survival was at stake. That optimism is bound to be tested in the coming months but it is worth clinging to.
“Who knows if the characteristics of Arie’s long-lived companies . . . boost resilience in such situations as this?” Mr Senge told me. “But it is hard to see them lessening it.”
Rahul Gandhi is back. Now with two economists, a migrant aid pack and an ethical hacker
Zainab Sikandar in The Print
It takes a lot to be defeated twice over, ridiculed for years and still care enough to show up for your country, the majority of which has rejected you for a national leadership role. Rahul Gandhi continues to surprise us. He simply won’t give up. He just doesn’t turn cynical and walk away.
He keeps coming back with his empathy as well as his willingness to find viable solutions to pressing issues induced by the pandemic: an economy in doldrums, a huge migrant workers’ problem that’s slowly turned into a humanitarian crisis as well as transparency of the government’s Arogya Setu app being used to map Covid positive patients. Rahul Gandhi’s comeback is all the more conspicuous against the backdrop of Prime Minister Narendra Modi’s unwillingness to have a press conference
Rahul is ready to talk
Rahul Gandhi is the eternal unputdownable comeback kid. He has managed to hold the attention of the media by continuously participating in the process of finding answers to the problems that Covid has thrown at India. He has had two conversations with two economists par excellence, former RBI governor Raghuram Rajan and Nobel laureate Abhijit Banerjee. Add to this, the migrant aid pack that Sonia Gandhi offered, where the Congress party would have paid the train fare for every migrant labourer who wants to go home. This “masterstroke” has made the fiercest of critics of the Congress party applaud the Gandhis. The Gandhis are consciously and conspicuously placing themselves polar opposite to Narendra Modi. Whatever Modi is avoiding, the Gandhis are accepting and dealing squarely.
Right-wing editorials are claiming that Rahul Gandhi is trying to come off as an “intellectual”. This, for a man who till recently they caustically made fun of. But this perception is cracking because for the first time, the entire BJP PR machinery is being used to not make fun of Rahul Gandhi, but to discredit his interactions with the two economists by either calling the interaction a “repackaged Socialist snake oil” or by spinning fake news related to the guests. MoneyControl.com and News18 misquoted Abhijit Bannerjee as criticising UPA’s schemes, which the BJP had embraced. Banerjee had said no such thing.
Ending obsession with Modi
Then there’s Rahul Gandhi’s two press conferences (via Zoom). We got to see a visibly more calmer and zen Rahul Gandhi who is neither shaken nor stirred by the six-year-long vicious slander by the BJP or the media, which has more often than not dealt rather unfairly with him. He has significantly altered his behaviour from the Rahul of yore, who would either attack Modi with his ‘Chowkidar Chor hai’ jibe or give him a hug in Parliament and say that he loves the prime minister.
Rahul’s detachment from Modi is palpable when he urges the government to transfer direct cash to the poor, as envisaged in Congress’s NYAY scheme, by saying “Call it ‘nyay’ (justice) or call it by any other name but do it.”
Rahul, it appears, has specifically distanced himself from acts of political pettiness and his statements reflect a sense of political maturity: “We can defeat the virus if we fight it together, we lose if we fight with each other”. Even though he also unapologetically added that he does not agree with Prime Minister Narendra Modi on most things but wanted to offer “constructive suggestions”.
Gandhi’s well-directed tweets with suggestions to the government are now also being affirmed by experts.
Turning Aarogya to his advantage
While the BJP is in pathological denial of anything substantive that Rahul Gandhi or the two economists had to say, an ethical hacker had the government promptly take notice and admit to its mistake. French hacker Elliot Alderson on Twitter looked into the Aarogya Setu app and confirmed Rahul’s fear that it was nothing more than a “sophisticated surveillance system”. The app’s user agreement states that the data can be used in the future for purposes other than epidemic control if there is a legal requirement. The privacy policy of the app states that the data on the app may be shared with as many agencies as the government sees fit.
Alderson went on to confirm and tweeted to the government that “A security issue has been found in your app. The privacy of 90 million Indians is at stake.” He ended the tweet with a post script that read; “@Rahul Gandhi was right.”
Although the Modi government confirmed that there could be no security breach in the app, they thanked the ethical hacker on engaging with them. Alderson on the other hand has confirmed that some of the issues he reported were fixed in the app and that he did receive calls from the National Informatics Centre (NIC) and the Indian Computer Emergency Response Team (ICERT), both government bodies.
In fact the press note of Aarogya Setu thanked Alderson for engaging with them. “We thank the ethical hacker on engaging with us. We encourage any users who identify a vulnerability to inform us immediately.” Anderson, however, maintained that the app should “stop lying, stop denying”.
