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  • Writer's pictureTikona Capital

Howard Marks insights on the story behind surprises and market cycles

Updated: Mar 5



As an equity’s portfolio manager with over 20 years of expertise in the equity markets, I've seen various economic and financial cycles. However, the year 2023 has been especially impressive for financial markets, which have demonstrated resilience and growth in the face of global uncertainty and problems. While it intrigued many investors' curiosity, going back to the drawing board and learning from the wisdom of legends makes sense. Howard Marks, one of the world's most recognized investors and thinkers, wrote the book Mastering the Market Cycle, which can help us answer many of these dilemmas.



Marks is the co-founder and chairman of Oaktree Capital Management, a renowned global investment firm with over $180 bn in assets under management. He is also the author of the influential memos that he writes to his clients and the public, sharing his insights and wisdom on investing and the markets.


Economic Data and market surprises in a period of uncertainty!


While most experts predicted a recession in the US for the year 2023, economic growth has continued to surprise positively. This robust performance was driven by strong consumer spending, even amidst inflationary pressures. Similarly, US employment remained strong in 2023. Despite the economy's gradual layoffs, unemployment remains low. Citigroup Economic surprise index throughout the year 2023 has been in a positive territory with high readings.


During 2023 S&P 500, over 75% of the firms outperformed analyst forecasts for earnings per share in every quarter. The average profit surprise of ~7.5% occurred in Q3 2023 highest since Q4 2020. Similarly, the S&P 500 index ended 2023 higher than all forecasts by analysts for the year and is still rising despite forecasts of a near-term recession.


This situation confirms Marks' view that "government actions...can have significant, often unpredictable, consequences." It's possible that the stimulus, a two-edged sword, and rapid technological advancement are currently accelerating the US economy with unexpected intensity.


The India Story is going strong!


Observing India's GDP which continues to grow above projections. Expectations have been upgraded given the GDP growth for the last three quarters surpassed estimates. The nation's GDP is being driven by formalisation, manufacturing expansion, and investment growth. While the country is growing at the highest annual growth rates amongst major economies, the government's AMRITKAAL roadmaps to achieve a developed economy status is inspiring youth to pursue their passions and grow to be successful entrepreneurs.


In his book, Marks writes, "Market participants tend to underestimate the capacity of human adaptation." Companies and people may be succeeding despite challenges as they adapt to the new economic environment.


Analysts are upgrading performing companies with pleasant surprises. Target prices for stocks are being revised upwards, as well the nifty earnings are gradually getting upgraded despite challenges of inflation, geopolitical issues and higher than last year interest rates. Domestic flows are supporting any selling by the foreign investors. One key instrument is India's demographic dividend. With a young and skilled workforce, the country is well-positioned to capitalize on the benefits of globalization and technological advancements.


Marks highlights the importance of demographics, stating, "Changes in population…tend to have profound economic consequences." underscoring the significance of demographics. India has a clear advantage in attracting businesses and fostering economic growth due to its demographic advantage.


Wisdom from the legends on Navigating the Market Cycles


As Marks cautions, "Markets are like pendulums – they never stay at one extreme forever. Never let the recent past determine your expectations for the future." While the present data is encouraging, we must remember that markets are complex ecosystems, and unexpected developments can occur at any time. The current positive data doesn't mask the underlying risks of Elections, high interest rates, geopolitical tensions, and persistent supply chain disruptions.


However, amidst this unexpected harmony, Mark reminds us that "the market cycle is not about predicting the future; it's about understanding the probabilities involved. The ability to think for yourself and make your own decisions…is crucial for success in the markets."


In his book, Marks explains the concept and importance of cycles, which he defines as “the natural ebb and flow of anything that is influenced by human psychology and/or activities”. He argues that “cycles are inevitable and pervasive in the economy and the markets, and that they have a significant impact on the performance and behaviour of investors."


Be prepared for the unexpected. The only constant in the market is change. Let us not get swept away by the unanticipated overflow of economic surprises. Instead, let us take this opportunity to re-evaluate our portfolios, look for undervalued assets with long-term potential, and, most importantly, remain flexible and adaptable. By accepting the market's unpredictable character and adhering to basic risk management principles, we can ensure that our investment plans align with the constantly evolving economic environment, regardless of any unexpected surprises that may arise.


Looking Ahead


Marks also notes that "Secular changes in long-term economic cycles are hard to predict, and the correctness of forecasts of such changes is hard to assess." Instead, Marks suggests focusing on understanding the underlying forces and adapting your investment approach as the cycle unfolds, embracing flexibility over rigid predictions. The question in front of an Indian investors, how the convergence 3Ds of Demography, Digitalization, and Dhanda mindset in the forthcoming "AMRITKAAL" will presents a compelling opportunity to create the biggest wealth on this planet! Is this cycle of centuries rather than of decades? While Marks mentions “cycles tend to rhyme and repeat “, India was once 30% of the global GDP vs at 3.4% currently, will history repeat?



Sumit Poddar

Chief Investment Officer & Smallcase Portfolio Manager

Tikona Capital




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