Navneet Sharma
With Indian Stock Market hovering around all time high figures of 21300+ Nifty and BSE Sensex at 71000+, every single day all the Investment Advisors, Mutual Fund Distributors and other related specialists are encountering these questions from desperate investors.
Markets are so high, should we sell?
It has grown so fast, will it fall at the same rate?
What If, I do not book profit now?
Mid and small cap stocks has grown faster than large cap stocks, is this rally sustainable?
The answer to all these questions can be found by doing your own introspection by asking yourself. ‘Why did you enter the market?If you entered for short term gain.Then market has moved almost 10-15% in 2 months. Please book some profit.
Or else, do you need money in next 1-3 years for some urgent life goal? Then do book profit and keep that money in fixed return assets.
But if your purpose of entering into the market has been to create wealth for your medium and long term goals and for passing it on to the next generation then the block buster movie has just started for you. For them, the rally has just begun and will continue for another 20-30 years. Why, I am saying so,is being explained in detail below with facts and figures related to the economic and geo- political developments which have taken shape in last few years.
a) Indian corporate are delivering highest ever corporate profits in recent times.
b) Dividends of Structural Reforms have started paying off.
c) Highest ever domestic inflow of funds on regular basis
d) Foreign Investors undergoing the FOMO Effect (Fear of Missing Out) and have re-entered with a bang.
e) Huge Opportunities created for India Incorporated out of international turmoil.
a) Highest ever corporate profits:
Indian corporate sector is showing highest ever profits in history in absolute terms. Corporate Profits to GDP ratio currently is almost 5%+and is one of the highest in the history of modern India. Further, one ofthe important parameter called Price to Earnings Ratio (P/E ratio) related to stock market valuation is giving lot of comfort in terms of margin of safety. The current PE Ratio of Nifty50 is 22.36 which is almost 16% less that the 5 year average of 26.06 and almost 10% lower than the 10 year average of 25. This confirms that even if we reach to average PE ratio to current profits we still have room upto 24000-25000 nifty or 75000+ Sensex
b) Dividends of Structural Reforms
The structural reforms which have happened in last 20 years and more so in last 10 years have settled down now and have started paying structural dividends in terms of increased productivity, transparency, reduced wastage, innovation, idea generation and so on so forth. The major ones are GST, Bank and Financial Sector Reforms, Digitization, Direct Bank Transfer, Productivity Linked Incentive Schemes for different sectors, Favorable Startup Environment and above all the governments’ focus on Self Reliance (AtamNirbhar Bharat) and above all booming defense sector. We have become 2nd largest manufacturer of mobile phones. Big players like Apple has shifted manufacturing base here in India. Almost all the major automobile manufacturers of the world have manufacturing bases in India now. Even players like TESLA are just sitting on the fence and knocking the doors. We are just on the brink of manufacturing our own Fighter Planes and who knows we might become manufacturer of Passenger Planes also in short time. Indian railway network is moving towards zero waiting list situation and addition of huge numbers of new trains.
c) Highest ever domestic inflows on regular basis:
The monthly investment by small / retail investors in mutual funds (called SIP book – Systematic Investment Plan) has crossed Rs 17000 crores per month and cumulative Mutual Fund AUM ( Assets under Management means total portfolio) is Rs 49 trillion ( Rs 49 lac crores). These retail investors as a group are not only very intelligent and patient but are also providing lot of stability to the market by buying every decent fall or correction in market which has happened in last 2-3 years. The participation of retail investors in equity market has come as a major shot in the armory of Indian Corporate sector which is providing them risk capital to invest in capital expansion thereby taking the sector to next level in the world market.
d) Foreign Investors feeling FOMO ( Fear of Missing Out) effect:
Foreign Institutional Investors (FIIs) who were historically very skeptical while investing in India and were notorious of flying away at first opportunity whenever there was even a small correction. Now with so many structural reforms delivering rich dividends and with presence of strong domestic investors lobby, every decent fall in last 2-3 years has been bought confidently by domestic players which in turn was supported by retail investors. Due to this the FIIs are feeling that they might have missed the rally of last 2 years and are thus now showing some kind of desperation in entering the market at any price. Net investment of these FIIs in first 15 days of Dec2023 is Rs 29000 crores approximately.
e) Opportunities created out of international turmoil:
The whole world has witnessed huge turmoil in last 4 years in almost all the areas which touch human life as well as economics of all humans together. While challenges like COVID19 threatened almost the whole world not only medically but also threatened various economies to move into recession. On the other hand the challenges like Ukraine – Russia war although had limited impact on human lives but did have a large impact on economies of the world. So did the challenge from Israel- Hamas conflict. But the smart way with which Indian Government handled the COVID threat and then the Ukraine – Russia conflict; it placed us as a country at rather sweeter spot to grab the opportunities created out of these threats. The whole world’s supply chain arrangements are changing and India is being seen as one major location which can become an alternative to China as manufacturing hub for the whole world.
The above mentioned facts clearly indicate, that we are witnessing a golden period of Indian economy provided we continue with a stable political environment. Even if there is any change in political regime then the new regime should come with clear majority and should not do much tinkering with the continuing policy framework. If this happens ( which looks really possible with recent election results of 3 states), then India can easily witness an average GDP growth of 5-6% in next 10 years. If we add an inflation of 5-6% to it than a nominal growth of 10-12% in practically possible in corporate sector.Common citizen or retail investor can only get benefit of this golden period if he/she confidently participate in equity market (through mutual fund or direct equity as per their comfort) and stay invested for longer period.
So coming back to the questions by retail investors discussed in the beginning of this article,my suggestions are as follows…
a) The profit booking should be only because of 2 reasons….
1) Your life goal is falling within next 3 years, so you book profit on that amount only and invest in fixed income.
2) Or your pre-decided Asset Allocation Ratio is breaching and heavily skewed towards Equity, then you should book only that amount from equity with which your ratio comes back to the pre-decided level.
b) Otherwise, if your horizon is of more than 5 years, then continue with your investments.
c) Use the Systematic Investment Plan (SIP) route for new investments.
d) Maintain your Asset- Allocation ratio.
e) For all those who are less than 50 years of age, and have zero or less than 20% of their investible funds in equity ( through Mutual Funds or Direct Equity), they are really missing out on a huge opportunity which is available to all Indians at current times. They are rather doing an injustice to their coming generations.
So in nutshell, enjoy the rally, invest confidently, do take help of specialists if you are not an expert and above all believe that India’s future is very bright and along with India, Indians’ future is also very bright.
(The author is a Management and Financial Services Consultant)
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