Investing in SAMVAT 2078 and Beyond an Investor’s Dilemma: Asset Allocation the Key

Investing in SAMVAT 2078 and Beyond an Investor’s Dilemma: Asset Allocation the Key

?Stay Invested, Book Profit or Invest Further the Biggest Question Investors are facing with Markets @ 60,000+.

?Stock markets do not move in a linear fashion. The Indian stock market has had a one way move from the lows of March 2020. A correction in the Indian market is imminent and rather healthy for the overall market and new investors will learn old lessons in their investment journey however the long-term prospects of the stock market and Indian economy are brighter than ever before.

?The Indian stock markets have had a dream run since March 2020. Nifty from the lows of 7500 is already trading at its lifetime highs and continue to inch higher. There has been a lot of investor interest in the Indian stock markets from local retail investors to Foreign Portfolio Investors (FPI). Large number of first-time investors have started investing and trading in the stock markets. With the markets at all-time high and this one way move since the last 18 months has resulted in huge wealth creation for lakhs of new investors that have invested in the stock markets.

?Earlier to this the stock market did not have a large amount of retail participation and were considered as a very risky avenue. With interest rates at all-time lows in India, thanks to the very supportive policy of the RBI which has helped most sectors recover has resulted in making bank FD the most preferred avenue for most retail investors very unattractive. An interest rate of 6% p.a. which is completely taxable as per the receptive income tax bracket thereby resulting in the effective return on investment being less than 5% p.a.; thereby making the Indian stock market an avenue for investment with no real alternative for most retail and small investors. Approximately 4 crore new Demat accounts have been opened in the last 18 months and millions of dollars of domestic savings have been driven to the stock markets. Financial assets as a percentage of overall savings in India is very low and of which amount invested in the stock market is even lower. Thereby this trend of retail savings being invested in the stock markets is here to stay and will only increase over a period of time. Thereby new incremental capital will keep flowing in adding to the liquidity of the stock markets.

?With this kind of run-up the Indian markets have witnessed in the last 18 months a correction in the Indian markets is rather healthy to keep the overall valuation at bay. A correction in the market is bound to happen; when and how much correction is rather impossible to predict. In overall terms corporate profits to GDP were at 8% to GDP in 2008 and fell to 3% to GDP in 2019/20. Hence with an earnings recovery and overall recovery in the broad economy, the corporate profits to GDP should get back to 8%. A correction in the Indian market may not be more than 7-10% overall in broad index terms and should be relatively short lived. The key is for first time investors to recognize this fact and position their overall portfolio accordingly and not panic when the correction does take place. The long-term prospects on the Indian economy is getting better and India is positioned better than ever before to grow at a robust pace resulting in overall economic growth and increase of overall per capita income.

?Some of the key reasons why the markets are going up and are vibrant in these turbulent times:

?·????????Low interest rates around the world and in India have resulted in investors looking at the stock market as a TINA (There Is No Alternative) factor, as the rates are too low for investors to look at fixed income and banks deposits.

?·????????Earnings come back which has been supported by huge pent-up demand due to the lockdown situation that has been present in most states around India; corporate earnings to GDP will get back around 8% in the coming year or so.

?·????????Huge direct inflow from retail investors continues, with record number of Demat accounts opened and internet penetration. Large part of the volume is driven by smart app which are very user friendly and help channelize the volumes in the market.

?·????????FPI continue to invest large amount of money into the Indian market. There has been a short-term pull back but overall, they continue to invest. FPI have invested in excess of USD 30 billion, highest inflow among emerging markets. The net portfolio investment has increased from USD 1.5 billion in 2019-2020 to USD 38 billion in 2020-2021; thereby clearly illustrating the large faith that foreign investors continue to have in the Indian economy.

?Some of the key concerns that investors should keep in mind that would lead to a market correction in the near to mid-term:

?·????????Inflation: With inflation rising around the world and in India, it will force the Central Banks to relook at the interest rates and increase the interest rates over time. Interest rates have been one of the most important factors for the flow of liquidity to the stock markets world over. However, the inflation witnessed at present is rather transitory mainly due to impact on the Chinese supply chain and markets hence would ease in the next few months. The inflation is mainly commodity inflation at large which will ease with rebalancing of the global supply chain.

?·????????Valuations: Sensex is trading at CY22 P/E 22X (EPS of INR 2,711) which is higher than the average one year forwarded P/E of 19X. Thereby at the present juncture making the Indian markets rather expensive in value terms. Investors should always look at valuation and not price, as Price is what you Pay and Value is what you Get.

?·????????Profit Booking: Profit booking and rotation of capital from capital market to other markets like real-estate. There has been a huge demand witnessed in the luxury real-estate markets around India as well.

?·????????Crude Prices: Rising oil prices, with crude inching towards USD 90 a barrel and petrol and diesel prices above INR 100 already, growth would be derailed.

?Investor should be prepared and position their portfolio for a possible correction in the Indian markets rather than panicking when the correction does take place. Ideally keep at least 30% of the portfolio in cash. It is always advisable to keep around 30% of the portfolio in cash, so that one can take advantage of market conditions and deploy the amount if a compelling opportunity presents itself. Hence majority of the professional investors would liquidate some part of their portfolio to keep liquidity at hand to either hedge the remaining portfolio or take advantage of a sudden crash.

?The overall corrections in the Indian markets will not be more than 7-10% at the index level and would be a rather short-lived correction which may last a couple of weeks to a couple of months but will not derail the growth in overall stock markets. With earnings catching up, SAMVAT 2078 to SAMVAT 2079 we could well be higher in the markets at an overall index level post the mild to medium correction that the markets will witness in the near term. The turbulent times for the Indian economy are well and truly over. Investors should deploy capital at every dip and stay invested in the long term as more wealth will be created in the Indian economy and stock markets in the next 10 years as compared to the last 75 years.

?_Farzan Ghadially.

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