Is the market showing enough conviction in equity right now? A cursory look at flows will indicate strong domestic conviction in Indian equities. Investors are pouring money month after month into domestic equities. The SIP book of mutual funds is robust and funds are receiving positive flows month after month.
Look closer at the data and you see a sustaining pattern. The pattern clearly indicates that money is chasing performance. Recency bias is driving liquidity into this market and money is only chasing performance. This is evident from the dominating extent of inflows into smallcaps and midcaps. This market is chasing the consensus themes and funds which did well in recent months are drawing most of the flows.
So while money is flowing into equities, it is not adequately broad-based and flows are clearly concentrated. Within equities, there is a clear bias moving away from the top down approach and towards bottom up investing. The domestic equity market is more performance led now than ever before.
The macros of the domestic economy are changing continuously and yet the market seems unaffected by these changing trends. The market is currently unwavering in its conviction in one part of the equity market even as the broader economic trend shifts gears. This probably means the market could be caught off guard if the macros move very fast and create a shift in performance.
There are hardly any contrarians in this market right now. Such is the dominating influence of the current momentum. But, contrarian investing has its own way of making a comeback. The coming months will create the groundwork for contrarian topdown investing to make a strong comeback.
As the ground shifts, capital allocation will see a directional shift. Investors taking a top down view now are likely to catch this shift early. Catching a shifting trend early will be a better way to capture future returns from here. Merely chasing past returns may not work as well in the coming year.
Investors should now consider a closer alignment of their equity portfolios to the broader top down economic trends emerging in our economy.
