If there is one thing that the past year has taught us, it is to be adaptive. We have over the last few months learnt to work from home, learnt to live with ourselves and very notably, learnt to live with uncertainty. In my view, it is only when we come face to face with uncertainty that we acknowledge and learn to live with it. It does not happen so easily when it comes to financial markets, because most investors, unlike investment advisors, are far away from it living other lives.
An important factor to keep in mind is whether a change is transient or structural? Temporary or permanent? Our view determines our decisions and plan of action to deal with the change. Unfortunately, we often tend to extrapolate a trend without exercising the necessary discrimination. (Ex.: When markets go up, they will keep going up – when they fall, they will keep falling.) Connecting all the dots is another skill that one needs to develop. Many are either horrified or skeptical of the equity index going up in spite of the number of people sick and dying. But the unemotional question one needs to ask, is whether the economy continues to function, whether businesses in general are growing profits. The answer is that the economy is recovering albeit at an understandably erratic pace and companies are growing profits. Markets are slave to earnings in the medium and long run. Hence markets are optimistic and continue to grow.
When could this change? If the economy is thrown out of gear once more for some reason or the flows into the market slow down. Global flows have been high last few years and more so since the pandemic due to liquidity being infused into the markets to keep the economy afloat by all central banks. Whenever the Fed decides to reverse this, markets are bound to behave badly. When will they do this? Anytime in the next couple of years is all one can say. The Fed has mentioned 2023 as date in earlier statements. With inflation taking center stage again, there is greater certainty that it will happen. So ideally, one should stick to asset allocation and not take unnecessary risks, and understand that there is a good likelihood of a correction whenever the liquidity tap begins to shut down. We will have to simply live with this uncertainty. Mind it.
T. Srikanth Bhagavat
Managing Director & Principal Advisor
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