Riding the wave: Navigating market cycles with strategic research
This article is authored by Mohit Mittal, Director of Investment Research, Acuity Knowledge Partners.
Market cycles determine investment decisions, economic analysis, policy formulation and overall financial planning, making them crucial elements in how the system is governed. Recognising and understanding these cycles provides valuable insights for individuals, businesses and policymakers to navigate the dynamic and ever-changing landscape of financial markets.
The significance of strategic research
Strategic research can help navigate the ups and downs of market cycles. For example, during the dot-com bubble and when it burst in the late 1990s and early 2000s, Warren Buffett avoided overvalued tech stocks and stuck to investment principles. His strategic research focused on company fundamentals and intrinsic value rather than on speculative growth; this paid off when tech stocks started plummeting.
Such examples help us understand market dynamics. Market cycles recur, and understanding what happened in the past and extrapolating it into factors that dominate the current environment would lay the groundwork for such understanding. For instance, the advent of technology would impact the market significantly. We have seen several unique market scenarios in the current market cycle. Although not a complete recession as that in the early 2000s or the ’90s, this could be a transitory one. In such a situation, conducting strategic research becomes paramount for predicting the next phase of the cycle.
Economic indicators and the overall economic performance – as suggested by GDP growth rates, inflation rates and particularly interest rates – are also important factors. For instance, during an economic downturn, a central bank may lower the interest rate to stimulate borrowing and spending while during an economic boom, it may raise the rate to prevent overheating.
Markets are generally said to be bull or bear – a bull market is generally associated with economic expansion while a bear market indicates economic contraction. In a bull market, it may be prudent to be cautious while in the troughs of a bear market, opportunities for value investing may arise.
Let’s look at the bull market after 2009. Investors who recognised signs of market recovery were able to capitalise on the longest bull market in history. Strategic research that focused on the effects of quantitative easing, improving corporate earnings and low-interest-rate environments helped investors identify growth opportunities.
Strategic research also helps in long-term planning by providing insights into the broader economic landscape. Companies can align their goals and objectives with anticipated market conditions, enabling more effective planning and decision-making. This long-term perspective helps organisations build resilience and sustainability, fostering adaptability to changing market dynamics. This also helps in asset allocation as different asset classes may perform differently at various points in the cycle.
Monitoring which sectors are rising while which are not performing well is crucial for keeping asset allocation in check. A well-diversified portfolio can help mitigate risks associated with the volatility of market cycles.
Besides research, one should also watch for corporate earnings, as they give a perspective on how the market is behaving. This would also give an idea of performance in the coming quarters, directly or indirectly impacting the overall economy. We saw this amid the pandemic when several sectors such as fintech, edtech and e-commerce benefited significantly while several others saw a dip. Many investors understood the shift in consumer behaviour at the right time and gained from the opportunities that opened up.
Role of technology
Big data analytics including data collection and data processing can help identify patterns and correlations that may not be clear through traditional analysis. Technology also helps in terms of the ability to alternative data sources, such as satellite imagery, credit card transactions and internet search trends, which can provide early signals of changes in market cycles, leading to more timely analysis.
Machine learning algorithms, now being integrated into every sphere, can also be trained on historical market data to predict market trends and cycles.
Many companies also conduct sentiment analysis; this indicates consumer behaviour, which has a strong impact on the market. For instance, consumer sentiment analysis of ESG considerations could show what consumers look for when purchasing a product, and a company could formulate strategies based on this. Sentiment analysis also shows how the market could act during and after elections.
Quantitative analysis has also proven to be accurate in predicting such cycles. It uses statistical models – including regression analysis, time-series analysis and econometrics – to identify historical market cycles and forecast cycles.
Back-testing is another proven method for understanding market cycles; it enables testing market-cycle theories against historical data to validate the effectiveness of strategies amid different market conditions.
For publicly traded companies, strategic research contributes to investor confidence. By demonstrating a comprehensive understanding of market cycles and outlining proactive strategies, businesses can instil trust and attract investments. Investors are more likely to support companies that exhibit strategic foresight and the ability to navigate different economic conditions.
Conclusion
Strategic research is indispensable for businesses seeking to thrive in dynamic market environments. By analysing market cycles, companies can anticipate trends, mitigate risks, allocate resources effectively, gain a competitive advantage, plan for the long term, understand customer behaviour and enhance investor confidence – all of which are critical components of sustained success in today's ever-changing business landscape.
Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.