But tread carefully because the rally has been selective in nature. stick to your asset allocation and keep some liquidity
The Sensex has hit a 33-month high, scaling 20,500 this week. However, the euphoria seemed to be missing, as most participants, including domestic institutions, high net worth investors and retail investors have been out of the market. This was true even when markets were at lower levels.
The losses of 2008 are still fresh and many investors are expected to enter at the 21,000 or 22,000-index levels. People are still questioning whether the rally is for real but lets not forget, we are already at over 20,000-levels. This goes to show that more money is lost waiting for corrections than during corrections. At every correction, people wait some more, hoping for a bigger. Time in the market is far more important than timing the market, which is an impossible feat.
What’s different this time?
The rally this time has been different from the last one. Let’s take stock of things that are different. Besides the index levels, there are many structural differences in the current market as compared to that in 2007-2008.
Markets were leveraged in 2007 and 2008, whereas today the exposure to stock futures and Nifty futures are on the lower side. Additionally, even retail participation in the market was high the last time.Today, even the savvy market guru is either under-invested or out of the market. The fact is that most of the investments made by FIIs in recent months have been in exchange traded funds (ETFs). On the other hand, domestic mutual funds have seen a net outflow of Rs 7,000 crore in the past two months and flows from the life insurance industry have been very shallow.
| Rs crore Date |
FIIs investment in Equity market | ||
Oct 01, 2010
Oct 04, 2010
Oct 05, 2010
Oct 06, 2010
Oct 07, 2010
During 2007, all sectors and stocks moved up, whereas the current rally has been restricted to some sectors such as banking, auto, FMCG, pharma and IT. Some of the hot sectors of the last rally are still biting dust this time. For instance, real estate, infrastructure, power, telecom, oil, media and entertainment stocks. Even the typical bull market metals sector is down from its peak. Most real estate stocks are down by more than 65 per cent from their peaks.
Bellwether stocks such as Reliance Industries and Bharti are down by more than 30 per cent from their peaks of 2007. At the same time, stocks such as Tata Motors, Hero Honda, Infosys, TCS, Axis Bank, HDFC Bank, HUL, Dr Reddy’s and ITC have all made lifetime highs. This time, money has gone to sectors and stocks that have really demonstrated earnings growth and a potential for future growth.
Like now, even the last rally saw a number of initial public offer s(IPOs). Every IPO then was oversubscribed and there was a rush of paper hitting the primary market every week. Only a fraction of that is happening now. A number of IPOs such as Coal India and others, expected this month should reduce some liquidity in the market. However we are yet to reach the 2007-2008 level of IPO mania.
Then, people were borrowing to invest and making a quick buck and issues were crazily oversubscribed. Valuations were not even talked about then. The market was rife with stories about companies having land banks and so on which spurred more buying. This time there has been some focus on valuations and quite a number of issues have been decently priced. There is hardly any leverage to invest in IPOs.
In 2007, there was a lot of euphoria post the 16,000-levels, with people expecting the index to touch 25,000. This time, once we hit 16,000, most participants, except FIIs, were expecting 12,000 or lower Sensex levels.
What should you do?
It will depend on whether one is moderately invested or not invested at all. Depending on the time horizon of your goal (immediate or in the near future), book profits partially or fully. The point is that your goals and financial needs should drive your decisions.
At the same time, you should continue investing in a staggered manner when the market dips, putting in one-time amounts.You could also look at investing through systematic investment plans.
If you miss the best seven to 10 days of a bull market run, then your returns could be hampered significantly.
Additionally keep some level of liquidity that can be invested in case there is a 10 per cent correction. This again will depend on your asset allocation, your goals and overall financial situation. On the domestic front, there is still a lot of cash on the sidelines that seems to be ready to buying out the dips. If the market corrects five to ten per cent, most of the dips would be bought. However, if the market were to correct by 20 per cent or more, then we will see investors fleeing.
The writer is a certified financial planner
