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We should prepare for end of bull market but at this stage I am not calling it out: Maneesh Dangi

We are in mid cycle. Over the next one or two years, one can perhaps make excess return over bonds but not significantly higher. Given that the early cycle or the reflation trade is already behind us, it makes sense to be either equal weight or underweight equity, says Maneesh Dangi, Macro Investor & Advisor.

Do you think the bull market is peaking out or would you say this is just going to be a temporary lull in an otherwise roaring bull market?
As far as returns in bull markets are concerned, the obscene returns that you have made in smallcaps in 17-18 months in India, is pretty much crippled. Of course, the tangent will be different now there will be relatively lowish return– nominal returns — in the inflationary backdrop. It will continue to be okay but not great. . I would be surprised if it is the end of the bull market because that would mean it would be like the 2009-2010 business cycle which ended within one and a half-two years.

My bet is in India the bull market would be longish and the midcycle phase would persist for one-two years at least, if not more. There will be lowish but reasonable returns in Nifty. We will have volatile returns in small and midcaps but one never knows if policy makers begin to surprise you by tightening rates because they start fearing inflation. We should prepare ourselves for the end of the bull market as well but at this stage I am not calling it out.

There is a reasonable space in the world economy and Indian economy to grow and that means that there will be undercurrents of more gains in asset prices.

I must say that you are the first of the lot to actually say that on record but point taken. I get where the fears are emerging from. If one goes underweight equities, where can one invest? Fixed income is not giving returns, gold has not had the best of the ride as it did in 2020. So where do you park your money? You cannot be sitting on cash?
Fixed income is not a place to go to, especially duration assets, if you are fearing inflation. But remember equity is the longest duration product. The long bonds of course are duration and so one ought to hide in short duration like three months, six months, one year assets but there the real returns are actually negative. Something cannot scale up in a significant manner but it could mean a lot if you buy farm land because that gives the best protection against inflation.

Gold and silver have independent cycles but there could be some steam there. One cannot have significant exposure to gold and silver as a percentage of a portfolio. So broadly speaking, one still has to be in at least equal weight risk assets but you one has to diversify, it could be real estate, more specifically farm land. Some of it could go to gold and silver and then one has to sit on equity mutual funds or equity oriented exposures but just be aware that if it is an end of cycle. you ought to be careful and quickly trim the exposure even on the largecap Nifty at some point time.

All things aside, valuations is just one beast of the stock market. Demand is something that you cannot move away from. What happens to the earnings cycle? That is not going to peak out. Companies will continue to churn demand and post the kind of profits that they have. Are inflation sensitive companies perhaps decent spaces to hide in whenever the correction sets in?
Company specific and sector specific, there are independent cycles but there is something called beta. Unless the broad markets are in good shape, a good or bad sector will tend to underperform bonds as far as the equity is concerned. But the bottom up stock pickers could always identify sectors and firms which would do well if policy makers begin to tighten again.

I approach markets in terms of cycles. Early cycles are the periods where you make humungous returns and those are the parts of a cycle when no news is bad but policy makers are hyperactive in stimulating demand or creating more supply and that ensures that very large returns of equity markets are actually generated. Now that part is over. We also call it reflation which basically means that policy makers are trying to reflate the economy.

Then we enter the mid cycle where while policy makers are restraining but overall earnings cycle has picked up and demand is actually chugging along well and that is independent of policy. Equity markets do reasonably well but remember a large part of the excess returns have already come in the reflation trade.

The mid cycle eventually gives into the late cycle in which policy makers surprise on the tighter side, trying to restrain demand significantly that markets do not like. Markets actually lose money in that period. We are in mid cycle. Perhaps over the next one or two years, one can perhaps make excess return over bonds but not significantly higher. So with that perspective, given that the early cycle or the reflation trade is already behind us, it makes sense to be either equal weight or underweight equity.

If you follow a macro approach of investing as I do for myself and my investors, you will have to trim exposure in equity, so that you prepare for a late cycle complete exit from equity. That is the approach I follow. But a lot of fund managers and fund houses will tell you and that is true for an average guy and I have told this many times that if you are not an active investor of timing it, then stay invested and keep allocating money. You will do a reasonable job in the next 10, 20, 30 years. But you do not necessarily have to time it. So that approach — the systemic investing, SIPs and stuff like can continue as we move forward irrespective of how the cycles are playing out.

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