You must keep an eye on your money. While you may not be the best judge of the valuation of a particular asset class, you may want to know about opportunities that come your way. Financial markets move in cycles, always allowing you to buy more at low prices or sell at a higher price.
The sharp selloff in equity markets may give you an impression of negative sentiment about India and Indian assets. The sharp selloff in Adani group company shares and the aftermath triggered the recent fall. However, allegations and counter-allegations are just the reason markets needed to correct.
Indian equities were the best-performing asset class in 2022. However, the outperformance cannot last for long. Investors always look for relative performance, and despite posting a standout performance in 2022, Indian equities would lose ground in 2023. The Sensex and Nifty are down 3%. Those in Hong Kong, Korea and the US have jumped 11 to 12% since the start of 2023. For the past 12 months’ stock performance, Indian indices still outperform those in China, Asia and the US. That means there is a good chance for other markets to rally more and for Indian shares to fall further.
That brings us to the issue of relative performance.
When institutional investors look at a diverse pool of markets, they try to balance the risk to their portfolios. Since financial markets move in cycles, the timing of these cycles may vary for different countries. For example, the aftermath of the COVID-19 pandemic has left a different impact on different countries. Some countries took the lead in bouncing back, while many others lagged. Investors put their investible funds into markets that are likely to grow faster than others. That allows them to buy low and sell high or vice versa.
As an individual, it is hard for you to assess the impact on markets every day. You may not indulge at all if you are not a finance professional. However, that does not mean you should keep off investing together. The relative performance of assets is a very fundamental way to judge a market situation. You could compare the Sensex or the Nifty to values in the past or read about market expectations on companies’ profit growth.
You could use the past or the future to make that assessment. The relative performance of a listed company could be with the financial performance too. An IT services company could have grown its business and profits consistently for a few decades. However, a slowdown in US technology spending lately can bring down the profit margins in the future. Share prices of IT service companies remained flat or lost ground recently. That does not make these companies unworthy of investment. If their share prices fall consistently, you may return to the philosophy that financial markets move in cycles. Equity investing is all about the long-term. When you understand that markets move in a cycle, you will also understand that in the long term,the share prices of companies that are down today will go up eventually. Similarly, share prices of companies that have zoomed over the past few years would go down.
Most of you believe you know about other common asset classes like gold and real estate. Most wealth managers and asset managers would tell you to buy more gold. If we go by the theory of relative performance, you may be tempted to do so. The same holds about property in different markets. You may realise that the pandemic has created new opportunities to buy property at low prices. If you look at equity markets and multiple sectors, they rarely move in tandem.
There are periods when technology or export-centric shares rise. Then, there are phases when commodity shares rally. Similarly, the domestic consumption of India is considered a defensive story in equity markets. Shares of consumer companies do well in good and bad times. Understanding relative performance across asset classes as well as within those classes could go a long way in helping you manage your finances.
Investors look for relative performance
Indian equities were the best-performing asset class in 2022. However, the outperformance cannot last for long. Investors always look for relative performance, and despite posting a standout performance in 2022, Indian equities would lose ground in 2023.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)