Depending on whom you are asking and rightly so, the world is divided. The bulls would say growth is not going to die, the bears would say what is wrong with you, look at inflation and look at what the Fed and central bankers would do? How should one look at the world now?
There are two views. I must argue that there are several views and none of them agree at this point of time, simply because we are at a very different stage in history, where it is a little unprecedented. We are just coming off a very significant pandemic though it continues to rage in other parts of the world. The uncertainty around it continues to be very high.
At the same time, we have got very significant volatility in the markets, driven by a tremendous surge of liquidity. How the endgame is likely to be is always going to be debatable because history tells us that markets tend to be cyclical and after a very large upsurge, it is likely to come down. However, one should be prepared for a range of outcomes and position your portfolios to weather the storm if and when it comes. So there is no single straight answer. It is going to be a guessing game.
If the economy has to do well, financials are considered to be a high proxy. But they are much below the Nifty benchmark of 30% plus. Why is that?
I agree with that and in fact, we have looked at financials from the prism of a safety net. The range of outcomes are fairly divided. That is really where the portfolio positioning comes from. We are not betting on the traditional economic recovery because there are phases in the economic recovery with repercussions on the markets. So what we call a recovery phase is followed by what is known as an expansion phase. Now, what tends to happen in an expansion phase is that the economy starts to really chug along, earnings growth starts to build but conversely, it may not be the best times for the market because the PE ratings actually come down and the PE de-rates.
For example, on few earnings on the restoration phase, the PE may have climbed to 24 times. With the earnings growth coming very strong, it is likely that the PE actually de-rates. So once we pass this period of uncertainty into pretty robust earnings growth, it is very important to hedge one’s bets because what has done well and what will continue to do and be the leaders in the next phase of the economic recovery in the stock markets, actually change.
It may not be logical to follow the economic path and then bet on the economic recoveries but try to look forward saying that once you are in an expansion phase, there are other parts of the economy which start to do well from a market perspective and…
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