The strong gains by the Congress to grab the Centre with independent strength and the reaction by the markets on what is now known as ?Magical Monday? will go down in the annals of the stock market and the country?s history as well.
Suddenly, from a dismal scenario almost a month ago, things on the equity market and the economy look bright. Research reports coming from all quarters hail the re-rating of the Indian equity markets and announce a comeback of sorts. Fund managers and money market experts also bravely speak of a revival in the fortunes. ?Yes we have started getting increased enquiries for making equity investments again,? says Rajesh Saluja, CEO of ASK Investment Managers, one of the leading wealth management companies in India.
Exuberant
And, like in any scenario that depicts ?irrational exuberance?, this too could prompt many to start transferring their wealth in a hurry to catch the next bull rally. The question therefore is, is it a time to rush into equities? And the answer is not an unequivocal yes.
On closer scrutiny of the huge 17% gain on Monday, May 18, it can be seen that the surge was caused by two things. One, strong buying from the overseas investors who picked up (at a gross level) around $2.75 billion worth equities, on a net level too it was worth $1 billion in one whole day. The second was the huge short covering that got through. Data from the BSE suggests that high net worth clients had net sold equities worth Rs 3,800 crore on May 13, in anticipation of a fractured mandate and a subsequent fall in the market on Monday. There were huge short positions built up as well and they had to be covered. All this led to having more excessively more buyers in the market than sellers, rather none on Monday.
?Markets were undervalued and investors were underexposed in equities. With the favourable resolution of the election uncertainty, which was a prime concern, cash sitting on the sidelines is trying to get invested, resulting in investors trying to buy in short period of time,? said Prateek Agrawal , head ? equity investments , Bharti AXA Investment Managers.
So, a great deal of the movement was indeed exuberance driven. The reason for this exuberance was rooted in the election results. Analysts, both Indian and overseas have started re-rating the Indian equity market and many have started realigning their portfolios as well (see box House Views). The anticipation of more inflows coming in are strong as there are around a trillion dollar worth funds waiting to be invested and are searching for destinations. With the political uncertainty getting cleared for the next five years, more commitments can be expected.
Cut to reality
However, fundamentally, not much has changed. And many investors could well be expecting the markets to rally to new heights seen in January of 2008 when the Senex breached the 21,000 levels. ?Now, that could be expecting a bit too much. The markets needed a re-rating, they have been re-rated. From 10,000 levels they have now settled down at 13,500 to 14,000 levels already,? says a research head with a global investment bank. It is a clear 30% growth in valuations, and that is handsome already, he adds.
There are concerns on several fronts. While the large consensus is that the worst for corporate earnings is behind and that the current financial year would see growth returning to earlier levels, it would have to be laced with caution as it depends upon the impact of lower interest rates and the stimulus package petering through. The government will now have to start delivering on their promises and these have to be translated into visible developments. And once this starts happening, quality would be restored to the valuation story, say experts. This also remains one of the largest risks outlined by fund managers and equity strategists (see box: House views)
Analysts with Nomura Securities, while being excited by the elections results say, ?From the equity perspective, near-term valuations have become rich and the performance relative to other major Asian markets is now decidedly superior. Given low fiscal headroom and the global slowdown, any sudden acceleration in growth on account of policy is unlikely. We advise caution at present levels.?
Hence, for retail investors, and not traders, it is a time to be ?optimistically cautious?.
Clearly, this is also not a time to sit on the fence and see the market grow past. Also, it is not a time to throw caution to the wind. The next stop for political development is the announcement of the Union Budget in the next few days. The announcement will throw more light on the direction that the government intends to take and the key beneficiaries.
The approach
?Don?t abandon your financial plan or your wealth management plan at the moment,? says Hiten Shah a financial planner. ?You could start allocating some extra amount of the cash reserve that you had to start picking stocks. And when the signal becomes clearer, start increasing the allocations,? Shah adds.
For those who have met their growth targets, you could either book profits and reallocate somewhere else or, if you think there is further scope of profit growth, you could set your current holdings as the acquisition price and then create a new target from here on. The latter is a better option as it does not destruct your financial plan. ?The biggest mistake people do is abandon their financial plan during both the sides of the market, either when the markets are tanking or when they start rallying hard,? Shah concludes.
?Another strategy would be to buy into the index through index funds and wait for the market to unfold and grow with it without having to bother to build a portfolio? says a senior fund manager.
Also it would be a good time to re-look at the areas where there could be maximum benefits.
The areas
And there are several areas that crop up. Firstly, any move to plug the fiscal deficit will send out strong signals to the global community and would attract more funds. The only thing that analysts are wary about is that if the government starts disinvesting aggressively, then the increasing supply of such avenues could divert funds from the secondary market. Analysts at Bank of America Merrill Lynch see this as a major reason to cap a rally on the secondary markets.
Increasing in the foreign direct investment (FDI) norms in the insurance and retail sector could help existing companies like ICICI Bank, Aditya Birla Nuvo and HDFC to gain from generating additional funds, expanding their businesses and thereby profitability as the insurance sector does offer a tremendous potential from growth.
Reforms and increased spending is the most obvious direction the government will have to take to spur growth. And this is one area that has seen the real estate companies and the capital goods companies rally ahead of expected announcements.
But banking sector reforms will be most looked after as they would tend to be radical in nature and set the tone for banks to influence growth further. Here, analysts are looking out for relaxation in government holding in public sector banks from the current 51% level to 33% levels. Allowing certain non banking financial services companies more leeway or even getting them converted into banks through acquisitions. Lastly, increasing the FII investment limit in banks from the 20% levels. Others reforms like labour reforms and strategic sales of government stakes will also add to the movement.
At the same point in time, it would be prudent to watch out for companies that lose out to the rupee appreciation. All these reforms would be aimed at increasing capital inflows and these would then have a direct impact on companies that stand to lose out. Like the ones in the IT sector whose fortunes are impacted by the rupee fluctuation.
Keeping this in mind, several fund managers have already started realigning their portfolios. The focus is now on high beta or aggressive companies. A statistical measure the beta is used to find out how aggressive or defensive a companies? stock performance is. A beta or more than one indicates that the stock is aggressive when compared with the market indices. Usually, companies with stable earnings have a lower beta factor.
Sectors like fast moving consumer goods and pharmaceutical companies also tend to have a lower beta and are seen as defensive picks, something to be chosen when growth rates slow down.
These are the pointers that the analysts are throwing up. And while you would take informed decisions based on these recommendations, it would also be a good time to recheck your fixed income portfolios. Already several good companies are offering attractive yields on their fixed deposits. And, with the liquidity crises looking to ease, these rates would also follow suit. For some wanting to lock in at yields of around 11.5%, this could be a great opportunity.
Speaking of opportunities, the way things are going, it seems there would not be a dearth of them.