Markets have corrected by 7% over the last 20-25 days, as national and international factors saw investors re-evaluate their portfolios. According to who you are talking to, market participants blamed the valuations, the covid, the few IPOs (initial public offerings) and even China for the last fall. But given a holistic picture of the last 18-24 months, a small 5-7% correction had to be made very late. Given the almost one-way rally we’ve seen, the erratic fall of March 2020 seems like a bygone era.
Markets never move in a straight line and a testament to that is the last six months of the rally. Short-term news events create the illusion of volatility. In essence, what it does is normalize long-term expectations and allay fears of euphoria. The recent collapse of the markets caused some companies to correct up to 30%. But these same companies also saw their market capitalization double and even tripled in some cases. Thus, in effect, a 30% correction is normal for the course. The market often reminds us through these corrections about the need to be patient and invested instead of playing into the next trend. This aspect of investing is also used in conjunction with the consistency of long-term returns. Over the past 40 years, the value of the S&P BSE Sensex index has risen from 781 in 1981 to its current high of 60,000. In absolute terms, passive ex-cost replication represents a 76-fold increase in investment. A ten-year breakdown of historical peaks looks even more impressive, with growth of 5 times the value of the investment each decade.
What we often seem to forget in these extrapolations are the countless short-term corrections, and so often a bearish market correction once in a decade that frightens the short-term investor.
How do we see the current markets and what is our strategy for playing the markets here?
Bottom-up strategies in focus
Rising world inflation could induce cost inflationary pressures and ultimately restore the inflation dilemma facing the West during the 1970s and 1980s. Fed Chairman Paul Volcker is in many ways a parallel that many economists believe central banks should follow if they want to keep inflation from rising. Meanwhile, for equity investors, inflation is likely to be a key factor to deal with.
As inflation continues to rise, firms with pricing power are likely to outperform as they are in a unique position to pass on the effects of inflation on commodities and labor to end customers. A bottom-up approach to identifying sectors and companies is an ideal solution for building a portfolio of these companies. But this requires countless hours of research on finance and business models across the breadth of Indian capital markets. Well-managed multicap funds are in an ideal position to assist investors in this journey and approach.
If covid has taught companies and business leaders anything, it would be the need to stay flexible, agile, and fluid. At the height of the first wave, when economic projections and growth came out the window, all executives and CEOs focused on one aspect: cost. Companies that managed to reduce the scale and then return to normal saw a superlative improvement in business efficiency. Management ability was tested.
As an investor, this attribute is the foundation of our investment philosophy, which we generally call “quality.” Quality investment aims to identify opportunities in profitable and cash-generating companies. In times of crisis, investors also look at individual companies where they can be trusted. the vision of management and its execution capabilities. A better understanding of the structure and functioning of an organization can help predict its future performance. Even globally, experts have argued the importance of evaluating those who run the business. Not all companies. will offer the valuation with which they are currently trading. Volatility around growth and margin will be maintained in various sectors and will depend on how individual firms execute and deliver their growth strategies. Therefore, the ability of senior management to run the business is an instrumental variable in the success of a business.
In conclusion, there is never a bad time to enter the markets. What’s more, an even smaller fix can be used to recharge and reposition your portfolio to generate long-term wealth. Frequent corrections in the midst of a bullish bullish market are a healthy sign of a long-term growth history and, above all, an opportunity for wealth creation. At Axis, we believe that investing well is a half-done job, and our “quality” approach to investing achieves the goal of consistent long-term equity returns.
Chandresh Nigam is CEO and CEO of Axis AMC
Source: Bloomberg, NSE, Axis MF Research.
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