Faith vs Logic
I firmly believe that faith is a better decision-making tool than logic. Faith lets you unconditionally accept or reject things. It makes it easier to believe or doubt the things you are thinking about – making the decision-making easier and faster. Logic, on the other hand, agitates the minds as it questions the beliefs and raises doubts. It often leads to protraction (and often prevention) of the decision-making. It is of course subjective opinion and could be challenged by logical thinkers. Regardless, my experience in life is that whether the decisions are right or wrong is only known in hindsight. There is little empirical evidence available to me, to prove beyond doubt that impulsive decisions are less or more effective than the decisions taken after applying deep logical thinking. So, I usually take the easier route to the decision making that saves me from thinking and
The context for mentioning this is a little complex. It is widely expected and accepted that the Federal Reserve of the US will soon embark on the path to accelerated rate hikes. For the record, the Fed policy rate remained at 0 to 0.25% from 2009 to 2016. It was gradually hiked to 2.5% between 2016 and 2019 and then sharply cut back to near zero during 2019-20. The analysts are scrambling to adjust their valuation models to accommodate a 2% to 2.25% hike in Fed policy rates in the next 12-15 months. The portfolio managers and investors are also struggling to reorient their investment strategy to be in sync with the new monetary policy regime.
As per the latest survey of global fund managers done by the investment strategy team of Bank of America Securities, a majority of the fund managers believe that central bank tightening remains the top risk for the global markets in 2022. Also, the “underweight on tech sector” is highest since 2006, even though the “long technology” is the most overcrowded trade. The fund managers are underweight assets that are vulnerable to interest rate hikes such as emerging markets, tech and bonds.
Fund managers also believe that inflation and asset bubbles are the other two top risks for markets in 2022.
I believe that analysts and fund managers are experts in the field of finance and usually have a strong understanding of economics, especially the impact of monetary & fiscal policies on businesses. They must therefore have strong reasons for their strategy and positioning, supported by logical reasoning and analysis. They must be using complex and elaborate algorithms and analysis tools for decision making, especially since their decisions involve the investors’ money held in trust by them.
However, from where I stand, they appear to be suffering from indecision, lack of conviction and agitated thought process.
With the benefit of hindsight, we know that the previous two Fed rate hikes have not been immediately negative for emerging markets. For example, during 2004-2008 Fed rate hikes (1% to over 5%) Sensex gained more than 200% (from 6000 to 20000). During 2016-2019 Fed hikes (from 0% to 2.5%) Sensex gained over 75% (from 24000 to 42000). Even the US equities had also gained materially during those periods. The market corrections happen much later and not necessarily due to rate hikes. Global market freeze post Lehman and lockdown due to Covid actually caused market corrections.
In particular, I would like to highlight the “bearish tech” stance due to Fed rate hikes.
I have strong faith in the digital transition of global trade and commerce. The significant rise in the digital intervention in common men’s life is inevitable. Technological evolution shall continue to impact every aspect of life and business for many years to come. The share of technology in all aspects of life – education, health, entertainment, relationships, trade, manufacturing, services, construction, management etc., shall continue to rise for the next many years. I, therefore, believe that technology is a good business to invest in for the next one decade at least.
I also believe it is highly inappropriate to classify online retailers and fintech companies, which are large consumers of IT services as technology companies. By this logic, Infosys must be classified as a real estate sector company and Indian Railways as a steel sector company.
I find that most of the global technology companies have net cash surplus on their balance sheets. Higher interest rates would normally mean higher treasury for these companies and higher dividends for shareholders.
Moreover, a higher cost of capital should normally encourage most businesses to invest more in technology to enhance productivity; implying higher business growth for IT services companies.
An investor who paints Infosys with the same brush & color as IT services consumers PayTM & Zomato; or highly indebted mobile phone manufacturers, because his algorithm classifies all these companies under the technology sector may end up making incorrect decisions. But, someone who has faith in the prospects of technology services may not face any dilemma in decision making.
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