The market has caught investors unawares again and not for the first time. Investors went into the Oct-Dec quarter fully confident of earnings growth only to see the narrative change drastically due to fears of inflation, war, economic sanctions and further supply chain shocks. During the Jan-Mar quarter investors braced for further downside as Russia amped up its aggression on the ground, the West tried to corner Russia economically while Brent crude took a trip to USD 140 per bbl. The nature of the current market appears to be one of many false starts before one can fully trust a trend.
While we focus excessively on the equity market, it is the bond market in developed nations that has borne the brunt of the recent developments. The US 10 year yield is at ~2.65%, that’s a rise of 100bps within 6 months as the US Fed has admitted that they are way behind the curve. Both short duration and long duration bond portfolios have been hammered and it is not a pretty sight. The narrative in the Indian bond market is starting to change too, inflation consistently printing above the accepted band will push the RBI to act on rates and policy normalization. The Indian 10 year moved 20bps after the recent policy, that’s a -1.5% return in a single session on a long duration bond.
This is what investing feels like during most times. Go back to the tumultuous period of 2016, we grappled with a commodity crash, China reset, Brexit, Demonetization and a shocker of a US election all in the same year. For all of these events rolled into one single calendar year, the headline index returned +3% for the year. I am yet to meet anyone who gets the large macro events right with a good strike rate, these events do matter a lot but they do not determine individual stock returns over a 3-5 year period.
Irrespective of what the overall market does, there are always individual business that do well and stocks that do well. Identifying these while calibrating to the changing macro environment is what makes active investing so challenging. You can see the variability in stock returns for yourself over the past 12 months. What looked like the best bet at the beginning of FY22 may have underperformed significantly while a seemingly lost cause like ITC delivered 40%+ return over the past 16 months and beat the pants off most FMCG stocks.
While individual stocks were on a tear through CY21, we had an eye out on the emerging macro headwinds and were sounding a note of caution starting from July. This hopefully should have prevented investors from chasing prices and buying stocks only within the recommended range. Buying Divis Labs at 4200 is different from buying the same stock at 5400
Right now when most investors are worrying about war, inflation, interest rates and liquidity shocks, we figure we are better off reconciling to macro headwinds and instead focusing on individual businesses that can deliver good earnings growth over the next 3-5 years. Many stocks that looked like obvious mistakes in 2018 have netted 3x to investors after 4 years
This is the essence of being a contrarian in investing and it is never easy. Being a contrarian for the sake of it is foolish and rarely works well, it should always be backed by detailed research and a sound investment thesis. What makes it difficult is also the fact that individual stocks have their own cycle and don’t necessarily mimic what the broader market does.
This is the time for investors to stay disciplined and build allocation by investing through uncertain times, the rewards of doing so may be evident only a couple of years into the future. Focus on the developments in the underlying businesses, study technical trends of the particular stock if you will but don’t react too much to macro headwinds. There will be some or the other macro narrative at play through CY22, we should not be guilty of paralysis due to too much macro analysis.
Regards,
Kedar