Musings on a hot market

Almost daily we see market observers caution investors on a possibility of a correction in the stock markets especially in India. Even globally, worried investors are treading the markets with caution as equity markets scale all time highs. Statistics indicate that indeed the markets are expensive compared to historical averages and hence the prognosis.

The problem is markets are seldom rational. If it were to be rational they would have auto corrected so far. What is heartening is of course the fact that investors are not euphoric and expecting even greater returns. If one were to read the current sentiment and make a case for euphoria, it would come up short. Most observers are looking nervously over the shoulder thinking what will drive a market drawdown? Various economic data is being shown as the cause for the next blip – may it be continuing higher rates, higher inflation, possibility of a slower economic growth in the next year (now revised from the second half of this year)

And of course if all else fails, there is the geo politics. Iran, Israel, Palestine and the Ukraine and Russia conflict can at any time spiral out of control to cause major disruption in the market. But these are “known-unknowns”. Real significant drawdowns occur only when “unknown-unknowns” appear. And for that we can only guess what they may be.

In the US some observers having taken up the most recent data are suggesting a reversal to mid-cycle growth from late cycle growth. This is an interesting observation as it elongates the possibility of continuing economic activity and support to markets. Rates could either remain status quo or even inch up in the face of continued demand for money.

It is indeed a futile exercise to predict the market at any time but especially precarious at the present time. Our advice would be to ignore the noise and concentrate on asset allocation. If you are not invested in equity and have a growth orientation and by that we mean the next 5-10 years as a horizon, one needs to allocate even at this level, simply because this will not be the only allocation and one will get ample opportunity to add at a later stage were a significant correction likely to happen.

Do not miss the wood for the trees

Wealth is accumulated over long periods of time and shorter-term volatility is at best an irritant. As long as the purpose is clear, decisions are easy to arrive at. The confusion regarding booking profits arise when we are unsure of why we have made money, confused about allocation and completely beholden to the current situation.

Economic growth is robust in India and the next phase of expansion is likely to remain unprecedented in its history. However speedbumps are natural along the way and if one stays focused on the longer term, say the next 10 years, investors are likely to be rewarded by staying in the market than outside.

However individual situations vary and it may be heedful to remain aware on one’s risk tolerance and take bets on the basis on one’s emotional comfort rather than listening to market experts.