The Signal: Breaking The Markets Code

You Asked – We Answered.

2020 has been a year to remember – Not for the pain but for the following gain. From preaching to teaching, the markets have been adept to those adopting the philosophy of, “Learn From Yesterday To Earn Today”

Markets confirmed as much as it confused. Data bore the thunder to show the rainbow. Below are a few key examples of the same:

1. Despite wearing record volatilities, the markets have witnessed a surge of inflows from the foreign counterparts.
2. Despite record GDP contraction, the markets are trading at all-time high levels reflecting revival of elements composing, not compromising GDP
3. Despite recording highest inflations in recent past, country’s macros in forex reserves, deficit balance and currency strength wear very bullish sentiments
4. Despite abrupt halts in several key economic indicators due to lockdowns, today the same carry prompt rises and resilient recoveries.

In juggling between good & bad, the markets were equally attractive to active & inactive (passive) investors alike.

The 1 commonality across market participants irrespective of time and taste of markets, remained the core questions they asked.

Coupling of questions with similar undertones gave birth to categorization system spread across the 4 most common “W” words in the English parlance: They were as follows:

1. What To Make Of Today’s Markets?
2. Why Are Markets Behaving Irrational In Irrational Times?
3. Where Will The Markets Go From Here?
4. Which Is The Strategy To Adopt In Times Like These?

So in today’s note, we look to address these queries in a FAQ style – Friday’s Asked Questions.

• What To Make Of Today’s Markets?

Markets have been tried and tested at every turn in different manners, encountering a host of crisis. 

Across bubbles (tech), loans (banks) and bones (health), markets have seen it all but have always yielded only 1 result – to continue to be pro-investor and pro-money.

Today is no different as markets juggle between the Co-vid past and the Go-vid future. 

While Domestic investors look for new burrows in the market, the FII look to borrow from the market (return potential)

The visible dichotomy in markets is put forward as reason for current unreasonable peaks and troughs.

We ask to change perspective and view markets from its eyes, drawing from events and not emotions. In-line with pricing in future expectations, the markets are moving in sync improving country health and prospective economic wealth.

As markets breach new highs (New 6 All-time highs in just this month!), we preach investors to stay invested and focus on asset allocation.

In retrospect, Covid will be earmarked as a benchmark for all other crisis to follow. Till then markets will continue rewarding those who focus on time in the market over timing the market.

Hence it is imperative to color your lenses in market’s shade to be the player and not to be the one being played.

• Why Are Markets Behaving Irrational In Irrational Times?

Markets are not influenced by participant behavior, but rather influence the behavior of its participants.

To dress the markets in particular attitudes lies in the aptitude of the assignee. The old adage of “Beauty Lies In The Eyes Of The Beholder” holds weight in the modern today.

Brandishing strong scents of irony, markets have as many banes as they have boons. 

In battling factual and fictional juxtapositions, investor’s showing hesitancy to factor in what’s coming because of what’s happened paint the board in black with opposite interpretations dabbing the brush in white paint

With question having forward-looking interpretation, we too choose to highlight key reasons which are hoisting markets at “elevated” levels. 

1. Shifting Away From Covid-19 Conundrum 

When world’s biggest economies in US and Europe eye/execute a 2nd lockdown, India enjoys one of the lowest Covid counts in the world with constant increase in recovery rates

2. Govt & Its Bank Police Policies & Packages In Prepping For The Present

Re-scaling relief quantum to 15% of GDP (2nd highest in world), “Make In India” initiative, and cheapest borrowing rates on record have usurped India into an upward trajectory.

Immediate impact seen in heavy FII buying (India only emerging country to record +ve flows across multiple horizons) has further breathed new life into markets

3. Mojo in Macros + Micros = Cue Money Music

India’s economic indicators (Examples: IIP, PMI, Surplus, Reserves, GST) carry strong indicators on the upside, registering growth figures only seen in years past. 

More so, India Inc.’s profit growth for Q2FY21 was higher than the top quartile profit growth records over the past 60 quarters

The resilience seen in country’s economic factions are acting as if Covid was almost a blessing in disguise

• Where Will The Markets Go From Here?

We don’t know.

You don’t know.

Nobody knows.

Those who say they know, definitely do not know.

Funnily enough, the longer the time spent in the markets, the harder it becomes to answer this question. Hence, knowing this question has no right answer is the real and rewarding answer.

Today, markets are trading at All-time highs, like they did in 2019, 2018, 2917, and backwards, respecting the values of the time. 

So if markets have made new all-time highs every calendar year, what’s to say they wont make another next year. 

Statistically speaking, it is more probable for market to breach new highs next year than not!

So it is an investor choice to book profits out of emotions today and pay with opposite emotions tomorrow.

As an example, investors who exited in 2015 in euphoria, today cry foul for missing out on 40%+ returns since.

We recommend investors to adopt active approach in maintain asset allocation in times and tides like these and to stay wallet-vested and emotion-divested.

After all the highs and all the falls, markets have weaved and sieved a 13x+ grow in last 20 years!

• Which Is The Strategy To Adopt In Times Like These

The graph above shows what the markets had in store for us today. 

This year was a year for active management, by which we mean regular and rigorous asset allocation. 

Portfolios which were equity skewed earlier in the year saw sharp reductions with asset allocation going askew.

Portfolio value in red shifted market mood from wealth generation (fresh off the all-time high in Jan’20) to wealth conservation

The opposite is observed as of today, where the market rally has bumped equity allocation to significantly higher exposures painting portfolios in deep green.

So what strategy could an investor adopt in light of recent learnings?

Time the market? – Regular readers will already know the answer to this one. A bug Two-lettered NO.

Portfolio Rebalance? Yes.

Rebalancing portfolio asset exposure at right/relevant times (after conversing with advisor, if necessary) could have helped investors arrest losses in the downside and amplify returns on the upside. 

If you’d rebalanced correctly, you could save your portfolio to from learning basic math facts as follows:

1. If a stock falls by 75% from ₹100 to ₹25, it will need to gain 300% to recover to its original price
2. If it falls by 90%, it needs to go up by 900% to recover to its original price

With this we conclude our brief note on Friday’s Most Asked Questions. 

Keep writing/sharing to/with us and we shall incorporate your thoughts in our weekly newsletter!

Happy Weekend!