Tips for investors in current market conditions
The stock markets touched the magical figures of 6,000 on the Nifty and 20,000 on the Sens*x last week. The mood this time around was one of caution with individual investors busy reducing their stock portfolios. The euphoria was missing due to the fear that the markets will come crashing down again.
The last time they were at 20,000 - sometime in December 2007 - individual investors we desperate to get in. Mutual funds were drawing net positive inflows of around Rs 3,000-5,000 crores from individual investors.
Today, at 20,000, there are net outflows everyday and the domestic financial institutions have net sell figures of Rs 3,000-5,000 crores on the negative side, indicating heavy withdrawals.
However, such caution and skepticism are healthy signs in a bull market. The Sens*x is valued at just 19 times the estimated earnings, compared with a high of about 24 times when the measure reached its record in January 2008. Even though the valuations are not cheap they are not too stretched either.
This has led to a reduction in margin of safety while purchasing stocks for investments. In this bull run, sectors such as banking, FMCG and auto that have led this market to 20,000 are trading at all-time highs.
These sectors form a very significant part of the index basket and as long as they continue to perform there is very little threat of a very sharp decline in the stock markets.
According to analysts, liquidity flows to India will continues as a part of 'new normal'. In the new normal, a sharply-polarised world with deflation or near deflation in the western world and a strong growth, albeit inflationary, in emerging markets exists, they say, where it becomes necessary to invest in the emerging markets to hedge against deflation.
This is also called deflation trade. There is some consensus among market participants that a fundamental rebalancing of the global economy is taking place from developed to emerging markets.
With the US Fed acknowledging the slowing of growth in the US, deflation hedging could become more prevalent. The second round of quantitative easing could also increase the liquidity surge to India.
One important takeaway from this year's market is that it has rewarded handsomely all companies that have performed well and has duly punished those that have slacked in earnings growth and performance.
The market has rewarded good performance, and more importantly, those who have respected their equity. Never have markets been so focused on performance metrics and paid such a good price for performance.
It was a dream year for analysts and stock-pickers to demonstrate their alphagenerating capabilities.