Looking ahead

Looking ahead

The fundamental characteristics of the markets haven’t changed even during the current challenging times. They have followed the principles on which they have always worked on. As individual investors, while we are struggling to envision a life after the pandemic, it is understandably difficult to look beyond purely emotional reasons for making investment decisions. To strike a better balance, it is pertinent to revisit these principles to get a sense of things to come and to make more informed decisions about our future

Principle 1. “Markets-don’t-like-uncertainty”: The outbreak of the Wuhan virus happened in end 2019, but it spread over to the entire world and reached pandemic proportions in March 2020. It was a time of rapid spread, rising fatalities and business lockdowns. The highest level of uncertainty in the history of mankind saw markets across the world react very sharply – our BSE Sensex fell 39%, from 42274 on 20-Jan-2020 to 25639 on 24-Mar-2020

Working on the same principle, today, when much more is known about the virus, how to control the spread, when lockdowns are area specific and not countrywide, and most importantly a vaccine seems around the corner, the uncertainties have reduced. The Sensex at 38129 on 24-July-2020, while still some distance away from its peak, is up 49% from the March lows

Principle 2. “Markets are forward-looking”: As the fog of uncertainties reduce, the markets vision of future growth is starting to reflect in the prices. While there is no doubt in anybody’s mind that FY 2020-21 will see a contraction in the economy, FY 2021-22 is expected to be a high growth year due to the lower base. And from thereon, normalized growth should continue. Yes, the next few quarters’ results of most companies will be reflective of the disruption caused by the pandemic, the markets have discounted that to some extent and have moved forward to the next year

Principle 3. “Markets are volatile”: In the short-term markets are always volatile. The forward-looking principle requires a lot of estimation based on certain assumptions which can spring surprises – negative or positive. Sometimes unrelated and irrelevant factors also affect short-term sentiment

Vaccine related news, rise in infection cases, increase in business lockdowns, elections in the US, escalation in India-China tension or US-China tension, foreign and domestic investor flows in the markets, and other unexpected events could keep markets volatile

But then volatility is a fundamental characteristic of the markets and will always be so!

Principle 4. “In the long-term markets follow fundamentals”: While sentiment is the major factor driving markets in the short-term, it is fundamentals that finally prevail in the long-term. The Indian economy has strong fundamentals of excellent demographics, abundant natural resources, self-sufficiency in agriculture and a global leadership in services industry

Opportunities of growth are immense just to bridge the gaps in our infrastructure requirements, and to increase the penetrations of consumer goods to our vast population. From what can give a big boost to manufacturing, the government has made it a mission to take maximum benefit from global MNCs desire to reduce dependency on China. Low global interest rates and low oil prices will keep our macro fundamentals healthy while taking up the challenges for growth

There are some industries that have been negatively impacted due to the crisis (retail, tourism, restaurants, aviation etc) and then there are others which are not too impacted or have gained from the crisis (Public utilities, IT, FMCG, Pharma, healthcare, Telecom etc) and with phenomena like work-from-home and tele-conferencing becoming the new normal, the business environment is undergoing some changes

After a slowdown, the Indian stock market will continue to create wealth for its participants, though from a slightly different terrain where new leaders and new industries may emerge. It is good to be with experienced fund managers who can be trusted to identify the winners from this changing landscape

Your Comment

Leave a Reply Now

Your email address will not be published. Required fields are marked *