Future is far less predictable than what you and I think, believes Ashutosh Bhargava, Head - Equity Research & Fund Manager, Nippon India MF. He was speaking about Equity Markets – Kabhi Naram Kabhi Garam at Cafemutual Confluence Investment Marathon 2021 (CCIM 21).
The market has seen many events and changing leaders but as an entity, it keeps going higher in the long run. Historically, whenever a theme takes leadership, the outperformance continues for a few years. For instance, the energy/infra theme dominated in pre 2008 period while consumer & pharma were leaders during 2009-15. Likewise, large caps, mid caps and small caps keep outperforming each other across different time frames.
Though different asset classes deliver similar returns over the long term, they outperform each other during varying time horizons. This is where asset allocation and diversification become important. Opting for assets having a weak or negative correlation helps in diversifying, so that when a particular asset underperforms, the other asset takes a lead and reduces the overall portfolio volatility.
|
Correlation |
Domestic Equity |
Overseas Equity |
Debt |
Commodity |
|
Domestic Equity |
1.00 |
0.19 |
0.10 |
-0.01 |
|
Overseas Equity |
|
1.00 |
-0.06 |
0.46 |
|
Debt |
|
|
1.00 |
-0.61 |
|
Commodity |
|
|
|
1.00 |
Source: Bloomberg, MFI Explorer
Further, investors should be mindful of emotional biases. Various studies demonstrate that the average investor earns below-average returns due to emotional biases. For instance, the ideal investor behaviour is to reduce equity allocation at higher valuations and increase equity allocation at lower valuations. However, investors influenced by greed/fear exhibit contrary behaviour.
Ashutosh also shared with us that from a three to five year perspective, there is no other way of creating wealth and maintaining purchasing power in the current times other than equity.
Watch this video to know Ashutosh’s view on markets, which are Kabhi Naram Kabhi Garam.
