Friends,
Apologies for the long silence (excluding the folks for whom it might have been a bliss) – Some investors even asked me if I had stopped writing Blogs. Income Tax Filing and GST Registration took a toll on my time – Need some excuse, right?
I have realized that starting a new habit like walking, running, swimming, meditation is easy. But, sustaining it for a long period of time is extremely difficult. I am telling this in the context of publishing blogs on a periodic basis rather than adhoc.
- ‘Invest cautiously through dynamic asset allocation funds’
- ‘Move from mid-caps to large cap’
- ‘Lower your return expectations’
- ‘Earnings continue to be muted’
- ‘Cash holding and arbitrage positions have increased’
- ‘Risk-Reward is unfavourable for Equities’
- ‘GDP growth takes a hit’
- ‘Foreign Money is chasing India’s Reform Story’
The above statements were made by key fund managers and analysts, both Indian and International, in the recent weeks. Has our reform story taken off or yet to take-off? Statements like price to earnings P/E is more than 10-year average; 1 to 15 is considered cheap, 16-20 is considered fair and greater than 20 is considered as expensive may not be relevant in the current context. Currently Nifty and Sensex are trading at close to 24 P/E. I would tend to argue that there are major changes to the investment pattern which will change the contour of equity investments and following are some of the points why I think so.
- Retail Investor participation in markets through MFs and ULIPs is at all time high with inflows increasing month over month. Equity MFs had an all-time high net-inflow of Rs. 21,875 Crores in Aug 2017. How was it before? Equity MFs had an all-time high net-inflow of Rs. 14,480 Crores in July 2017. This highlights the appetite of Indian Retail Investors which was not the case earlier.
- Other than MF Equity route, inflows are high from sources like National Pension Scheme, Provident Fund, ULIPs.
- The reason attributed to this heavy inflow is not that Investors have started embracing equity but also due to stagnant Real Estate Sector, Gold still struggling to cross 2012 levels and lowering of Bank/Post Office/Company Fixed deposit rates.
- Instead of yearly dividend payments which was the norm until a few years ago, Quarterly and Monthly dividends in Equity Funds are being paid to attract gullible investors.
- Some Wealth Management firms and independent practitioners, enticed by the volume and immediate benefits, invest huge lump-sums of their clients, running into crores, even in the current market.
- The argument of average 10-year Price Earning is something that I don’t subscribe as there will be demand-supply mismatches which inflates the PE of a good stocks with earnings visibility
So, as sensible investors, what is that we can do in this frenzied Bull Run:
- Investors who embark on direct equity in this period need to know that, during bull runs, even the worst of stocks do well. Warren Buffet, the Oracle of Omaha and considered as the god of equity investing quoted ‘Only when the tide goes out do you discover who’s been swimming naked’.
- Do not go for Lump-Sum investments and invest through systematic plans – SIP and STP – Almost all Chief Investment Officers and Fund Managers of Fund houses are unanimous with this message.
- Medium and Small Company stocks have become overvalued and the hit will be heavier during correction. Advice is to stick with Large Company Stocks or move allocation from Small and Mid to Large. This is also a unanimous message
- The Equity markets would have changed the asset allocation pattern – skewed towards Equity than Debt and this needs to be rebalanced.
- Cashing out of Equity, especially MFs, is not a good idea as it is extremely difficult to predict when the correction will happen and when the market will go back to the original high. I remember atleast 3 popular fund houses, that took cash calls during the 2008-9 global crisis and for a short period those funds were doing better as they contained losses. But the celebration for those funds was short lived as the markets turned around sharply, not allowing the funds to re-deploy the cash. Some of these funds are still languishing.
- Even if there is a 10 to 20% correction, the macro factors for India is good which will life the markets – Inflation down, GST Implementation, Current Account and Fiscal deficit, Government gaining due to low Crude Prices – The only reason to be cautious is if we get another shock like Demon. or Beef ban or unrest with neighbours
<Blog # PenguWIN 1055 – Equity Market Dynamics>