The current week was no different from the many previous weeks where the markets rallied by another 2% driven by significant Foreign Portfolio Flows. The Indian markets outperformed most of the other markets where we saw a mild correction in some markets and flat markets in others. The global risk assets froth is not only evident in stocks but also in cryptocurrencies, commodities etc now. Crude Oil prices were up 4% for the week and ended up at the high point on Friday.
As inflationary pressures have started to build up we have seen an underperformance start to build in for the financials where the Bank Nifty has been underperforming lately after a stellar run. The CPI Inflation data was somewhat lower than expectation however inflationary trends are building up. Most commodities are moving up sharply with Steel Prices persisting near all time highs, copper crossing $ 8000/Tonne after 7 years, crude prices up by nearly 40% over the last 6 weeks among others. Many manufacturing companies in Consumer Durables have announced price hikes starting January ranging between 4-5%. In some products in the brown goods segment the hikes are even larger.
Even with a straight line rise in the markets many are loathe to call this a bubble citing the example of retail investors who have been pulling out money and the fact that there is still skepticism. However factually the money pull out is largely in India. Globally we have seen investors pour in huge amounts of money into ETF’s where the funds do not look at valuations but just invest based on flows. Some global data out last week indicated that cash positions with global funds are now at multiyear lows and Emerging Markets overweight positions at multiyear highs. The unprecedented rise in Cryptocurrencies such as Bitcoin where it crossed $ 23000 this week is also reflective of a cycle of significant speculation. With an artificial limit on the No of Bitcoins that can be mined euphoria has built up. This is also not helped by US Federal Reserve policies where they are committed to pump in more liquidity and have let the US Dollar depreciate big time.As I see the markets today I have never seen them more overbought than what they are since maybe 1999. The more the straight line upmove continues the bigger will be the drawdown eventually.
What we have been doing is to selectively book profits and increase cash in the portfolios. I bought Asian Paints in many portfolios in August at around Rs 1750 levels which we exited at Rs 2500 and similarly Page Industries at Rs 18000 which we exited at its peak at the end of the week. These are large consumer companies where I was expecting a 20% CAGR return every year for the next two years. However if we make 45-50% in just 4 months should we just sit and watch. No, I don’t believe so. I believe in buying good companies in distress and selling at Euphoria.
This brings us to the debate of TIME IN THE MARKETS Vs TIMING THE MARKETS. Now I do agree that many retail investors by themselves find it tough to do as the noise is too much. When there is panic and the time is right to buy everyone is shouting negativity and despair and the view is that we can get stocks lower. The same is the case in Euphoria where no negative is talked of. The best time to buy is when you don’t feel like buying in the fear of losing money and the best time to sell is when you fear to sell fearing losing out the upside. Time in the market works well if the timing is right. I did an analysis using ASIAN PAINTS which is the favourite example of many who say that only time in the markets matter. If someone bought the stock at the high point of 2016 over the next three years they made no return, however if the same was done at the low point of 2016 when there was panic three year returns were 17%. Over very long periods of time, lets say 10 years it might not matter so much. However how many investors have that kind of patience, most lose patience if stocks don’t perform for 3-4 months. Every 12-18 months markets give a large sell off, those are the times to increase allocations to equities, play the upside and trim as your equity weightage in the overall portfolio starts going much above the strategic allocation levels. Many investors have got frustrated out of Equity Mutual Funds as they have been sold the story that any time is good to invest. Unfortunately that’s not true. Timing and Time both are important.
2020 as a year has been obviously very surprising. Who would have thought in March that most global markets will be at new highs by December. However that has happened now. 2021 with the vaccines and control over Covid 19 will be much better for living, however what we need to ponder about is that have the markets factored in full economic recovery with strong corporate earnings growth already or the economic recovery and profit growth will still surprise us over and above the current elevated expectations. My strategy at this stage is to keep on increasing cash as markets continue to rally. There is no concept of missing the Bus as there is always another bus.
“There are no facts, only interpretations.”