All is well in the equity markets – really? is it ?

All is well in the equity markets – really? is it ?

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Why do I follow Brexit?  Today’s 255 points jump in the Sensex I hope provides the answer.

One of the reasons our markets seem to be celebrating is because negotiations by UK Brexit Secretary David Davis with European Union will begin soon. What is it expecting to happen that its celebrating? I hope PM May has that answer.

The Indian market which shadows the global markets has also ignored every bad and not so bad event in its near uni-directional climb upwards.

Therefore, its not only Brexit I follow closely but many other such geopolitical events which have the ability to spark them self into a fire.

We in India, most grudgingly admit that, valuations are stretched in the hope that, earnings growth (which has been long expected) should help these valuations. The Nifty is back to almost the same level after 3 years and the 12 month trailing EPS has been in the vicinity 390 for the same length of time. The PSU banks are in a mess with NPAs above Rs 9 lakh crore but we continue to buy them in the hope that, the government will get them in better shape over the next 2 years.

Our markets are floating on hope.

Money seems to continue pouring in with retail investors being aggressively sold equity mutual funds and FIIs buying into Indian equity and debt.

Look at the orange line in the graph below which shows the spurt in the inflows into Indian mutual funds have escalated post Dec 2014.

On the other hand, our Nifty which was around 5,600 then is now at 9600 and is being screamed up to 10,000!

Our retail investors remain so true to their nature. One wonders if the older ones have forgotten how they burned in 2009 or is it that, our unscrupulous mutual fund salesmen have been able to locate an entirely new set of suckers for the equity story? Sorry no prizes for giving the right answer here.

It is that time when it becomes fashionable for TV anchors to ask “What could be the next “Black Swan”? Well by definition, it wouldn’t be a Black Swan if we knew, would it?

I would rather concentrate on evaluating risks which are emerging and take my investing decisions based on what I can see happening around me.

The Indian economy seems to be safely trudging along though, I don’t see any need for euphoria on our fundamentals and I am entirely on the RBI’s side when it says there is need to be cautious.

The risks are global and mainly geopolitical in nature. However, there are enough headwinds in India to keep our markets on tenterhooks.

The Brexit and its impact on the political and economic future of the EU, the Qatar mess and its impact on US dominance in the Middle East, the Iran and Saudi equation, the Russian play in Syria, the Greek debt really never went away, China pushing around, the North Korean angle and of course Mr Trump.

Markets are entirely liquidity driven despite which, neither the US Fed rate hike nor the RBI’s holding on to its rates seem to have any impact.

How long will this liquidity continue to slosh around markets is anyone’s guess. Especially when the US Fed is looking to reduce its balance sheet, the Japanese central bank and the ECB have already indicated that, their negative rates policy has not worked as well as they had expected and nearer home the NPAs have stifled our banks’ ability to grow credit and the GST may hold back our economy in the next 12 months.

What sort of an impact will the reversal in the monetary policies of these key Central Bank have in general and on cross border debt in emerging markets in particular?

Even the volatility indices have been napping for the past couple of months. An eerie peace prevails.

I believe retail investors should be wary of those pushing equity and equity oriented hybrid funds (popularly called Balanced Funds which have 65% in equity) and book profits to protect their gains and capital. It’s better to move into equity arbitrage funds and for those who have a higher capacity and appetite for risk, and wish to retain a foothold in equities, choose asset allocation funds which limit their equity exposure below 25% after you checked on tax implications.

Your savings from hard earned and taxed income should be protected by actively managed asset allocations. The market will surely present many more opportunities to get back into equity. You should consult your advisers but take your own decisions.

 In the meanwhile, I would leave the punting to the greedy because for me its time to be fearful. 

 


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5 Replies to “All is well in the equity markets – really? is it ?”

  1. Very well written to enable the real aam adhmi to read and grasp. Down to the ground realities explained clearly.

    1. Thanks Somi. The entire paid and motivated propaganda made under the guise of investor advise and education needs to be seen through by the retail investor. That its not working is evident from the fact that, even a decade after the financial crisis they pour money into equity funds when the market is peaking. I hope to write more and regularly on this. Please suggest any particular topics of interest.

  2. Thanks for a different thought and it is well written. We see ever increasing numbers in SIPs by retail investors pouring in money into equity schemes, what these retail investors should do? The challenge will be keeping them continue when markets fall. We need better financial planners who help investors based on Financial goals. In end goals are to be achieved for better life.

    1. Thanks Durgesh for taking the time to comment – taking a cue from what you say,I will begin writing on Personal Finance.
      As of now, it would suffice to say that, the SIP is NOT investment strategy & panacea as it made out to be – its nothing more than an investment mechanism. The accumulations remain exposed to market volatility and the need to protect our capital and gains continues.
      As for the financial planners/advisors – use them for getting information,obtain a formal plan from them but the call has to be ultimately yours because its your money and your future.
      I have no doubts that, when it comes to my hard earned and heavily taxed savings, I intend to stay conservative so that, I never lose my sleep over my investments.

  3. Rajan-your statemaent “when it comes to my hard earned & heavily taxed……..
    …….” is sensibly right approach. This helps me in getting a good night’s sleep!

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