Robust Corporate Earnings but markets remain volatile

India reports robust Q4 earnings across the board...

It is always surprising that markets in the short term fail look beyond the current situation, positive or negative. We have seen many instances where despite bleak macro environments, equity markets have shown tremendous resilience (most recent instance was when the corona virus pandemic was raging around the world, markets rallied to all-time highs) and conversely in the face of robust earnings, markets somehow show indifference because a larger macro event overshadows fundamentals.

These events showcase how investors should look at the markets - not with trepidation and with a sense of loss, (as many do look at current valuations and calculate unrealized losses as real) but with a longer-term outlook that is in line with long term average returns on asset classes. Noise overtakes signal and investors then fall prey to emotion. Any action taken based on the current situation is bound to deliver sub-par returns to investors, as their return deviates from the asset class return if they opt to sell out or substantially reduce exposure and move to relatively “safe” assets. Remember the average return on the asset class calculated over the long term includes periods of drawdown, market crashes and market upturns and euphoric valuations.

The average return is simply as stated – the average. It accounts for all market movements over the period and calls for no action to be taken if investments are truly for the long term and if the investor wishes to mimic asset class returns in his or her portfolio. However, timing the market is fraught with risk and the real risk is losing out to emotion on a path well begun.

Indian small savers via systematic investment plans in equity-oriented funds have shown great resilience so far in the face of volatile markets. Structurally, a large mass of savers have gravitated toward this asset class and lend significant robustness to our capital markets. This has ensured that the scale of drawdowns have remained within an acceptable band however, continued volatile geo-political situation may possibly lead to some nervousness. To bring this in perspective, small investors are better informed today, they have access to information that helps them make better decisions and we can expect better behaviour than in the past.

Where is the smart money going?

Within the spectrum of domestic investors, HNI and UHNI category who are in a position to make more informed decisions based on the quality of advice they receive are looking at ways to diversify their portfolio. Recent performance in north Asia in markets such as Taiwan and South Korea are examples of such interest. This we can squarely place in the realm of behavioural finance that follows “the recency effect”. Some time ago the interest was in Gold and Silver.

The fact remains that asset class returns on an annual basis are random and seldom consistent. Diversification after a period of solid gains is most susceptible to mean reversion.

What should the investor do now?

Should one then change portfolios?

• It is always difficult to follow a trend that has emerged already

• If the eventual reduction in geopolitical uncertainty does come quickly, recovery in the lagging sectors will be dramatic and investors could experience a whiplash effect

• investors should stay with their long-term allocation to asset classes for most cases as such disruptions in the markets are routine and are incorporated in the longer-term averages of returns of asset classes

• The full impact of the current supply shock will turn up in inflation and subdued margins for companies affected and will only be clear over the next 2 quarters

Asset Allocation will be key

A well-diversified basket of investments will hold the investors fear at bay. A better approach would be goal based investing and sticking to a long-term plan. Here the behavior needed would be resoluteness in the face of longer-term data despite near term hiccups.

This long-term approach ensures that one remains disciplined in spite of near term volatility and appearance of patterns appearing.

Happy investing!