Article by Karan R Kapadia

Guess the most common question asked by investors?

Should I buy more equity or should now start selling out and exiting?

Here are some pointers why there is a clamour to get an answer to this question.

  • In FY08 Indian companies delivered an average profit of 7.8%. This has reduced sharply to 2.9% FY17E.
  • US interest rates are on the upward trajectory increasing the costs of borrowing in the US – capital moves to less risky assets such as bonds from more risky assets such as equities.
  • US 10 year Govt Bond yield is at an all time high reducing liquidity – less money available globally to spin around across markets including India.
  • Oil has crossed $75 per barrel and rising which increases pressure on India’s current account deficit.
  • Fixed deposit rates are on the upward swing shows signs that interest rates in India are more likely to rise.
  • India heads into an election year in 2019 – coalition politics, reduced mandate to a single party leading to uncertainty with respect to continuation of reforms.
  • The most common answer I have heard is“Never time the market. There is no right or wrong time.” While this holds true even today, I believe investing in equities requires a calibrated approach which means, accumulate when valuations are low, stay invested when the market is at fair value and book profits when the market shows signs of over valuation.” Confused? Let me explain.

    Through interactions with fund managers and industry experts, you will always get a “yes” or “invest for the long term” or both when investing in equities. The Equity Valuation Index developed by ICICI Prudential AMC is a simple representation to decode whether to invest, stay invested or book profits. What does this say:-

  • The black line is the valuation matrix based on intricate calculations across data points at different points of time from Apr05 – Apr18.
  • Green zoneindicates accumulation or investing phase across equity market caps.
  • Yellow indicates, continuing the accumulation in equities through SIPs or in asset allocation funds for example balanced funds.
  • The pink bar indicates continuing allocations with a focus on higher debt in the portfolio for example monthly income plans where debt accounts for>75% of the portfolio.
  • The red zone infers to booking profits in equities and holding higher levels of cash in the portfolio.
  • Indian market valuation is current in the pink zone.

    For Indian markets to come back into the Yellow &Green zone some of a the macros need to reverse:-

    1. US interest rates should come down. The first signal is when the Federal Reserve halts rate increases.
    2. The US 10 yearbond yield needs to reverse. There are many macro economic factors that will lead to this reversal with a signal once again from the Federal Reserve on easing of liquidity in the system.
    3. Oil (specifically for India) starts a reverse trajectory. This will ease inflationary pressures and improve the current account deficit. OPEC will give a signal when they announce an increase in production.
    4. A consensus by the end of 2018 on a single party winning the elections in 2019, hopefully the NDA so that they can continue the reform policies to attract foreign investors and assist domestic enterprise to grow.
    5. On the positive side we see that capacity utilization of Indian industry in 2017 was at 73%. During the period 2002-2007 capacity utilization was at an average of 76%. This was the time when economic conditions were favourable for industry to expand, such as low interest rates, low inflation and political stability. This gives me the belief that corporate earnings and profitability will converge should this continue with no break or reversal in policies and reforms.

      Next steps:-

      Q) Do I start booking profits?
      A) At this stage stay invested and increase allocations by continuing your SIPs rather than investing in a lumpsum.

      Q) Should I choose to allocate fresh funds where do you think I should invest?
      A) Asset allocation funds such as Balanced Funds, MIPs, Dynamic asset allocators. Use these funds that gives the flexibility to the fund manager to move across debt and equity within the fund itself based on fundamental attributes.

      Q) What about getting help to review my portfolio or start fresh?
      A) Call us and speak to our advisors. They will evaluate your portfolio and provide suggestions.

      Q) My neighbour believes increasing equity allocations is risky and hence has suggested I stay away?
      A) Ensure you get a professional to handle your money rather than going by what your neighbour or friend is doing with his.

      Finally, if markets remain at heightened levels of volatility, don’t panic….As John Templeton said:

      “Bull markets are borne on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is to sell.”


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