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Posted by: Uma Shashikant on Wed, Sep 22nd, 2010

Worries at 20,000

Amidst the celebration of the new high at the equity markets, I am somewhat worried. For an inveterate optimist who believes there are always good stocks to be found in the Indian markets, the worry is strange but strong.  Here are the four reasons why I have pared down my equity exposure and am unwilling to participate in the "rally".

 

  1. When the markets are driven completely by liquidity and momentum, the 'greater fool theory' prevails. Those who buy are fully aware that the price they are paying is high, but are fondly hoping to sell it off to someone else at a higher price. History has enough instances of markets collapsing under their own weight when the 'greater fool theory' prevails.
  2. When the stories bandied about to justify the market level turn macro and broad brush, it means that there is little new information on the ground.  If the reasons to buy now are about India’s economy booming, our businesses beating the world and our consumers being different, I will discount all of these as old stories and generalizations. There is nothing new that we have discovered about why markets should move up, but we are only justifying why the price is still right.
  3. When we suddenly get smug about the rest of the world and bring back the ‘ de-coupling ’ idea, I get skeptical.  If the rally is being driven by inflows from foreign investors, the risk of the market falling when there is a global risk event, only goes up.  Global economic indicators still do not point to sustained recovery for most developed markets.  If international investors seek Indian markets at these levels, a simple change in risk aversion will alter their view dramatically.
  4. When macro and micro fundamentals still remain somewhat weak, it is time to be cautious, not exuberant. The current account deficit is at a record high; the fiscal deficit is unlikely to be lower despite the 3G auctions; credit growth is yet to pick up; inflation is still high, though it may have peaked; corporate profits are not on a firm high, with many businesses still recovering; interest and employee costs have moved up too much too soon; and the high GDP growth has not percolated as broadly as we would have liked.

While the India story is quite a plausible one and while the long term case for equity remains, the momentum in the markets seems to have weak roots.  If we think that value in the market is being seen by the FIIs and therefore we need to follow ‘smart money’ by participating, we may be doing it at a very high cost to our long term wealth.

 

Anyone who sticks their neck out to worry about the market at these levels, runs the risk of being left behind by the euphoria.  The market may mock such caution and keep running ahead before it corrects under its own weight. It is therefore common to suggest that abused oxymoron - be cautiously optimistic!  I would give up a part of the frenzied rally to stay on the sidelines, with money in the short term debt funds.  I would like to see something more than just FII money  and momentum to become overweight equity again.

Uma Shashikant on Mon, Sep 27th, 2010 9:11:10 am

It is always tough to predict the future course of the market. The risk I am highlighting is one of aligning the portfolio to such a future predicted direction, based on a recent surge. Our action point always rests in our portfolio and holding back the temptation to overweight equity is important. As several have pointed out in their comments, sticking to the strategic allocation might be the best thing to do. I have moved one step ahead to be underweight equity. I am not looking out for a market crash, either :)

Rajalakshmi Rajesh on Fri, Sep 24th, 2010 9:18:29 am

Comments from one of my clients Dr.G.Mugundhan While everyone agrees that the surge is liquidity driven, it is a little dissimilar to 2008: 1) Lower P/E 2) Almost a 2.5 year time lag for the Sensex to claw up to 20k 3) Increase in productivity of Indian businesses during this period. A correction may be round the corner, but not a crash.

Rajalakshmi Rajesh on Fri, Sep 24th, 2010 9:16:00 am

Comments from one of my friends, S.Ilango, SRF Ltd. I fully agree with the author. Additional points are, Markets are never rational; they over react on either side .Pl go back to "Mr.Market" principle. Now Mr.Market is very buoyant and optimistic and hence he demands more money for any stock Also we need to look at the fundamental principle "Risk-Reward" ratio. Now the "risk" of investing in this market outweighs the "rewards". As long as FII pour money, the markets can scale new highs, but to that extent the risk keeps increasing. According to Benjamin Graham ,investing means , protections of capital and earning reasonable returns. How can PE of 22+ be justified? (GDP -8.5 + Inflation 9 ,total 17.5 , much lower than PE of 22)

KUMARRS on Thu, Sep 23rd, 2010 4:02:15 pm

The thing is that, market is touch new high on every trading is not the issue. it is breaking the circuits without any drastic changes in the fundamentals of the economy or the company.

