Most people approach the markets expecting a reasonable amount of certainty, but the reality is that on a probabilistic basis, at any point in time, you can have a massive upswing, a massive downswing, or a flat market!
What are the probabilities one should attach to the event of a major crash or a bear market happening, now? In my opinion, one can have a correction, but the chances of a prolonged bear market are almost non-existent.
Why do I say so? It is very simple: We are not going to have a bear market in India any time soon because we have already been in a bear market for the past 11 years!
That may appear like a shocking statement. But consider this data: the Sensex was around 21,000 in the January of 2008 when it peaked out. Today, the Sensex has just crossed 50,000. After 11 years.
This gives a compound annual return of approximately 6% over the past 11 years. Even a lay reader will understand, that is roughly equal to the return from a fixed deposit. And do remember that fixed deposits have no volatility, while the 6% compound annual return from the Indian stock market over the past 11 years has come with a minimum volatility of around 15% per annum.
When any particular asset class gives you returns that are below minimum acceptable levels (for Indian equities, this should be around 15% per annum), for an extended period, that asset class is in a bear market.
When you look at data in this manner, you can see that my assertion that the Indian stock market has been in a bear market for the past 11 years is supported by basic facts. Something that is already in a bear market does not go into a bear market.
In fact, quite the opposite might be true: something that has been in a fairly long-term bear market—like Indian equities—can only go into a bull market.
What is happening right now is something called a Recency bias. What this means is that the most recent data points are given disproportionate value in the minds of investors while ignoring the wider, longer data set.
Under these circumstances, the mind is only reading the rally from the lows of March 2020 and becoming apprehensive. However, let us think of a few reasons why this market rally could end, even if temporarily:
(i) Rising inflation forces the RBI to raise rates: To my mind this appears to be the most serious reason that can derail the current rally. India faces the prospect of significantly higher inflation, and it is already seeing a very sharp upswing across the board in various commodities. A global commodities rally, including one in which crude oil features prominently, is simply bad news for India.
However, it is my firm belief that the Reserve Bank of India will not raise interest rates even if inflation moves up significantly higher from the current levels. The central bank today is driven by growth considerations more than price stability, and it will tolerate a lot of inflation because it does not want to sacrifice any level of growth. Also, the fact remains that India has lost nearly three years of growth because of the pandemic and, therefore, the central bank will be extremely accommodative.
(ii) U.S. Fed tapers easy money policy: This is another big fear the markets have. And in my view, this fear is completely unfounded. Even if there is indeed some tapering, the markets have been informed of this and, therefore, these are already discounted.
(iii) Rising U.S. rates in 2020: In my decades of investing experience, the one realisation I have had is that markets are extremely short-term in nature. Markets never look beyond the next 12 months at the maximum.
Therefore, one should not worry about what policy the U.S. Federal Reserve will have after two-three years. It is, again, a very well-known and well-transmitted policy stance and unlikely to have much effect on markets.
My view is that the American monetary policymakers will have no choice but to continue with their easy money policy for a very long time. Since the great financial crisis of 2008, this experiment with ultra-cheap money has worked like magic. And it has shown this magic in the last 12 months as well.
The U.S. Fed is unlikely to take any risk with the stock market rally since 2009—driven by ultra-cheap money—which has cushioned the impact of generally low economic growth worldwide in the last several years and in particular in the last 12 months.
This is a great drug to keep people happy on and I am willing to lay a bet that this drug will be in plentiful supply over the next several years.
(iv) Newer variants of the virus: This is a well-known and well-understood potential problem and anything that is well-known and well-understood does not cause a stock market crash. Last year this was an unknown animal and that is why it caused the devastation of March. No matter what variants come, stock markets are not going to react negatively to those because the problem is already understood.
In fact I will argue to the opposite that every single correction must be invested into aggressively because we are nowhere close to bear market territory right now.
(A version of this article first appeared in Fortune India)
From the desk of
Shankar Sharma & Devina Mehra
If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side, super quick!
Or WhatsApp us on +91 88501 69753
Economists Think Dollar's Fall May Explain the Recent ‘Rally’ by Steve Liesman
Einstein taught us about relativity in nature. Now come Devina Mehra and Shankar Sharma of First Global to teach us about relativity in financial markets -- and raise some serious questions about just what is driving stock prices.
First Global reports are quite credible and, on occasion, more than that.
What prompts this mention is Intel's earnings report and the fact that First Global has had a pretty good bead on the company and its stock.
AMD up again following First Global upgrade to ‘buy’ (AMD) By Tomi Kilgore
Analyst Kuldeep Koul at First Global upgraded Advanced Micro Devices (AMD) to "buy" from "outperform," given the "exceptional traction" that the chipmaker's Opteron line of processors has been able to get.
Baidu Climbs on First Global’s ‘Outperform’ Outlook
Baidu Inc., the operator of China’s most-used Internet search engine, rose to the highest price in two weeks after First Global rated the shares “outperform? in new coverage.
Personality counts: Walmart's frugal, but Target charms
"It's better to take a slight hit on [profit] margins and keep on moving and inventing," says First Global Securities. And at least for now, Target is inventing in a way that appeals to consumers with money to spend.
At 11 times trailing earnings, Energizer is cheaper; Gillette's multiple is 25. But cheaper doesn't mean better, says First Global.
Bipinchandra Dugam @bipinchandra90
invested in both GFF-GTS and Super I50. Thank you very much for such wonderful investing experience with completely new approach. In my 15years of investing first product I felt which close to what customer want.
Shishir Kapadia @shishirkapadia1
by far you are the best, I have not come across transparency, acumen, global expertise, exposure, protection of capital, delivering return from any fund/ fund managers. Invested very small size in 3 products will keep on increasing it over the period
Copyright 2019, All Rights Reserved. Developed By : Hvantage Technologies Inc.