From the USA to India to Japan, almost every country reported gigantic numbers of confirmed Covid-19 cases in 2020. The entire planet was adversely affected by the Covid-19 virus and had significant consequences on our lives, livelihood and the economy. Many pundits have already declared Covid-19 as the “Black Swan” of 2020 as the global economy suffered one of the worst recessions in history.But surprisingly enough, a strange thing was happening in the stock markets across the globe, especially the Indian stock exchanges. One can only say that India’s financial markets not just braved the Covid-19 headwind very early and very well so far, they have outperformed other markets. Be it the bounce-back of the market to pre-covid levels or the confident high rides of equity markets, the equity markets were well ahead of everything and we were left wondering why are the markets up?!
The journey of the markets was much before everyone expected. As the Covid news broke, it took just 20 days for the market to fall by nearly a third, or 33%. This was seen by many as an opportunity to get into equities, and then the slow recovery started. It took just over four months to recover the fall by rising nearly over 48%. Over the next 14 months, the markets saw a more or less secular uptrend throughout, except for minor volatility in between, especially during Feb-March 2021. Overall, the markets have delivered over 130% absolute returns over the lows in the past 18 months. BSE Sensex crossed two major historical marks of crossing 50,000 & 60,000 both in the single year of 2021. Moreover, the key indices are up by over 55% in the past year. Figures speak amply about the movement & the confidence of the markets, even when things were looking very unpredictable.
But why are the markets so bullish /high when possibly the economy is not doing so well? Well, there is no one answer, and the timing of the rising trend itself is bewildering for many. Here is the trend/cycle we could decode in layman terms…
- Encashing the opportunities: From early days, there was hope that there would be a recovery, sooner than later, and the extent of the problem was unknown. The sudden fall of the market was seen as an opportunity, and with better equity awareness, the fear of the markets was also seen as an opportunity and the journey of equity participation started.
- Markets look at the future while economic data is of the past: The world was suffering but interestingly, India was faring much better than the big developed economies. With bold governance measures, there was also the hope of a strong recovery. There were also expectations that the China backlash would ultimately benefit many Indian companies/sectors, and thus a rally was first started in a few sectors where India is globally competitive. While the present was uncertain, the long-term growth story seemed intact and even stronger, as India seemed to be doing relatively well.
- Growing liquidity and retail participation: With lock-downs and realisation of the importance of savings, people started saving and investing. Low-interest rates in traditional savings avenues like bank FDs made it harder to avoid the rising equity markets. The liquidity was further boosted by fiscal and monetary policy measures taken by the government to support the economy. The additional liquidity in the system was also being directed towards mutual funds and equity markets. This time, the FIIs /foreign investors were selling and the domestic investors /funds /institutions were buying; new retail investors were also entering the markets.
- Strong Economic recovery: Finally, a lot of the hopes came true. India was seen to emerge victorious from the first wave with higher recovery and very low mortality rates. The budget was good, the vaccination drive was slowly picking up and the economy had slowly started to open up. There was a quick recovery seen in many sectors and many companies too posted strong earnings for FY21-Q4 with lower tax rates. This cemented hope and people started looking beyond Covid. The last few months have seen the Indian economy outperforming every major economy and even its ratings being upgraded. Not to mention, India recorded its best-ever quarterly GDP growth at 20.1% in Q1 for the financial year 2022. On the other hand, the ambitious target of vaccination looks realistic, which in itself is seen as a big achievement for a developing economy with a huge population.
- Ample liquidity, the low-interest rate regime, recovering markets, strong fundamentals, strong earnings, rising global stature, strong capital inflows, supportive monetary policy, strong retail participation coupled with the confidence of handling challenges and optimism have all led to sustained upward pressure on the equity markets. A State Bank of India (SBI) report indicated that over 14 million new individual (retail) investors started investing in 2020-21. Today, perhaps many investors are putting fresh equity money on the back of high returns, hoping to make good profits in the short run. There is also this FOMO effect, fear of missing out, playing in the minds of new investors. This is being encashed by a flood of IPOs in the markets with reasonably high valuations.
We have seen this play out many times. Many who were afraid to put in money in April last year are happy to put fresh money now. In the above journey, the market cycle of fear-hope-greed is out there for everyone to see. There is an old saying – markets can remain irrational longer than one can remain rational. Whether the present bull market is euphoria, will the markets correct, etc. are questions no one can answer. Times like these are just a reminder of the words of wisdom once said by a renowned fund manager, Terry Smith “There are only two types of people when it comes to market timing: (1) People who cannot do it, (2) People who have not realized that they cannot do it.” In a nutshell, it means – timing the market is a futile exercise.
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What should we do now?
Well, thankfully, our language and position have never changed from day one. To this day, it remains the same. You might have gotten used to listening to it, but frankly, we hate adding any exciting stories and are happy to risk being called boring. Here is what we have to say, again without the need for any detailed explanation now …
- The Indian growth story is intact and has even strengthened further. All fundamentals, democracy, demographics, systems, institutions, etc are in place which is essential for a sustained growth story.
- The equity asset class will outperform other asset classes in the coming decades. It will help you earn real, post-tax returns and grow your wealth. In terms of returns, one can expect better returns than nominal GDP growth (real GDP growth + inflation) in good funds /companies.
- The equity asset class is only recommended for long-term investment horizons, preferably over five years. The shorter the horizon, the bigger the risk and higher is the volatility.
- Asset Allocation is the ideal strategy to decide on your exposure to different asset classes, namely equity, debt, physical assets like gold, real estate, etc.
- Lastly, mutual funds are the preferred route for investors to invest in equities and even other asset classes and offer many advantages.
Right now, asset allocation is the keyword for us. It will help us identify if we are overweight on equities. In general, a balanced asset allocation is recommended at present times. The asset allocation approach to investing automatically answers many questions for investors. The important thing is also to decide what asset allocation you should follow and what strategy – either fixed or dynamic asset allocation, should you adopt. Furthermore, what is your risk appetite? This question also needs to be answered. As investors, we would recommend that you speak to your Financial Expert/Advisor and seek further guidance and explore products that can easily help us manage our asset allocation.
There are a lot of questions today in the minds of investors. With markets at all-time highs and a positive outlook on the economy, what should we do? is the question on top of our minds. There are also a huge number of new investors who have entered the equity markets over the past year. A majority of the new investors have seen only a one-sided equity market rise. Perhaps, understanding asset allocation would be the right thing to do at this time. Wondering how to start, reach us at chandrakant@ghanchiinvest.com or call at +9820926446 / +91 7977061717. For other financial and Investment planning check our section here
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