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The markets have corrected 7% over the past 20-25 days as domestic and international factors saw investors re-evaluate portfolios. Depending on who you spoke to, market participants blamed valuations, covid, the few IPOs (initial public offerings) and even China for the latest dip. But looking at a holistic picture over the past 18-24 months, a small 5-7% correction was long overdue. Given the almost one-way rally we have seen, the jagged fall of March 2020 seems like a bygone memory.

Markets never move in a straight line and a testament to that is the past six months of the rally. Short-term news events create the illusion of volatility. In essence, what this does is it normalizes long-term expectations and quells fears of euphoria. The latest dip in markets saw some companies correct as much as 30%. But these same companies also saw their market cap double and even triple in some instances. So, in effect, a 30% correction is par for the course. We are often reminded by the market through these corrections about the need to remain patient and invested rather than play the next hot trend. This facet of investing is also used in conjunction with consistency of long-term returns. Over the past 40 years, the index value of the S&P BSE Sensex has moved from 781 in 1981 to its current peak of 60,000. In absolute terms, a passive replication ex costs works out to 76x growth in investment. A decadal breakdown of historical peaks looks even more impressive, with a 5x growth in investment value every decade.

What we often seem to forget in such extrapolations are the innumerable short-term corrections and ever so often, a once-in-a-decade bear market correction that scares away the short-term investor.

How do we see the current markets and what is our strategy to play the markets here on?

Bottom-up strategies in focus

The rise in global inflation could induce cost inflation pressure, ultimately bringing back the inflation conundrum faced in the West during the 1970s and ’80s. The famous clean-up of monetary policy envisioned by the then Fed chair Paul Volcker is in many ways a parallel that many economists believe central bankers need to follow if they are to keep inflation from spiralling. In the interim, for equity investors, inflation is likely to be a key factor to contend with.

As inflation continues to rise, companies with pricing power will be likely outperformers as they are uniquely positioned to pass on inflation effects on raw materials and labour to end-customers. A bottom-up approach to identify sectors and companies is an ideal solution to building a portfolio of such companies. But this requires countless hours of researching financials and business models across the breadth of the Indian capital markets. Well managed multi-cap funds are ideally positioned to help investors in this journey and approach.

Management in focus

If covid has taught businesses and business leaders anything, it would be the need to stay flexible, nimble and liquid. At the height of the first wave, when economic projections and growth went out the window, every line manager and CEO focused on one aspect—cost. Companies that managed to scale down and then rescale back to normal saw a superlative improvement in business efficiency. Management capability was put to the test.

As an investor, this attribute forms the bedrock of our investment philosophy we broadly call “quality". Quality investing aims to identify opportunities in profitable and cash-generating businesses. In times of crises, investors look at individual businesses as well where one can trust the vision of the management and its execution capabilities. The increased understanding of an organization’s structure and working can aid in the prediction of its performance in the future. Even globally, experts have advocated the importance of evaluating those who run the business. Not all companies will deliver the valuation that they are currently trading at. Volatility around growth and margin will continue to remain across various sectors and it will depend on how individual companies execute and deliver their growth strategies. Thus, the senior management’s capabilities to run the enterprise is an instrumental variable in the success of a business.

To conclude, there is never a bad time to enter the markets. More so a correction, even a minor one, can be used to top up and reposition your portfolio to build long term wealth. Frequent corrections amid a rising bull market is a healthy sign of a long-term growth story and more importantly a wealth creation opportunity. At Axis, we believe that investing well is a job half-done and our ‘quality’ investing approach achieves the objective of consistent long-term equity performance.

Chandresh Nigam is managing director & chief executive officer, Axis AMC

Source: Bloomberg, NSE, Axis MF Research.

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