# 20 Too Green by Far, My Favourite Equities

Too Green by Far

Sri Lanka’s economy is on its knees. 

There is  a severe shortage of food and fuel across the nation, and this weekend, a curfew was imposed to prevent protests against the government. This is a nation whose economic and social development has been streets ahead of the rest of South Asia - in 2019, their per capita GDP was twice ours, and their Human Development Index (HDI) rank is 72, compared to 131 for India.

A robust economy can survive many years of mismanagement and policy mistakes, but in this case, the “pandemic torpedoed tourism and remittances, both vital to the economy”. Sri Lankan investment was increasingly dependent on foreign borrowing, especially from China, and when economic activity dried up in 2020, it was hit by a foreign exchange crisis.

In response, President Rajapaksa banned all imports - and use - of synthetic fertilisers and pesticides in March 2021. In 2019, his ‘Vistas of Prosperity and Splendor Agenda’ had already declared an intent to phase out the use of fertilizers and agrochemicals, in order to improve the health of the Sri Lankan population. One doesn’t know how that would have been phased in, but the overnight ban was disastrous.  Rice production plummeted by 20%, prices surged by 50%, and Sri Lanka was forced to import half a billion dollars worth of rice. Within months, food availability in Sri Lanka had been dialled back half a century, to the time before the Green Revolution, when - like India - Sri Lanka was chronically short of food.  

The romantic in me cherishes the notion of food as nature’s bounty, untouched by harmful chemicals. On our own land in the Himalayan hills, our practices steer clear of chemical inputs. We exchange grass from our fallow fields for manure, and look philosophically upon insect attacks on our fruit trees. But these are the luxuries of the global elite, who don’t mind paying a substantial premium for organic food in the boutiques of New Delhi and New York. 

Organic tea accounts for less than 1% of global consumption, due to its higher costs. Meanwhile Sri Lanka’s loss of tea output cost it 425 million USD.

I would certainly welcome a day when the earth can produce enough food for its 8 billion humans without synthetic nitrogen, but wishing something doesn’t make it so. Agricultural scientists in Sri Lanka had warned that President Rajapaksa’s fertiliser ban would have severe consequences, but they went unheard. In a comprehensive piece on the resultant crisis, this sentence in a Foreign Policy article stands out, “The farrago of magical thinking, technocratic hubris, ideological delusion, self-dealing, and sheer shortsightedness that produced the crisis in Sri Lanka implicates both the country’s political leadership and advocates of so-called sustainable agriculture.” One of these advocates, apparently, was our very own Vandana Shiva, “an Indian activist and ostensible face of anti-modern agrarianism in the global south, (who) turned mute as the ban’s cruel consequences became clear.” 

In his latest book, “How the World Really Works”, Vaclav Smil sets out the energy balances that underpin the modern world. For organic farming to work, a large number of us would need to “ resettle villages and spend much of our time collecting and spreading animal manure.” 

The larger thrust of Smil’s book is that a global shift away from fossil fuel energy is going to entail a long transition, fraught with policy mis-steps. Faced with energy rationing in the face of the Russian war on Ukraine, Germany needs no reminding that the road to hell - or freezing homes - is paved with good intentions. Its famed Energiewende, or energy transition away from fossil fuel, has cost the nation dear;  the German consumer pays twice as much for power as the French. Renewable sources now account for 46% of electricity consumed in Germany, but both wind and solar energy output are highly erratic, so thermal plants still need to be on stand-by to ensure stable supply. 

When you go beyond electricity - to include industrial fuel, transportation, and heating - fossil fuel still accounts for 75% of Germany’s energy needs. And, except for lignite, it’s all imported - coal, petroleum, and natural gas. Unlike its neighbour France, Germany has been shutting down nuclear plants since the Fukushima flooding. Combined with the loss of gas from Russia, this means that Germany is inevitably going to be burning more coal in the near future.

As in agriculture, so in energy, the path to a greener world is going to be a long and tortuous one. In the urgency to get there, policy makers, who typically belong to the global elite, need to remember that our material prosperity is hugely dependent on fossil energy. Moves away from it must be carefully crafted, and take especial care to protect the consumption welfare of the world’s poor.

My Favourite Equities

If you have been following this newsletter, you know that my favorite equity index is the Nasdaq composite. I publicly recommended buying it in a piece for Mint, in the summer of 2019. Beginning May 2nd 2019, I regularly track the relative performance of our own Nifty 100 with the Nasdaq, using the simple yardstick of how much 1 lakh of rupees invested then in either index would be worth today.

The score, as on March 31st 2022:

Nifty: Rs. 1,48,950

Nasdaq: Rs. 1.93,140

Over the last financial year, the Nifty has been remarkably resilient, out-performing the Nasdaq, and most global indexes. But, I’m in for the long run, and retain my bias for the Nasdaq. The most convenient way for Indians to buy the Nasdaq is via ETFs, or Exchange Traded Funds, which you can buy and sell just like any Indian share on our exchanges. The pioneer here was the Motilal Oswal N100, launched in 2011; over the last 10 years, the ETF has yielded a compound return of 22.7%. Over the last couple of years, investing overseas via Indian mutual funds and ETFs has become increasingly popular; regulatory authorities had set an upper limit of 7 billion dollars to be invested via these schemes, with a sub-limit of 1 billion per fund management house. These limits are now being hit, and popular schemes have had to close the door to fresh investment. While the limit is subject to review, I suspect it will not be opened up while the rupee is under pressure.

The market has reacted as it always does to a shortage, via price. The N100 ETF now trades at a premium to the underlying value of the dollar index. For the last few years, the market price and the NAV (Net Asset Value) have moved in tandem. On Friday April 1, the N100 ETF traded at a premium of 5.25% to its NAV. You can view this premium as the preference for investing overseas, which is a mildly worrying sign.

Within the Indian equity landscape, Information Technology (IT) stocks continue to out-perform the rest of the market, with the Nifty IT index putting on 39% for the year. Indian IT stocks are not cheap, but I think they are better priced than many sectors of the Indian market, and have a built-in buffer against bad times - if the rupee continues to drop in the face of economic uncertainty, IT companies get a little extra wind in their sales. I continue to be hugely overweight in Indian IT stocks.