In the previous part of the series, we looked at how the pandemic has decimated the world economies, plunging them into perhaps the worst recession since the 1930s. Concerning economics, we are in a proper recession. However, there has been a sharp contrast between economic data and the stock markets of the world. This has puzzled analysts across the globe, with many of them citing the bounce as “dead cat,” while others are calling it a “once in a decade opportunity.” We will not engage in the futile exercise of debating whether the market is right or wrong in its bounce. Instead, we’ll try to identify the core factors of the rally and how they can translate into long term gains in the future for the investors.
To begin, we’ll look at some of the factors fueling the current market rally. These factors are:
- Discounting Mechanism – Perhaps, the most reiterated theory believes that the stock market works as a discounting mechanism, and the future events are priced in at the present value. The recent rally could be an indication that the markets are pricing in a rapid economic recovery post-COVID-19.
- Liquidity – Liquidity is probably one of the biggest reasons driving this rally. The Fed has created massive liquidity in the market as the amount of money printed in the last six months is more than the amount printed 108 years combined. The effects of this massive money printing are being felt across the globe, including in the Indian markets.
- Optimism – There has been a wave of confidence among the investors as specific sets of economic data showed green shoots. The recent upswing in jobs data showed that the economy is indeed rebounding
The above factors relate to the broader market. Some sectors that were out of favor six months back have performed exceedingly well, beating the current market rebound by a substantial margin. These sectors should be on an investor’s radar for long term capital appreciation. While selecting the industries, it is essential to note that the winners of the previous bull market will not necessarily lead the next bull market. With this philosophy, we identify the following sectors:
- Pharmaceuticals – Once, an all-time favorite of investors, the pharmaceutical sector was caught in headwinds of regulatory pressures in the critical market of US, thereby leading to price erosion. However, the regulatory environment seems to be stabilizing, and there are indications that it could be the start of a new bull run in the industry. Selecting companies with strategic advantages in key geographical areas is the key to higher returns in the sector.
- Automobiles – The automobile sector was in a structural slowdown since 2018 due to uncertainty regarding the BS-VI transition. However, as the regulatory hurdles disappear, the industry is likely to make a comeback due to a fresh start of the CV cycle and renewed buying of BS-VI vehicles. Investors might also want to look at auto ancillaries as they have the most substantial potential to deliver returns. Companies with dominant market share and innovative management will thrive in the scenario.
- FMCG – The sector can be a defensive play in your portfolio as the demand for consumer goods largely remains in an increasing trend. Identifying companies with a mismatch between perception in the market and the actual reality of the company is the key to get superior returns in the future.
- Commodities – This sector is a classic example of “The best investments are made in the worst times” principle. The commodity cycle looks to be at its fag end. An investor looking to gain from an upswing in the commodities cycle can allocate a specific part of their portfolios to commodity-centric stocks. However, an investor must have a pre-determined selling point, without which the gains made could be wiped out by downturns of the cycle.
- Financial Sector – It is widely observed that there cannot be any growth without the banks. Hence, the financial sector remains an indispensable sector to invest in, if you want to take advantage of the growth. However, an investor must assess whether the company they are choosing is likely to survive the recession or not. To avoid this confusion and critical analysis, an investor could perhaps simply stick on to the market leaders in banking and NBFC space. This can lead to steady, superior returns in the future.
Apart from the sectors as mentioned above, we could see the following trends in the next bull market:
- Technology – The pandemic has made it clear that technology is now a utility, just like electricity and telecom. Growth-oriented investors cannot ignore technology while screening for companies for their portfolio.
- Gold – With massive money printing, the US dollar continues to be healthy and it isn’t going to depreciate against Euro or Yen. So can it devalue against gold? Investors looking to benefit from this scenario can allocate certain parts of their portfolio towards gold.
- Emerging Markets – If the commodity cycle is indeed rebounding, we will see a lot of money moving towards emerging markets as they typically require high commodity prices to do well. Indian investors stand to benefit the most as the inflows in Asia after the pandemic are likely to be focused on India as well.
The liquidity created by central banks across the nations is creating a massive stir in the global equities. The money printing in developed countries will continue until the economy indeed rebounds, and the markets will cheer it every time. The only question that matters is whether we, as investors will be able to take advantage of the current scenario and build a strategic portfolio to get superior returns in the future.
Coming Up Next – As we move further, we will take a more in-depth look at the trends identified and how retail investors can use these trends in their portfolios to gear up their returns.
By- Akshay Vyas