Indian shares scaled record highs on Friday, with the benchmark S&P BSE Sensex topping the 60,000 level for the first time on the back of gains in tech and property stocks. The blue-chip NSE Nifty 50 index rose to hit a high of 17,947.65.
The world-beating stock rally is fueled by millions of first-time investors, willing to buy riskier assets as the central bankâ€™s record-low policy rates reduce returns from traditional saving avenues like bank deposits.
Given the massive gains in stocks in the past few months, investors are sitting on pretty awesome gains on equity investments. What should investors do now? Here are some scenarios for you to consider.
Diversify beyond equities
Since March 2020, when Covid brought stock markets to its knees, equities have surely edged up higher. Within a few months, the bulls were back in action. Momentum has been strong, barring a few moments.
Sandeep Bharadwaj, CEO, Retail, IIFL Securities, says: “Expectations of solid economic recovery and sustained growth in the next couple of years is keeping the bulls enthused. Also from global funds perspective, India remains an attractive destination, especially in the China+1 scenario.”
Having said that, Sandeep adds that retail investors must have a diversified portfolio at this stage to face any kind of volatility.
To put it simply, if you are sitting on good gains on your equity allocation of your total portfolio, you have to follow the principles of asset allocation. For example, if your original equity allocation was 60% and now its 75%, you have to bring it down to 60%. This means either you book profits on equity or allocate more to other assets like debt, gold, real estate etc.
Don’t forget that bulls point to an easing pandemic that could fuel even greater gains. New infections in India have held steady since July, with the bulk of cases coming from just two states. The pace of vaccinations has picked up, with almost 45% of people in the worldâ€™s second-most-populous country having received at least one dose and 15% fully vaccinated.
Don’t touch allocation
The truth is nobody knows when the bull run will end. When Sensex crossed 40,000 for the first time, many felt markets will crack. It didn’t. A pause or breather happened, but that’s about it. The story repeated when Sensex hit 50,000. And now, 60,000. Already there are many experts giving 1 lakh target for the Sensex.
If you belong to the camp of equity optimists, maybe the best thing now would be to not do anything. Just stay put.
According to Motilal Oswal, MD & CEO, Motilal Oswal Financial Services, the rally in domestic market is driven by positive global cues, strong inflows by FIIs/DIIs, good corporate earnings, falling Covid-19 cases, upbeat corporate commentaries and low cost of capital.
“Amid the buoyant sentiment and increased activity, valuations has reached elevated levels and demand consistent delivery on earnings expectations. Given rich valuations, one cannot ignore intermittent volatility â€“ however we expect the positive momentum to continue on the back of improving economic activity and recovery in corporate earnings,â€ Oswal points.
The prognosis seems that while markets may show small bouts of volatility, the trajectory will be up and up. If that is the case, booking profits would be limiting the upside. So, best would be to continue with regular investments in equity within your overall asset allocation framework and goals. Continue SIPs and avoid looking at market levels.
A diametrically opposite view is that it is time for investors to be really cautious about equity investments, especially higher-risk small-and-mid caps.
Says Anand James, Chief Market Strategist at Geojit Financial Services: “Sensex mounted the 60k mark as risk appetite improved after fears surrounding Evergrande debt crisis eased. BSE found almost 60% of the stocks advancing in the first hour. But we remain watchful of markets weighing in rate hike prospects as US treasury yields have begun to firm up, following Fed’s taper signals.”
Investors have to be more selective now, With key equity gauges trading above their long-term averages and Indian stocksâ€™ valuation reaching 1.3 times the countryâ€™s GDP, clearly caution is warranted. Historically, it is moments like these that precede euphoria and ultimately a crash.
Cautious investors will note that the Nifty is trading at close to 23 times its estimated 12-month earnings, well above its five-year average of about 18 times. This is also much higher than the MSCI Emerging Market Indexâ€™s multiple of 13.
UBS Group AGâ€™s wealth management arm is downgrading Indian equities to neutral from most preferred. It argued that the countryâ€™s fast macro and earnings recoveries are largely priced into the marketâ€™s very rich valuation.