In a heavily over-bought markets, small fears can get blown out of proportion. In such situations, sharp technical pull-backs are inevitable. This is precisely what we saw towards year-end. With market on one-way rally since Nov, it was technically heavy when the second strain news (viral strain) hit the market. Sharp technical unwinding that followed led to a flash crash on 21st Dec (Black Monday). Since the crash brought back memories of March mayhem, many investors started wondering whether this is time to pull out, esp. when the benchmark indices are trading at life-time highs.
The fear that frets many investors is this: when Nifty and Sensex are trading at life-time highs amid fundamental dis-connect between economic reality and market sentiment, is it not risky to stay invested esp. in small and mid-caps? Investors need to understand that small and mid-caps perform with a lag. While the initial leg of the rally is led by benchmark indices, action shifts to broader markets in the later leg of the rally. Going by past cycles, we may be in for a big surge in small and mid-caps like the one witnessed between 2015 and 2017. This does not mean that there will not be corrections on the way. Brutal volatility like the one we witnessed on Black Monday will come and go, not once, but many times. One should be prepared for such Monday Blues. But that is unlikely to affect the overall positive medium-term trend for the broader markets. Any such interim corrections should be grabbed as an opportunity to build long-term portfolios.
On the dis-connect between fundamentals and economic reality, one needs to understand that the markets are forward looking and hence driving with a rear-view mirror (looking at the economic slump of 2020) will be unwise and will be self-defeating. As highlighted in our earlier blog posts, in the eyes of global investors, India’s even modest growth outlook will look extremely attractive in the back-drop of scarcity premium for growth on account of ample liquidity amid slowing global economies. Not stopping with this, with the stunning turn-around that may be unfolding in India’s domestic manufacturing because of effective implementation of PLI and other structural reforms (labor and farm bills), India story can catch the fancy of global investors not in the too distant future.
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