The din of macroeconomic analysis continues to be loud while the Indian equity market appears to have a mind of its own. We’ve said this multiple times in our twitter posts that the headline equity index responds to a delta change in the direction of FPI inflows and not necessarily to the quantum of flows.
Anyone who had decided to sit out of the market “till the sentiment gets better” has let go of an easy 15%+ return since July. Today we have better sentiment, just that the macro noise has moved from one concern to another. At the risk of sounding insensitive, the Ukraine situation doesn’t scare the market anymore. It was the same thing with COVID too, once acceptance comes in the market rarely reacts to the same concern with the same intensity as it did the first time.
Unless you can conquer your emotions during periods of volatility or periods of sharp upswing, you are doomed to repeat the same old predictable mistakes. It is important for investors to get out of their emotional persona and lead with their rational persona to have any hopes of doing well at investing. This at a time when the whole world bombards you with “feels over anything else” every day.
Investing is and will continue to be a social science. Price determines the return and does change the perception of business quality, if not the business quality itself.
Market valuation needs to be seen as a self reinforcing loop till a decisive pivot occurs. As earnings get better, stock price moves higher. As the stock price moves higher the perception of the business improves; as this happens, conviction improves and supply/demand mismatches occur. This is when you see stocks moving higher on volumes but when they consolidate it is at lower volumes. This constant tug of war is what creates well known patterns in charts. Fundamental news flow drives pattern formation but many a time the pattern tends to predict fundamental news flow in advance. See the chart of Divis Labs and IT Services around Q3 FY22, price action first and fundamental news flow later.
If earnings growth is all you look at, you would have loaded up on IT at the worst possible time last year. Appreciating the finer nuances of a stock price journey calls for a combination of perspectives. It is much easier to connect the dots this way, this also reduces the possibility of investors having a blind spot.
Our view on the market hasn’t changed materially since the beginning of the year. CY22 is an year of macro reset and may continue to offer interesting opportunities to do stock specific buying every now and then.
We only see ourselves making changes to sector allocation based on a combination of earnings visibility and valuation, we don’t see ourselves changing our stock picking style too much. We find ourselves doing work on sectors that we have historically stayed away from like capital goods & lenders. In these sectors it is not just a question of earnings growth over the medium term, it is also about getting a sense of where are in the cycle right now and what is being priced in. This is never easy and the best investors struggle to get this aspect right consistently.
Over the past 12 months the best 5 stocks by return within the NIFTY50 have been M&M, Coal India, ITC, Tata Motors & NTPC. None of them were hot names for a long time. On the same lines, we can all observe which sectors are delivering the best earnings growth right now. But that doesn’t mean these sectors will deliver the best return over the next 3-5 years. What looks like a smart buy today can look idiotic after 3 years and vice versa.