Smart Beta For Volatile Times

In the equity market not everything goes up in tandem and comes down in that order. There are themes and factors that play differently in different periods of the business cycle, market cycle and investor sentiment. The following report provides some insights

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In the last one year, against all the expectation and prediction, the equity market globally has witnessed one of the best run in years. The last time we saw such a phenomenal return from equity in India in a one year period was almost 11 years back in the years 2009 and 2010 just after the global financial crisis. The graph of rolling one year returns shows the one year rolling return of the Sensex since 1998. We see that only in four occasions in the last 23 years the equity market at a broader level has generated such higher returns.

The graph also highlights how after such a spectacular return the market tends to generate lower returns going ahead. For example, after generating annual return in excess of 100 per cent in 2009 and 2010, the return generated by the Sensex in 2011 and part of 2012 was negative.

The reason for such a negative return is that as the market moves vertically, many cases of speculative excess are built up. There is inundation of ideas from various social websites and investors are naive enough to act on them. It takes some time to clear this excess through time correction or price correction.