Rahul’s initial warning, as early as 12 February, foreboding the government of ignoring the contagion almost seems prophetic today. The BJP can go on to dismiss him but it’s getting harder for the party and the government to ignore Rahul in these Covid times.
It takes a lot to be defeated twice over, ridiculed for years and still care enough to show up for your country, the majority of which has rejected you for a national leadership role. Rahul Gandhi continues to surprise us. He simply won’t give up. He just doesn’t turn cynical and walk away.
He keeps coming back with his empathy as well as his willingness to find viable solutions to pressing issues induced by the pandemic: an economy in doldrums, a huge migrant workers’ problem that’s slowly turned into a humanitarian crisis as well as transparency of the government’s Arogya Setu app being used to map Covid positive patients. Rahul Gandhi’s comeback is all the more conspicuous against the backdrop of Prime Minister Narendra Modi’s unwillingness to have a press conference
Rahul is ready to talk
Rahul Gandhi is the eternal unputdownable comeback kid. He has managed to hold the attention of the media by continuously participating in the process of finding answers to the problems that Covid has thrown at India. He has had two conversations with two economists par excellence, former RBI governor Raghuram Rajan and Nobel laureate Abhijit Banerjee. Add to this, the migrant aid pack that Sonia Gandhi offered, where the Congress party would have paid the train fare for every migrant labourer who wants to go home. This “masterstroke” has made the fiercest of critics of the Congress party applaud the Gandhis. The Gandhis are consciously and conspicuously placing themselves polar opposite to Narendra Modi. Whatever Modi is avoiding, the Gandhis are accepting and dealing squarely.
Right-wing editorials are claiming that Rahul Gandhi is trying to come off as an “intellectual”. This, for a man who till recently they caustically made fun of. But this perception is cracking because for the first time, the entire BJP PR machinery is being used to not make fun of Rahul Gandhi, but to discredit his interactions with the two economists by either calling the interaction a “repackaged Socialist snake oil” or by spinning fake news related to the guests. MoneyControl.com and News18 misquoted Abhijit Bannerjee as criticising UPA’s schemes, which the BJP had embraced. Banerjee had said no such thing.
Ending obsession with Modi
Then there’s Rahul Gandhi’s two press conferences (via Zoom). We got to see a visibly more calmer and zen Rahul Gandhi who is neither shaken nor stirred by the six-year-long vicious slander by the BJP or the media, which has more often than not dealt rather unfairly with him. He has significantly altered his behaviour from the Rahul of yore, who would either attack Modi with his ‘Chowkidar Chor hai’ jibe or give him a hug in Parliament and say that he loves the prime minister.
Rahul’s detachment from Modi is palpable when he urges the government to transfer direct cash to the poor, as envisaged in Congress’s NYAY scheme, by saying “Call it ‘nyay’ (justice) or call it by any other name but do it.”
Rahul, it appears, has specifically distanced himself from acts of political pettiness and his statements reflect a sense of political maturity: “We can defeat the virus if we fight it together, we lose if we fight with each other”. Even though he also unapologetically added that he does not agree with Prime Minister Narendra Modi on most things but wanted to offer “constructive suggestions”.
Gandhi’s well-directed tweets with suggestions to the government are now also being affirmed by experts.
Turning Aarogya to his advantage
While the BJP is in pathological denial of anything substantive that Rahul Gandhi or the two economists had to say, an ethical hacker had the government promptly take notice and admit to its mistake. French hacker Elliot Alderson on Twitter looked into the Aarogya Setu app and confirmed Rahul’s fear that it was nothing more than a “sophisticated surveillance system”. The app’s user agreement states that the data can be used in the future for purposes other than epidemic control if there is a legal requirement. The privacy policy of the app states that the data on the app may be shared with as many agencies as the government sees fit.
Alderson went on to confirm and tweeted to the government that “A security issue has been found in your app. The privacy of 90 million Indians is at stake.” He ended the tweet with a post script that read; “@Rahul Gandhi was right.”
Although the Modi government confirmed that there could be no security breach in the app, they thanked the ethical hacker on engaging with them. Alderson on the other hand has confirmed that some of the issues he reported were fixed in the app and that he did receive calls from the National Informatics Centre (NIC) and the Indian Computer Emergency Response Team (ICERT), both government bodies.
In fact the press note of Aarogya Setu thanked Alderson for engaging with them. “We thank the ethical hacker on engaging with us. We encourage any users who identify a vulnerability to inform us immediately.” Anderson, however, maintained that the app should “stop lying, stop denying”.
Rahul’s initial warning, as early as 12 February, foreboding the government of ignoring the contagion almost seems prophetic today. The BJP can go on to dismiss him but it’s getting harder for the party and the government to ignore Rahul in these Covid times.
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