During the last nine months, most investors’ concerns are centered around the impact of rising inflation and surging interest rates on the equity market. As inflation spiked from 1% to 8.5% in the USA, central banks’ singular focus to curb inflation resulted in Fed raising interest rates from 1% to 4.0%. Markets are grappling with the worsening trade-off policymakers face between growth and inflation Consequently, we come across a litany of gloom on GDP, earnings, valuations, employment, etc. While they are important data points for the economy, the crucial question for equity investors is how to interpret these numbers and what action should one take. Should one wait for a better GDP growth print? That dilemma of investing today vs investing tomorrow is the most discussed topic we experienced from our investors despite India facing lesser issues and being reasonably resilient in the current global macro sell-off.

Stock Market is not equal to Economy

To find an answer, we studied the market behaviour of United States equity market (we selected the US as that is the most developed market with tons of data published on a daily/weekly basis).

During the 2009 Global financial crisis, the worst GDP print of -3.3% came in Jun 2009 but S&P 500 Index made a bottom in March 2009 – nearly 3 months ahead of the worst economic print. You will observe the same pattern during the recent pandemic crisis when the US GDP registered a decline of 7.7% in Jun 2020 and S&P 500 Index made a bottom in March 2020 – again ahead of the economy. If one analyses the 40 years of data, we would get many similar patterns.

The reason for such pattern is that the stock market is forward looking. The price you are willing to pay for a stock today is based on how well you and other investors expect the company to do in the future. By contrast, economic data looks at what has already happened. Because of this, when the initial signs of economic slowdown begin, worry pushes investors to selling as they look to exit at a good price rather than ride out the bottom. Subsequently, as economic indicators start to worsen, market tends to fall more and continues to remain volatile. At some point in this period, stock market recovery begins while economy is still in recession and media headlines are negative. During this period, many investors hesitate to invest even as market begins to recover while continuing to look at lagging bad economic data. They thus miss out investing at favourable valuations.

The conclusion is: Equities generally bottom ahead of Fundamentals economies and investors should patiently keep investing during the volatile period to take advantage of opportunities.

Earnings growth more reliable indicator

Instead of economic metrics, it is the long-term earnings growth which determines market returns and, importantly, portfolio returns. If one studies, S&P 500 Index, during the last 30 years, S&P 500 Index earnings grew at a CAGR of 8.8% and S&P 500 Index also delivered similar 8.5% CAGR returns (refer Fig3) with a strong correlation of 94%.

AAA PMS Strategy – strong focus on high quality earnings growth

At AlfAccurate, our equity team believes that the best way to preserve and grow client assets is by investing in competitively-advantaged companies that have the potential to deliver continuous and robust earnings growth under any economic environment. In challenging periods like these, we believe the strong get stronger. In other words, we believe that businesses with robust balance sheets that can self-fund growth are poised to withstand a potential recession, maintain resilience and gain market share while their competitors retreat. Our portfolio companies’ characteristics of the market dominance, under-leveraged balance sheets, and 18%+ earnings growth truly reflect our robust stock selection process.

AAA PMS Performance

(AAA Emerging Giants PMS Plan has been renamed as AAA Budding Beasts PMS Plan)
* (23 Nov 2009 – 31 Oct 2022); #(17 Nov 2014 – 31 Oct 2022); @(01 Jan 2021 – 31 Oct 2022)
Performance is after all expenses and fees from April 2018 onwards. Prior to April 2018, the performance is after all expenses and Fixed Management fees. Index performance is calculated using Total Return Indices, as per SEBI guidelines.
Note: Returns of Individual clients may differ depending on the time of entry in the strategy. Past performance may or may not be sustained in the future and should not be used as a basis for comparison with other investments. Performance related information provided herein is not verified by SEBI.
DISCLAIMER: This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. No person associated with AlfAccurate Advisors Pvt Ltd is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this document. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon. Neither AlfAccurate Advisors Pvt Ltd., nor any person connected with it, accepts any liability arising from the use of this document. The recipient of this material should rely on their own investigations and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavour to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. We and our affiliates, officers, directors, and employees worldwide, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (is) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (is) discussed herein or may perform or seek to perform investment banking services for such company(is)or act as advisor or lender / borrower to such company(is) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The same persons may have acted upon the information contained here. No part of this material may be duplicated in any form and/or redistributed without AlfAccurate Advisors Pvt Ltd.’s prior written consent. No part of this document may be distributed in Canada or used by private customers in the United Kingdom. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.
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