2020 is breathing its 2nd last breath as it gears up for the next year, and it is doing so in some fashion.
The year kick-started with markets touching all-time highs on January 20, and investors asking:
➢ What shall we do now?
➢ Why are my mutual funds not delivering in the same manner?
10 months since, we find ourselves in a similar position asking ourselves the same question. And like then, we say the
same thing today – Stay Invested.
Courtesy of all things that transpired in between, staying “wallet-vested and emotion-divested” has garnered more merit than ever.
But before address the underlying challenges, let us 1st understand the joy market participants and periodicals find in markets touching all-time highs.
Like almost is tradition, news outlets were quick to draw up headlines about market’s new peak with no actionable on the investor end…. like they’ve always been:
While drawing successful attention to mounting markets, the click-bait headlines often left the reader having more
questions than answers. Questions such as:
➢ Is this the last peak markets will hit?
➢ How long can markets sustain at this level?
While these questions are very valid, we go a step further and ask, “What is All-Time High, and does it hold any significance?”
Simply put, all-time highs are when markets beat their previous recorded highest levels. And their significance?
Well that answer varies depending on your investing style:
➢ For traders (short-term participants), markets making new highs is extremely attractive as it fits well in their approach of making a quick buck
➢ For investors (long-term participants), markets making new highs is another good day at the office but does not
hold as much weight in their adopted approach.
If anything, shooting up of equity valuations can cause for asset allocation mismatch (Get your portfolio vetted today with Fisdom research)
So, is markets peaking a frequent instance? No.
So, should I exit my investments to realize markets potential at its upside best? Also, No
Saying yes to the 2nd question would mean that markets will never materialize at levels seen today. However, as we saw from graph above, this is not true.
Also, saying would question markets ability to generate alpha like it does if one were to exit today. So lets test this thought by comparing todays All-time highs vis-à-vis yesteryear’s
As can be seen, longer the timeframe from the high at the time, higher the opportunity cost.
Hence, it is in your monies best interest to stay invested or have the misfortune of missing out on ~40% returns like investors in 2015 who questioned markets ability to make new highs at the time.
So far, we analyzed the trend across markets peaking at different time intervals and concluded that pre-mature exit could come at high costs.
However, is the current market fervor still looking as disguised fever to you? Well, let us nip those worries in the bud too by breaking down the current elevation and sensations.
❖ The Sweet-&-Salty Market Palette
After months of sustained volatility, market’s current levels have taken everyone by surprise.
In fact, the market levels are coming at a time when the country’s GDP is coughing and roughing it way through its toughest times. The sharp contraction in GDP of -24% has shone light on the dichotomy between markets and underlying fundamentals.
As Co-vid becomes Go-vid, and green-shoots across high growth economic indicators become visible, markets bid adieu to mood of conservatism.
As markets continue to trade in future-positives for past-negatives, today’s levels fail to realize material return for investors. The table below highlights the same
As can be seen, even at its highest ever level, markets have returned >5% on CY20 YTD basis.
Also, this is the 1st time post-covid that market returns are in the positive.
Newer positives such as:
➢ Revived FDI belief (Net buyers FY21YTD, PLI scheme)
➢ Retail holdings at their 11-year highs
➢ Govt’s intention and incentives to shake-&-wake the country
can act as the water to your money plant
❖ The Index Is A Mix Of Concentrated Gain & Diluted Pain:
All pictures say a 1000 words and some more than others. The graph shows how much of the market’s magic run has come from its top performers.
The index ex-Reliance alone, would have returned >10%+ less, highlighting today’s levels being representations of stock-focused gains.
On further number crunching, it is observed that 27 and 28 stocks of the Nifty 50 are faring in >0% return territory
on YTD and Nifty’s previous all-time high time periods respectively.
The number of stocks in the >-10% return zone is at 21 across both time periods.
The sectoral level analysis yielded the same results with API, AI and UPI leading the way. Recent pick-up in consumer durables is the latest addition to the mix.
In foresight, the majority of Nifty being subdued presents good news for it highlights the upside potential that markets have yet to offer. This is after it has already touched all-time highs.
❖ The Divide Between Nifty Wealth & Market Health
The Indians in population and trading make for one of the biggest indices in the world. Boasting an investment universe of 5,000+ companies, only 50 of them account for our country’s representative index in Nifty 50. That’s a mere 1%.
India’s evergreen investment product in Mutual Funds smoothens the width to a certain extent by looking at the top ~1,500 companies, thus accounting for ~30% of total investable universe.
Hence, the share of Nifty’s representation jumps to 10%. But this brings a bigger problem in contribution as the remaining 90% of the stock universe continues to be a composition of Mid & Small-caps
The table below showcases how it is inaccurate to judge Nifty’s health as market’s overall health, given its incomplete representation of India’s business basket:
Hence, do not confuse market’s wealth your portfolio health for the spread in factual representation can cause actual significant differences.
Investor Takeaway
“The stock market is designed to transfer money from the active to the patient” –> Warren Buffet.
At 93, Mr. Buffett has sworn by these words since age 11, and look at where he stands today.
Fun-fact: Mr. Buffett had majority of wealth created after the age of 65.
As time passes, markets will caress newer highs only to solicit the old reactions. And for when that happens, resort back to this note to keep emotions at bay and act in the interest of investing principles.
And lastly here’s a fun math fact for all those who think exiting at market’s all time high will tide over all their losses:
❖ If a stock falls by 75% from ₹100 to ₹25, it will need to gain 300% to recover to its original price
❖ If it falls by 90%, it needs to go up by 900% to recover to its original price
Hence, think wise and act wiser. More important than valuing markets levels is valuing your investment time in the markets.
