Stock markets can be fickle, but there are a couple of things constant about them—wealth creation and volatility. And investors need to pay heed to those, says Anand Shah, Head, PMS and AIF Investments, ICICI Prudential. Shah was speaking about changing trends in the market and what it means for investors at the PMS AIF World's 5th Annual Summit.
"Equity markets in the long term have been one of the finest asset classes and have consistently created wealth over long periods of time, making equity markets a resilient and rewarding asset class for long-term investors," he said.
The second constant he says is volatility. Over the last two decades, Shah says that markets have experienced several situations where they have fallen more than 20 percent. He says that investors in equity markets need to be mentally prepared for market fluctuations, even during bull markets.
Difference between volatility and risk
Between volatility and risk, Shah says that as an investor, one needs to be more worried about risk. “One cannot predict how the markets will behave and if there will be volatility, but one can work on risk. Can we avoid risk in the market and avoid investing without understanding the strength of the business, management, valuations, etc.? "That is the single-minded focus for all AMCs—to mitigate the risk for the investor, to mitigate the risk of a permanent loss of capital," he explains.
Changing trends
Shah says that one needs to remember that it's very difficult to predict the market over a short period of time. For example, he explains that even as recently as last year, all the market pundits were being very cautious on the market, but by the end of the calendar year, the markets were up by 23 percent. "There was also a lot of fear in the minds of all the experts on small and midcaps, and very surprisingly, the market's been sort of led by small and midcaps over the last year," he adds. Hence, he advises that one should invest in the markets for the long term with an expectation of unpredictability as well as uncertainty in the short term.
On changing trends, Shah points out that a lot of stocks, which were the darlings of the market and were doing extremely well up until 2020, are not doing well.
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On the macro-level, prior to 2020, for almost four or five years, we practically had no earnings growth rate." Over the last few years, the earnings growth rate in the large cap, mid cap, and small cap has been "phenomenal." Shah adds that it is the changes within the macro that are causing "a lot of divergence in the portfolio performances of various different portfolios as well as within the stocks that you own and the stocks that you don't own."
Before 2020, China was the factory for the world, and their overcapacity, Shah explains, made it tough for manufacturing companies outside China, while consumer-facing businesses did well. This also had an impact on banks that were supporting manufacturing. After 2020, the changes have not been major, but China has become more expensive for manufacturing. Non-consumer businesses have been doing well in India, resulting in a change in earnings growth.
Outlook
On capex, Shah says, "We believe we are in the very early days. Capex has just begun." Going ahead, one can expect growth in private sector capex, especially in manufacturing exports, driven by initiatives like Make in India and production linked incentives, he adds.
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