Investing at 46,700 Sensex Levels!

We hope that this note finds everyone in good health and spirits. The events of 2020 have further re-emphasized the importance of health and staying safe.

On the investing side, what a year it has been so far?  It put it as a roller-coaster ride is a mild understatement.

“The Stock markets have the ability to make you feel like an idiot and a genius at the same time.”

Ben Carlson

In 2020 we have experienced this full cycle!

Right now, the Indian equity markets is at an all time high with the Sensex trading at 46,700 levels as we write this.  The natural question in everybody’s mind is what you should do now?

The Market Journey over the Medium term

Let’s take a step back and see what happened in the equity markets over the last 3 years.

• We have seen extreme polarization with top 15-20 stocks driving markets
• Markets have seen volatility like never before
• Mid and Small cap stocks fell sharply and has started to rebound now

The markets have moved up by about 35% in 3 years even after this recent sharp rally.  The SIP returns are in the range of 8 to 9%.  Instead of looking only at the last 6 months movement, if you see over the last 3 years, you will appreciate that the rally hasn’t been very sharp after all.

What is driving the markets now? 

• Flood of global liquidity – Foreign investors have pumped in more than Rs1 lakh crores in the months of November & December alone
• Covid vaccine and decreasing trend of new cases in India – The successful development and the expected rollout of the covid vaccine in 2021 is a huge positive for the markets. The declining case numbers also augurs well
• Improving corporate earnings –The Sept 20 quarter saw better than expected corporate earnings.  The markets are betting on a revival in the earnings.  The lower interest rate scenario will also help
• Sectors with reasonable valuations – There seems to be sector rotation taking place with money flowing into undervalued PSUs, Energy, Infra, Construction, Cement etc., thanks to the reasonable valuations

Should you sell Equity now?

The burning question in everyone’s mind now! Unfortunately there is no straight forward answer.  The answer would vary for each individual/family after looking at the following things:

• What is your Asset Allocation plan? – The key question to ask is how does your asset allocation look like? Are you overweight equities or underweight against your target. If your current equity allocation has exceeded your target allocation, then you can use this opportunity to rebalance
• When do you need money? – When do you need money to meet your financial goals? If you require it within the next 5 years, this is a good opportunity to reduce equity exposure.  But if you are investing for the long term goals, then it would make sense to stick to the journey.  Yes, it would be tempting to book profits and re-enter but very difficult to execute.
• Can you stomach the market falls? –If you feel extremely nervous during market falls, track markets every day of the week and get stressed about market falls (our behavior in March/April 20 would be a good barometer!), then this is a good time to do some rebalancing

What you should NOT do in the current market? 

• Stop your long-term investing plan – Do not get swayed by market forecasts by “experts” about market rise and falls. 2020 has again showed us the futility of such forecasts. Stick to your planned investments (monthly SIPs, yearly top ups) for the long-term goals
• Miss the chance for Portfolio clean up –The current scenario is a great time to clean up the portfolio and stick to a compact core portfolio.  Get rid of the duds in your portfolio
• Increase direct stock investing – Investors who have picked direct stocks post March 2020 have made big gains. Definitely hold on to quality companies for the long run, if you can continue to track their operational performance. Avoid over committing funds to direct stocks unless you have the necessary expertise and time
• Planning your retirement based on your current investment returns – Do not get carried away by the current returns and extrapolate it into the future

To recap, the Indian equity markets have rallied sharply in 2020 due to various fundamental and technical factors.  As we see, the equity investment journey will continue to be volatile.

It’s in phases like this the concept of asset allocation and investment horizon comes in and plays a major role.  It’s time to re-look at your asset allocation and make yourself comfortable with that.  If your equity allocation is above your comfort level, start trimming the equity allocation. Even after you partially exit, the markets may continue to go up.  Waiting at the sidelines after the exit at times becomes discomforting.  We have to learn to get comfortable with that.

The temptation to time the market, that is exiting exactly at the top and entering at the bottom is highly theoretical and almost impossible.  So, the one line answer to the key question on equities is “asset allocation” and your “investment horizon”.  Revisit them now.