This week I explain how the mean reversion is happening in the overall spectrum and we can see things coming back to getting sanity, how they were supposed to be; followed by what’s trending in markets and curated good reads.
1. Market snapshot📈
Markets remained slippery last week majorly due to heavy FII selling but at the end of the week, it closed in green-up, i.e. by 0.2%. Only sectors- Consumer discretionary, Pharma & healthcare, and consumer staples were up by 1.9%, 1.6%, and 1.2%.
You must have heard of the “Buy the dip” strategy & now seems like a good opportunity to invest in excellent companies with good valuations but one might get confused while thinking about “where to invest”.
No worries, we got you covered! We have identified some and launched the small case basket called Do as the promoter does which comprises a diversified selection of 20 good companies where promoters have been increasing their stake substantially.
Read more here and consider subscribing!
2. 2022: The year of mean reversion🌀
“What goes around, comes around”
There is so much noise in the market lately, but in my point of view, mean reversion is happening in the overall spectrum. We can see things coming back to getting sanity, how they were supposed to be☝🏻
Let us dig into a few cases of mean reversion happening:
1. MEAN REVERSION BETWEEN OLD ECONOMY AND NEW ECONOMY SECTORS
Saudi Aramco has become the world’s largest company with a market capitalization of $2.382 Trillion.
For context, this is higher than the tech group- FAANG companies.
Not sure if Data is still the new oil or Oil is the new data😅
2. MEAN REVERSION BETWEEN GROWTH AND VALUE INVESTING
Mean reversion also happened in the Ark Innovation ETF’s extraordinary returns. Currently, the returns of ARK & Berkshire Hathaway since inception is in the similar range of ~120% which by the way is lower than S&P’s total return of 163.1%.
3. MEAN REVERSION OF ONLINE TECH MODELS TOWARDS HYBRID MODELS
While I believe some of the tech companies are making a real difference in the world but I won’t deny there was a lot of hype in the valuations of a few such startups/companies.
But, as you might know, a lot of these ridiculously high valuations have started fading away in the last 2 months and we can see startups realizing that everything tech doesn’t help🤞🏻, it has to be a core business model which needs to be focused upon.
One such example is of an ed-tech startup: Unacademy. From being a full-fledged online platform for a decade, recently it has announced that they want to follow a hybrid model (online + offline) & has launched its first store in Delhi.
This is not the 1st time, any tech business decided to mix up the traditional approach as well to their model (hybrid), there are many other examples also such as Pepperfry, Lenskart, Nykaa, and many other D2C brands.
4. MEAN REVERSION OF SMALL-CAP INDEX
Smallcap index was hovering above NIFTY for the last 6 months, but now we can see the valuations of the small caps normalizing.
5. MEAN REVERSION MIGHT HAPPEN IN DEPOSIT RATES
Recently, RBI increased the repo rate by 40bps, as a result of which banks have started increasing their deposit rates. Not just this, but the hike has also led to chaos in markets.
But is the high-interest rate scenario really so rare? No! Have a look at the chart below:
Till 2000, the deposit rates used to hover between 10-12% range😲The mean deposit rate from 1976-2000 was 10.7%. Yes, you read it right, it was used to be almost equivalent to NIFTY’s rolling return of ~13%!👀
This is the reason, even now, our parents or grandparents still believe in parking their money in fixed deposits because they have seen the era where they were able to earn high returns from FDs.
One thing which is common today & high-interest periods is “High inflation”. But interest rates since 2020 were kept low even after high inflation (as visible in the chart above) to maintain the money flow in the economy during covid.
Finally, RBI has realized that to control the inflation, interest rates need to increase and we can expect more such hikes in coming quarters.
It will be interesting to watch here whether the interest rates will also revert to mean higher rates as they used to be during high inflation periods?
6. MEAN REVERSION IN THE EMPLOYEE COSTS IN START-UPS
Mean reversion is happening not just in markets, but also in the start-up world💁🏻♀️
Nithin Kamath tweeted a few days back that he is hoping and expecting a mean reversion to happen in the employee costs of startups.
7. MEAN REVERSION IN THE HYPE OF CRYPTOCURRENCY
Here’s the last but my personal favorite case😬 of Crypto🙅🏻♀️
We have seen the retail’s madness for crypto over the last few years, but now the craziness seems to be fading away now🔻Bitcoin is down by 50%+ in the last 6 months.
Scary right? Keep calm because there’s more😌 Luna- which is one of the top 5 cryptocurrencies, has literally collapsed in the last few days!
Well, we can surely see the hype of crypto getting back to normal, not sure of whether will revert though.
Few exceptions: In fashion, there are things like Bell Bottoms and Anarkali, where we can see it again trending after its mean reversion👗
Also, here are a few things that always stay constant and beat the law of averages. That’s Mr. Anil Kapoor for u. The AK 20 yrs back is the same AK even now. Defies the law of averages!
3. What else is trendin’?🤙🏻
✔️ Tata motors announced its results last week, among other companies. It saw revenue growth of ~11% in FY22, and its operating profits, and losses contracted from ~13,451crs to ~11,441crs.
In spite of incurring large losses, the company closed at ~8.6% gain on the announcement of results as the analysts seem to be optimistic about the company and the sector in general.
✔️ FMCG companies struggling from higher input costs and the inability to charge higher. So, for higher volumes, these companies have decided to try out “Bridge packs” to sustain margins.
This means that they will be launching mid-packed products which will be priced between low-priced products of Rs5-Rs10 and the high price points of Rs20 and above.
4. Good reads 📚
4.1 A write-up on “20 lessons learned” by Michael Batnick.
4.2 An article by The Economist on “How the Indian economy is being rewired and the opportunity is immense”
See you next week. Until then, happy investing!