01 Aug 2016


High Beta Nation

Beta and Alpha are the core jargons which the investment world revels in. While the former is the market risk which measures the ups and down of the financial markets the latter is the excess return which a stock, portfolio or a fund manager can generate over and above the market return. In mature and developed nations like the US beta is much lower and so is the Alpha which means while the markets are relatively steadier with finer gradients of its roller coaster the fun of upside is also limited. In case of younger and developing nations like India not only the beta is higher but also the alpha which means while not only the markets are more volatile on a relative scale but at the same time there is room to have much more upside as well.

Rohit Sarin

Ever wondered what makes the nations so apart in their financial behavior. While there are many good reasons and good old sound financial logic to explain this but besides that a significant contributor towards this is the behavior of the society which is driven by a combination of factors one of which is the emotional construct and other one being awareness quotient.

If we have to deconstruct beta then the drivers of the same aren't just the corporate earnings or the GDP growth. They are just one of the two parts which define beta of a nation's market. In the financial world they are known as the Fundamentals Camp. The other one are the greed and fear of investors which in the financial world are known as the Sentiment Camp.

Emotional Construct
It is the Sentiment Camp which gets its nutrition directly from the emotional construct of a society. Greed and Fear are the very basic human emotions and something which pretty much defines the world that we see around us. Not only daily but also minute by minute behavior of the financial markets is the melting pot of the emotions of the investors. Would it then not be correct to assume that a relatively more emotionally intense society will have investors whose decisions are driven more by heart than cold and sound logic of the mind?

India is an ancient civilization but a very young nation with just about 70 years of journey to define its independent future as compared to developed nations of the west which are 3 times older than us and at our age were going through their own trials and tribulations and far more chaotic times. Not only is our national age very young but also our current demographics make us literally a very young nation. Our case is not very different than a young entrepreneurial organization driven by a young and aspirational team whose dreams and expectations about the future could gyrate much beyond reality just like the greed and fear of an initiated investor would oscillate beyond the fundamentals of the economy and financial markets.

There is a thesis that got developed over several lunch table conversations with my colleagues that India is a great nation of simple, emotional and impatient people. Doesn't it show in the emotional outburst across our hundreds of TV news channels who are pandering to the emotional construct of their consumers? This has made two Indian jobs the most difficult to deliver probably in the whole world – Indian Prime Minister and the Captain of the Indian Cricket team – although the UK PM off late has become a close contender for the top honors. We would expect our PM to tweet on everything and our Cricket Captain to deliver under all circumstances. Clearly the pressure of expectations from a simple, emotional and an impatient audience is unmatchable. While as a nation and as a cricket team we should be focused only on getting ahead and winning every match but thanks to our emotional preferences even the smallest of the issues could distract us, generate unnecessary noise and therefore make us a bit more greedy with unreal expectations at times and bit more fearful of unreal fears at some other times. With all this we got to be a High Beta Nation.

Going beyond the Sentiment Camp of greed and fear are there any dots which connect the Emotional Construct to the foot soldiers of the Fundamentals Camp – Corporate earnings and GDP Growth. Fortunately and unfortunately the answers is a clear YES. Earnings and GDP is the constructive output of the input of a society. They are the by-product of collective efforts of business and government organizations of a nation. Collective efforts are defined by the decisions taken by the people who constitute these organizations. If the decisions are driven by an emotional bent of mind they would tend to be more reactionary and populist addressing near term challenges and opportunities very similar to the greed and fear of financial markets. Such decisions would have a direct impact on the earnings growth of the business world which feeds in directly into the GDP growth. A case in point is the talent attrition which is plaguing India's growth. Supply of employable talent has simply not kept pace with the growth of business organizations. Evidently everyone is ending up chasing the limited talent pool and in the process converting them into overvalued assets which eventually would defy the economic logic putting even this limited talent pool at the risk of becoming unemployable leading to an endgame where all stakeholders of a business – employers, employees and customers – would loose and therefore the nation would end up producing a high beta growth.

Awareness Quotient
Every human being irrespective of its age – child, adult or old – is an emotional being. For that matter probably every form of life on this planet has an emotional side to it. However, what makes humans superior to every other form and therefore sit on top of the food chain is their ability to control their emotions on account of self-awareness or simply wisdom. However, while God has blessed us with wisdom it comes to us only with time through education – both structured based on classroom learnings and non-structured based on life's lessons. This shows up in the financial world too with older, mature and therefore developed nations having low beta financial markets on account of better understanding of risks and rewards. This leads to more strategic decision making in the society than tactical leading to far more stable economies than their developing counterparts.

In a young and aspirational nation like India while we are certainly on the shorter side of maturity and wisdom we are gaining it faster than the developed world did all thanks to the internet revolution. In our quest to grow faster than fast we are committing mistakes but also learning from them and correcting them. The mantra to become the next unicorn by burning more capital than the other has very wisely given way to ensuring sustainable unit economics and respect for the good old ROI (return on investment) discipline has come back. In our industry I see visible signs of maturity setting in across all stake holders – both mature talent and mature customers have figured out that there is not much difference in terms of products and services offered by different wealth management platforms. Therefore, instead of changing from one wealth management platform to another for tactical reasons they are choosing to continue to stick to the one which comes closest to their own DNA and values as that is the one they would be able to develop and retain their trust with in a service domain which is perpetual in nature. Similarly, long term steady wealth management platforms with no pressure to finish the marathon like a sprint are shying away from onboarding talent which defies the discipline of unit economics. This pattern could address the problem of attrition over time not only in our industry but across all in India.

Way forward
Increase in the awareness quotient is the key for India to transition from a high beta to a low beta nation. We have to shut the door to the distracting noises of the greed of winning the marathon in a sprint's time or of the fear of never being able to complete the marathon. We have to think big enough to run a marathon and keep the faith to stay at it long enough to complete it. We have to stay focused on making BIG that one thing which we know the BEST instead of getting lost in the woods of chasing umpteen small things. One true love is much more valuable than a thousand infatuations.

Anyone who is able to do this while India transitions from a high beta to a low beta nation would stand out as an Alpha – someone who was able to think and behave differently than the crowd. But the catch is that the time to create Alpha is now when India is still a high beta nation. When everyone will know everything it would be difficult to be an outlier.

Time to put our head down to build an inspiring life is now!

By: Rohit Sarin

Reach at: rohitsarin@clientassociates.com

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