Following a strong FII inflow of Rs 5,000 crore in the first week of February, the Sensex at the Bombay Stock Exchange rose by close to 5 per cent to trade at a new high and has crossed the 22,000 mark on Monday, forcing retail investors on the sidelines to think that the markets have become expensive now and to regret about the missed opportunity.
This is not the first time that the domestic retail investors have been left behind in a market rally except for those who continue with their disciplined approach of monthly investment in mutual funds. In fact, in the pre-election rally in 2009 when the markets rallied sharply by 70 per cent in the three-month period between March and May 2009, the quantum of FII inflow during that period stood at Rs 27,115 crore while that of the domestic institutional investors stood at a low of Rs 3,087 crore. The retail participation too lagged significantly in that period.
Even in the period between April 2005 and May 2006, when the Sensex rose by more than 100 per cent to cross 12,000, the domestic retail investors did not participate and failed to gain from it.
It is an irony and has been proven time and again that retail investors have been the last to capitalise on the rise in domestic equity markets and they end up entering at a high and are seen exiting from the markets in desperation when the markets are not going anywhere and they find themselves stuck with the investment.
A recently released report by HDFC Securities captures this retail behaviour and says, While the markets are at a new high, the investor confidence is not at a new high. On one hand, the market is making a new high and on the other hand investors are getting afraid of investing at higher levels.
While the markets did not generate much return for investors over the last few years on the back of several domestic and global factors slowdown in GDP growth, high fiscal and current account deficits, lack of investments and several scams taking a toll on the overall environment, global slowdown market experts, however, started anticipating a rise in markets in 2014 if the prospects of a growth-oriented government coming to power in the general elections strengthened.
In January, while speaking to The Indian Express, Harsha Upadhyaya, CIO-equity, Kotak Mahindra AMC said that even though the markets were trading at levels similar to those in January 2008 but in terms of valuations they were 35-40 per cent cheaper as the PE level in 2008 was then at around 25 as against that of 14 in January.
Even on market cap to GDP ratio which the FIIs look to compare among various markets, is at a 10-year low, said Upadhyaya.
The HDFC Securities report further says, If in the past six years, the markets have not gone anywhere. They will surely do in the next five years. Remember that you will always have to invest in uncertainty, no matter how long you wait.
Over the last four trading sessions the Indian markets have beaten all major markets in the world as they rose by 973 points or 4.6 per cent to close at 21,919.8 on Friday. As the election comes closer and with prospects of a pro-growth government coming to power getting brighter, the market is witnessing a revision in its valuations. But sadly, the retail investors sitting on the sidelines are again missing out on the rally.
Why this rally and will it sustain
Market experts are calling this is pre-election rally emanating from the fact that the market is now expecting one particular coalition getting closer towards forming the next government.
It is a pre-election boom and there is bullishness around a pro-growth government coming in, said S Naren, CIO, ICICI Prudential AMC.
There is also an expectation that this rally has the potential to sustain the momentum. Unless doubts start emerging on the prospects of formation of such a government, current market levels are likely to sustain, said Naren.
There are some who feel that the current market is also revising the valuations of sectors that were not doing well but are expected to outperform when high growth rate comes back in the economy.
In the last four trading session sectoral indices such as capital goods, oil & gas and power rose between 6 and 9 per cent only re-emphasises this fact.
So what should you buy now
Market experts suggest that it is the right time for retail investors to make a comeback. Investment in diversified mutual funds should be the way to go for retail investors. If you have not started investing, it is not advisable to wait for the markets to come down to start your investments, you should start with your monthly allocation and even go for a lump-sum investment in the market. Investors looking at direct equities as investment option may look at the infrastructure sector.
Over the next 5-7 years, infrastructure spend in the country is bound to rise, said Raamdeo Agrawal, Jt MD Motilal Oswal Financial Services.
Investors must, however, focus only on high quality stocks that have strong fundamentals, low levels of leverage, strong order books and a good promoter and management.