Taking stock: Even as markets touch new high, bet on equities for superior returns

Written by Sandeep Singh | New Delhi | Updated: Jun 9 2014, 12:35pm hrs
Money trapIn a dramatic rebound, the average return of infrastructure schemes over the last three months jumped by 50 per cent thereby lifted the three-year compounded annual growth of the group of infra schemes to a reasonable 8.9 per cent.
If the entire mutual fund industry found it hard to come out with an explanation on the performance of their infrastructure funds that were the darling of their sales teams six years ago but have languished in performance ever since, they can now go to their investors with a broad smile and show them the fruits of their patience. In a dramatic rebound, the average return of infrastructure schemes over the last three months jumped by 50 per cent thereby lifted the three-year compounded annual growth of the group of infra schemes to a reasonable 8.9 per cent. Not only has it made up for the underperformance over the last few years, it has also re-established the fact that equities are a long-term play and investment in good companies with good business and assets may be down but not out.

A good example of the same is the equity performance over the last six years (July 2008 to June 2014) even when the equity markets faced huge volatility. While an investment of Rs 3,60,000 in Sensex, spread evenly across 72 months in the form of systematic investment plan, would have grown to Rs 5,52,543 now, the same monthly investment of Rs 5,000 over the last six years in a recurring deposit with a bank, earning a fixed 9 per cent per annum, would have grown to only Rs 4,70,342. So even in a period of highly volatility, equities have outperformed fixed interest returns by a significant margin.

With a sudden revival of investor sentiment both global and domestic ever since the opinion polls indicated a strong mandate for the BJP-led NDA, the Indian stock markets have witnessed an unprecedented surge thereby making up for the underperformance over the last few years. The Sensex at the Bombay Stock Exchange has jumped by 20 per cent over the last three months closing at an all time high of 25,396 on Friday.

The mutual fund industry which is a direct beneficiary of the rise in investor sentiment too benefitted and the industrys average assets under management for the month of May crossed the Rs 10 lakh crore milestone for the first time ever and stood at Rs 10,11,102 crore. While the major additional inflow continues to be in the income funds and liquid funds, the inflows into equity schemes too witnessed a revival.

With a turnaround in the overall sentiments in the economy, there has been a reversal in the retail investors interest as they are coming in big numbers towards mutual funds. We have seen significant flows in all segments including equities and we expect this to grow further, said Sundeep Sikka, Amfi chairman and CEO Reliance Mutual Fund. The inflow has been strong even in equities as the net inflow in equity schemes in the month of May stood at Rs 2,452 crore, the highest monthly net inflow since April 2011 when the net inflow for the month was Rs 4,809 crore.

Can this rise continue

Market participants look very optimistic about the future of equity investments and feel that while the short-term rally witnessed in the past may not continue in the same form, it is bound to do well over the next three years. Over the next three year period, the industrial production is expected to grow at a year on year growth of 10 per cent and interest rates too are expected to drop substantially and would be big positives for the earnings and markets, said S Naren, CIO, ICICI Prudential AMC.

Another argument that backs markets performance over the next three to five years is that while the markets are at an all time high, the valuations are not. The earnings trajectory is improving and the 8 per cent earnings CAGR of the sensex companies over the last six years is expected to double. Even though they are trading at all time high levels, markets are still trading at their long term average valuation of around 16 and there would be a re-rating if the earnings come in line, said Harsha Upadhyaya, CIO, Kotak Mutual Fund.

There may be a possibility that in the current rally the markets may have moved ahead of the economy and there may be a small correction, however, that is unlikely to have an impact on the three to five year horizon.

where will the gains be

A closer look into the market performance shows that while the large caps have gained, it is the mid cap and the small caps that stole the show. If the rally from 2005 to 2007 saw several small and mid cap companies becoming multi-baggers for investors and thereby becoming large companies, experts feel that the potential for such a phenomenon does exist over the next three to five years.

As of now, the rally has taken everyone along the good or bad, but that may not continue for long and there may be differentiation in stocks that continue the run and those that are left behind. If the economic recovery sustains, the momentum will continue but not all companies in a particular segment will do well and become a multi bagger. As of now people are positioning themselves in the market but after some time they will start differentiating between companies that are strong and have a higher potential to do well, said Upadhyaya.

Experts advise that investors must look to have some exposure to mid and small cap companies through mutual fund schemes that invest in them. Infrastructure and banking sectors are also expected to be strong themes.

Are retail investors in

It is a fact that net inflow in equity schemes for the month of May is the highest since that registered in April 2011, but that does not mean that retail equity investors are back in the market. While a lot of them are still wondering if they have missed the bus and are committing the mistake of waiting for a correction to enter the market, there are others who are still not convinced of putting their hard earned money into equitiesin a sense not yet convinced of the Indias long term growth story. While it may be worthy for them to refer to the example of how equities outperformed fixed returns even in the volatile period of last six years, they must also know that the Sensex has grown at a CAGR of 17.8 per cent over the last 10 years and therefore it is a good option for their savings meant for the long term.

Industry insiders say that the money flowing into the equity market is from investors who understand them and are already invested.

Retail investors must understand that markets at all time high does not mean it will not have a new high in future and one can only refer to the near past to take a lesson. While the Sensex crossed 22,000 almost 10 weeks ago in May to hit a new high then, it has since moved up by 15 per cent to close at 25,396 on Friday. Therefore, rather than waiting for a correction, get sensible and start your asset allocation.