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Polarised Markets? What does it mean?

The dominant trend in equity in 2019 has been the opposing move in stock prices within an index. Large cap indices for example have seen gains in prices of the top ten stocks, but losses for all others.

The term “polarised markets”, has been used many times to describe the trend seen in domestic equity markets throughout 2019. But what does it signify? Should it have any impact on your investment choices?

Explaining this trend

The idea behind including equity as part of your portfolio is to generate long term wealth or gains to support your life goals. However, commentary that defines the short-term trend can sometimes distract us from this path. 

As money chases a small handful of stocks, the term polarisation caught on. It means that the market and investors have made these few stocks the centre of their attention. 

The dominant trend in equity in 2019 has been the opposing move in stock prices within an index. Large cap indices for example have seen gains in prices of the top ten stocks, but losses for all others. However, the gains in these handful of stocks have been enough to cover up for the lack in the rest. In a sense, the market has shunned a group of stocks while at the same time, given more attention to another smaller group. 

As money chases a small handful of stocks, the term polarisation caught on. It means that the market and investors have made these few stocks the centre of their attention. 

Does it matter?

It does matter for those who invest looking at 6-12-month gains. For long term investors, who put their money to work for 5-7-10 years or more, there are likely to be several such trends that come by in the market. 

An equity mutual fund scheme has 40-60 different stocks in its portfolio. While the fund managers will take cognisance of trends in the market, it is unlikely that the entire portfolio will be framed by a single trend. Moreover, stock prices move on the basis of earnings generated by companies over a period of time. Market trends follow stock price behaviour rather than the other way. 

Which means if you try to chase a trend, most likely you will get in too late and with no clear indication of the outcome. A better approach is to remain with your overall asset allocation strategy rather than jump after each trend. 

Trends form not just in equity markets, but across assets too. For example, it may seem like the uptrend in gold prices has returned, but do you need to add gold in your portfolio now? Before deciding on your investment strategy merely based on a price trend, ask yourself what outcome do you seek? 

If the outcome is safety of capital, your choice of asset will be different than if the desired outcome is long term wealth creation

Hence, always focus on your reason for investing rather than the current market trend. 

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