The unpredictable onset of the COVID-19 pandemic, and the resulting market collapse in March, caught many investors on the wrong foot, but what was equally surprising was the sudden bounce back in stock markets globally.
So with several economies still in dislocation and various sectors ravaged by the pandemic, many markets are sitting at all-time highs.
S Naren, ED and CIO of ICICI Prudential AMC, believes there is only one factor largely responsible for this: global central banks.
In response to the economic crisis caused by COVID-19, central banks (and governments) globally, and especially in developed countries such as US, launched stimulus programmes measuring trillions of dollars, through asset purchases, liquidity injections and other means. Interest rates were slashed to near zero.
The unprecedented money-printing exercises have the intention of reviving growth as well as healthy inflation to the point that it is reflective of high demand and a vibrant economy. But they carry a risk of things â€“ also growth, but mainly inflation â€“ getting out of hand.
What does this mean for markets?
â€œThis is a developed world central bank bull market,â€ Naren said in an interview with CNBC-TV18. â€œThis means that till inflation starts rising in the US, and the Fed chief wants to withdraw liquidity, valuations will remain elevated.â€
Since macro developments are notoriously difficult to predict, especially by way of timing when a particular event could happen, it makes it that much difficult for investors to say how they will play out when it comes to markets.
Towards that end, Narenâ€™s AMC recently launched the ICICI Prudential Business Cycle Fund.
As opposed to bottom-up funds, where fund managers focus on identifying individual stocks with the highest prospects for growth, business cycle funds follow a top-down approach, identifying how broader economic cycles will affect markets, sectors and stocks.
â€œFor the next 10 years, central banks will drive markets. This means that business cycle oriented funds, which focus on macro-oriented thinking will be the best way to look at investing,â€ he said.
The importance of top-down investing emerged over the past two decades as a global liquidity boom lifted most stock markets around the world between 2003-2007, and the global financial crisis caused equities to crash.
In India, too, the governmentâ€™s response to the 2008 crisis resulted in a short-term boom till 2012, till it caused high inflation and currency deprecation, and loose lending practices caused the NPA cycle, which took several years to wind down.
This means that fund managers who identified the top-down trend that India would be in a deflationary period between 2013 and 2020 — as banks and companies unwound their balance sheets — would have tempered their approach accordingly.
Following the COVID-19 crisis, the immediate outlook is that earnings are set to bounce back strongly, and depressed sectors, such as cyclicals could see their stock prices rise.
â€œMetals, corporate banks, infrastructure and metal stocks could do well,â€ he said.
But the fact that these trends are linked to broader macro cycles mean that they make the job of investing that much more difficult for the average investor.
So what should retail investors do?
â€œHave an asset allocation plan,â€ Naren said, talking about the principle where investors should outline a mix of investments between asset classes such as stocks, bonds, property and gold decided by their goals, age and risk appetite.
â€œDonâ€™t overleverage on equity (thinking that stocks will continue to remain in a bull market for a long time). You will pay if you donâ€™t have an asset allocation plan. Whether you will pay in 2021 or 2024 is difficult to say,â€ he said.