Hindenburg, Adani & Indian Markets

Sanjiv Mehta  |  2023-01-30

Hindenburg was a doomed airship that crashed, killing 35 passengers in the year 1937. It was a man-made disaster since people were loaded onto a balloon filled with flammable material. Eight decades later, Nathan Anderson founded a financial forensics research firm specializing in spotting wrongdoings and frauds, essentially man-made disasters, at companies around the globe and named it Hindenburg Research.

On Jan 25, Wednesday, Hindenburg released a report on Adani Group, alleging that the group has engaged in brazen stock manipulation and accounting fraud over the course of decades. This report sparked a major sell-off in Adani shares with Adani Enterprises losing 18% and Adani Ports 16%. It caused a ripple effect on other stocks, notably banking stocks which otherwise are doing well, and the main indices, Sensex & Nifty 50 lost almost 1.5%.

I have been following closely multiple analyses. The Economist mentions that the Adani group made public a point-by-point rebuttal in a PowerPoint presentation on Jan 27. Hindenburg responded by saying that it welcomed the prospect of legal action, especially in America. “We have a long list of documents we would demand in a legal discovery process”. In an article in the Hindu Business Line on Jan 27, CLSA ( Credit Lyonnais Securities Asia), Jeffries, and InGovern have downplayed the Hindenburg findings, stating that the Indian banking sector’s exposure to the group is within manageable limits.

Obviously, the Indian markets are rattled and my view is that a further downside is highly probable with important technical levels breaking. Quite a few sectors, not related to Adani, will also remain subdued. Additionally, negative sentiment can prevail for some time. Our careful structuring of the portfolios providing resilience comes into play exactly when such market scenarios inevitably unfold. Different steps are designed to give the portfolios multi-layered protection against such shocks.

First of all, we determine asset allocation based purely on economic fundamentals and investor goals. Equity because it is volatile is never allocated to short-term goals, thus providing staying power. Second, we utilize only mutual funds, which have limited exposure to one company or a group, and therefore concentration risk of a stock is avoided. Third, we select the best mutual fund schemes with a good track record of risk/reward parameters. Fourth we prescribe several schemes in a portfolio with different styles, processes, and sectoral exposure thus providing further diversification protection. Fifth, our asset allocation is also dependent on portfolio requirements, for example, if a monthly income stream is required, we maintain adequate liquidity in the portfolio, therefore enabling us not to disturb equity schemes when they face unfavorable circumstances and only to take profits when they are up.

My long-term view of Indian equities continues to be positive, as stated in my last note of Jan 1, 2023, and the market will eventually provide attractive buying levels. It is illustrated nicely by the recent move in the banking stocks. Those were doing well and went down with Adani stocks because of the overall panic and also their exposure to corporate debt. Even a big HDFC bank was down 4% on Friday. But as the CLSA report says that Indian bank exposure is very limited, investors will find the good bank stocks to be at nice buying levels. Indian economic fundamentals which are good will eventually reassert as the current problem becomes more confined.

Recession in developed countries is a real possibility although the probability of a shallow recession and a soft landing is increasing. Today there was a statement by RBI Governor, Mr. Shaktikanta Das that the central banks globally are now moving towards a slower pace of tightening and might even pause. Stock markets are forward-looking and to a great extent, they have already discounted the slowing down of the economy. For example, the Indian market has not moved up since October 2021. Therefore, any slowing down of interest rate tightening could actually move the markets up.