There is a lake, about 36kms from Tawang called Sangetser Tso, that I had visited a few years ago. It makes for a surreal setting and is a fascinating sight. Being early in the winter (December) it was not yet completely frozen. But there were a few people walking on it. I could not resist the thought of walking on the frozen areas of the lake. About a 100 feet in, the unexpected happened. The ice gave way under my foot and I had to scramble in a panic to a safer place, but not without my leg going into the icy-cold waters first. As the shock subsided, I realized that it could have been much worse if all of me had fallen in. Speaking to the jawans on the shore, I was told that I had been pretty stupid. Those I had seen walking were experienced with the lake and knew the areas that had thin ice. I should have asked someone before venturing onto the frozen lake. But that is life…we are not always smart enough to take help. We do not realize that our assumptions can be faulty.
The last couple of years markets have been operating on the assumption that high liquidity and low interest rates are here to stay. Cheap money goes with high PE ratios. Cheaper money goes with higher PE ratios. As I had written in the January newsletter, low interest rates are making investors willing to pay more for assets. But as the circus became a runaway success, did anyone think of changing the act? No. Asset prices are stretched but the circus continues. The events of the last few days in the USA and India amply reminded investors that we are on thin ice.
Navigating such markets requires different strategies, conviction and a bucket full of patience. But most importantly asset managers continuously need to be asking themselves – what is the narrative that the market is following? What is the narrative that we are following? And, has the narrative changed? The joker in the pack of questions though, is “Should the narrative change?”