Wish you a happy new year!
The liquidity gush of November was followed by another month of strong FII inflows. Over the past two months more than 1.1 lakh Cr of FII inflows have taken the equity markets higher almost effortlessly, this quantum is ~9% of the equity mutual AUM. If and when this trend of inflows reverses, our domestic asset management industry does not have enough firepower to keep volatility in check. The vulnerability of our equity market to FII flows continues to be significant. View this 10 year chart and come to your own conclusions. Every time the trend of FII flows reverses conclusively, the NIFTY 50 does react.
We soon go into the Q3 results season, going by what we have seen so far it should be good. But that, by itself does not move the market. What moves the market over the medium term is a mismatch in expectations and actual business performance. While the market is far better than I am when it comes to estimating near term earnings growth, the medium term is where I have an edge. Over the past decade, my legacy portfolio which is small & micro cap heavy has beaten the NIFTY 50 about 75% of the time. You may view the updated performance snapshot. The multi cap approach should do a better job of containing interim volatility.
One of the things investors need to be wary of right now is an excessive focus on short term performance. Sometimes a bit of underperformance over the short term can set portfolios up for better performance over the medium term. One of my big learnings over the past decade has been to turn a bit reclusive and start cutting out the noise when the market does really well. There is never a shortage of narratives that sound positive when the market moves higher and vice versa.
If not anything else, I have respectable clarity on the portfolio objectives – medium term outperformance and steady compounding over the long term. Every investor should have this objective sorted out. If your objective is short term outperformance, so be it. Just that your thought process and actions need to be aligned, else it is a matter of time before outcomes suffer. I’ve made this mistake before.
Time to start monitoring asset allocation regularly and carefully. Market timing is anyway a low accuracy endeavor, we might as well focus on the things we can evaluate and control. Turning slightly cautious given the market mood, but not coming to any conclusions yet.