Equity clearly remains the preferred asset class right now. This has more to do with other asset classes like real estate and gold being expensive. Investors also feel that equity has relatively better return prospects even from current levels. This has created an investor slant towards equity that is quite unprecedented. The all-time high SIP book is evidence of that growing preference of investors contributing their incremental saving towards equities. This is also a reflection of a generational shift in our mindset towards asset allocation and wealth creation.
A generation wants to get more out their money and is willing to take more risks. But taking higher risks at all times is not an all weather strategy. Fast changing macros, geopolitical trend shifts, domestic political transitions, and significant valuation divergence within equities create situations that warrant a differentiated equity strategy. When the need for a differentiated strategy arises, investors must read the trend correctly and adapt quickly. In such circumstances, being value centric in equity investing will act as a natural hedge and protect portfolios from potential downside risks.
Investors need to now think of their downside risks clearly and improve their portfolio alignment to value. Owning expensive parts of the equity markets simply because they offer better growth is not going to work well beyond a point. At a point, one must move more towards value to improve their portfolio’s defensive stance.
When bluechips show low multi-year returns even while trading at lowest historic valuations, that twin construct is a unique buying opportunity. In a phase of slowing growth, the best businesses trade cheap when investors grow impatient and dump them. When their growth visibility improves, the bluechips revert to their mean. This happens repeatedly across cycles in defensive businesses with strong cash flows, cash rich balance sheets, and sound managements. When such businesses trade significantly cheaper to their historic levels, they offer tremendous value for long term investors looking to buy and hold for years. The current market setting supports investors wanting to invest in blue-chip businesses and stay invested for the long-term.
Interestingly, most investors seem disinclined to chase the value in bluechips even as they are ready to further overpay for already expensive growth companies. Recency bias clearly is at its highest. But, that really is seeding the opportunity elsewhere.
This market is a free hit for value investing and could well end up being the powerplay in hindsight which went unnoticed by most investors. It is upto us to grab those easy opportunities which others are completely ignoring.
