Dealing with new market highs
Why should one learn “how to deal with new market highs”?
Isn’t investing more about dealing with lows well?
In theory, investors should be in a happy mood when the market makes new highs. In practice, investors are usually a worried lot when the market starts making new highs. Note the words carefully – starts making new highs. This is when a market rally comes out of nowhere and takes people by surprise, investors are still stuck in the past narratives of what can go wrong. They still don’t see too many things getting better in a tangible sense. Investor confidence goes up only as the new run matures, at the peak of the run most investors are not only bullish but are looking to deploy as much money as possible at every 2-3% fall.
Investors trying to take some money off the table is common in the early stages of a new run, if it indeed is one. We’ve seen this in 2014, 2017 and 2020. The 2014 run literally came out of nowhere, the headline index not only surpassed its previous high of 6,300 but hit 7,500 the day the new regime came into power. The 2017 run followed the lows of demonetization and the world coming to terms with the new US regime. Disbelief was the norm then too.
Right now, this rally comes on the back of high inflation, Ukraine war and a few financial institutions collapsing in the developed world as recently as March 2023. What we appear to look past is the fact that we’ve had 20,000 Cr+ FPI inflows for 2 months in a row – May & June. Time to revisit a few things we have written about multiple times
The headline index reacts to the delta change in FPI flows, not the absolute inflows. A positive month following negative months moves the market, a positive month following many positive months may not. See it here for yourself
India has been a start stop market for more than a decade. One good year followed by a couple of average/bad years. If you don’t participate in the good year, good luck with making double digit returns over the medium term
Mini bull runs are ferocious while bear runs are becoming shallower with time. Mutual fund SIP book has grown to 14,500 Cr from 8,000 Cr in 5 years. DII’s rarely sit on cash and prefer to deploy all the time. Barring the exceptional month of March 2020, the market hasn’t seen a 20% fall too many times
So what are we saying? It is time to stay put and enjoy the fruits of being patient since H2 2021. If you’ve been sitting by the sidelines waiting for the market to stabilize before you start allocating, sit no more and get started. The market can fall 5-6% at any point for any reason but that shouldn’t worry you unless you have a large ticket lifestyle outflow planned in the next 12 months. Don’t overthink your way out of making healthy returns in the market. The pessimistic case always sounds smarter than the optimistic case, that’s just the way the human mind functions. But do keep in mind that only optimists thrive. When a 18- 24 month range bound market breaks out of range, it does so decisively on either side. The run may not be linear or smooth but the market does eventually make a move.
What should active investors buy right now?
This question is what keeps boutiques like us in business. Active investing is celebrated because it works brilliantly for a few, even if the average investor gets knocked out by the market. One cannot be a successful active investor by loading up on themes that worked well in the past. Through the 2003-11 era the Indian market cared about capex led growth and dissed on consumption as a theme. In the next era of 2012-20 the market cared about consumption and dissed on investment led growth.
Figuring out what pockets to load up on and what to avoid is the biggest determinant of alpha generation over the short and medium terms. Over the long term (8 years+) it is more about business quality and longevity than anything else, but very few investors can stay put with stocks for that long a period. Intent to hold stocks for the long term rarely translates into a real long term holding period.
Look around you and ask yourself a few simple questions
With an election coming up next year, do you think the Govt focus on infrastructure spending will increase or reduce?
With rents going up and interest rates set to peak, do you think real estate can come back into vogue after a decade of stagnation in urban India?
With the kind of incentives and policy clarity we are seeing in certain manufacturing clusters, do you think businesses have enough incentives to invest?
With the kind of traction we are seeing in monthly GST collections and cashless payments, do you think the extent of formalization in the economy is improving?
In a stock market sense just observe these trends over time –
- Relative strength of sectors over the past 12 months
- Earnings momentum of each sector
- Average valuation multiple of each sector relative to the 5 and 10 year average
This basic framework should point us in the right direction. Do remember that an average business in a strong sector beats the returns from the best business in a weak sector in a mini cycle.
Sometimes we tend to complicate things needlessly, basic ground rules and logical thinking should get us to above average outcomes if not excellent outcomes in investing.