We all strongly believe that India’s(economy) time has come, and it is at an inflexion point. On most parameters, the economy stands out and presents relatively a better opportunity than most major economies. So, have we changed our view to have come up with the headline? We obviously haven’t. It’s important to understand that over shorter to medium term, the economy and markets can have different trajectory. Surprisingly, it’s not as obvious as it ought to be. This post is about reinstating this distinction
Relationship between Markets & the Economy: its complicated
Over long term, most equity markets tend to move in tandem with their economy’s performance. However, as stated earlier, over short, and medium term, that need not be the case. Let’s take a few scenarios:
- Imagine an economy growing at 7 % and expected to grow at similar level in the coming years. However, after couple of years, it ‘slows’ down to 6 % growth. Make no mistake, in absolute, this is still a high no for a major economy. However, the equity markets wouldn’t like this and most likely go down
- Imagine the reverse; an economy growing currently at 2 % and expected to continue at similar pace. However, it moves up and starts growing at 3%. No prizes for guessing on how the equity markets will behave
- There’s a in between scenario, wherein the economy is growing at 6 % and expected to grow at & 7 % in the coming years. Instead, it continues to grow at 6 %. The markets won’t like that either
We aren’t painting a negative picture
We are equally ‘invested’ in the idea of India (the economy). However when it comes to investing, ‘In war, prepare for peace; in peace, prepare for war’. – Sun Tzu, author, ‘The Art Of War’
- Don’t let the current equity market’s performance sway you away from your asset allocation (debt : equity allocation)
- While the debt returns have looked pedestrian in comparison to equity markets in the last 3 years, it’s improving. In all likelihood, over the next 12-18 months; debt returns might not be too behind than equity (at the risk of sticking my neck out)
Staying true to one’s process is as important in the good times as it in bad.
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