Barjesh Singhal on Thu, Sep 23rd, 2010 3:39:16 pm

I feel that the main contributor to the manupulation in the stock market in the present scenario is Futures & Options. My point is why futures??? What is the need of futures??? Is this contributing the nation in any way??? In case we stop futures & options,the ills in the market will be curbed to the greater extent.

sanjay on Thu, Sep 23rd, 2010 2:22:57 pm

Yes. Absolutely right Uma. But why is one seeing only the Sensex and Nifty reaching the highs of 2008?. What about the Midcap Index crossing 8000?. If I am not wrong Midcap Index was at 2000 in 2008. Which means Midcap index has returned 4 times. So one should exercise caution and re-aline his asset allocation. But Uma as you know if are looking at 5 to 10 years I guess there is nothing to worry. But whom am I to say this I am not the expert. Your thoughts are perfectly laid out.

Balaji Vaidyanathan on Thu, Sep 23rd, 2010 1:03:46 pm

Interesting thought on this Uma. I feel that while the Sensex is touching new highs almost daily, what makes the rally different this time around is the lowered participation of domestic participants especially MFs, LICs and most importantly, the average retail investor. Particularly, the last segment is more or less staying away from the markets and is content watching from the sidelines. A lot are even exiting using this opportunity as profit booking / recouping losses from the last time. The buzz on the market is visibly missing this time guess people have burnt their fingers the last time around and are more cautious this time around.

sunil on Thu, Sep 23rd, 2010 10:43:50 am

I certainly agree with abhishek bansal .. just stick to ur goals in a discplined manner as no one can predict when there cud be a correction ,in case u want to book profit jus go ahead don't be greedy if u believe in long term then stay inn. yhanx .

SUMITRA SWAIN on Thu, Sep 23rd, 2010 12:28:37 am

agree with ur comments

KARUNANITHI on Wed, Sep 22nd, 2010 11:32:58 pm

WHEN THE INDIA GROWTH STORY IS FOR REAL, AND GROWING FASTER THAN CHINA THE OTHER MAJOR EMERGING ECONOMY, WHY THE SENSEX SHOULD NOT MOVE TO HIGHER REGION. AGRICULTURE PRODUCE PLAYS A VITAL ROLE IN GDP. WITH THE HELP OF ABOVE NORMAL MONSOON GDP PREDITCTIONS WILL BE ACHIEVABLE. IN THIS CASE WHY THIS KIND OF DESPAIR SHOULD BE CIRCULATED. IT WILL FUEL OTHER INVESTORS TO GO FOR SALE AND THE MORE SELLERS MAKES THE BUYERS TO VANISH.

Uma Shashikant on Wed, Sep 22nd, 2010 8:33:41 pm

If only we can predict the markets, we would not be pursuing any other profession for a living! I seriously do not know if and when the market will correct, but I am worried that the rally is weak on fundamentals, as i currently understand them. All rallies are fueled by liquidity and FIIs have been the providers of liquidity in a long while. When new highs are on the cover pages of newspapers, small investors wring their hands in despair and may worry about having missed out on something. Their urge to participate moves up with the high decibel celebration of market highs. That is really the worry. The highlighting of risks to them is perhaps paramount.

Ranjan on Wed, Sep 22nd, 2010 8:14:08 pm

Yeah what you said is absolutely correct...even in one of the article I read that recovery from recession would be "W" shaped. That means whatever we are witnessing is just a start of another recession..because still the US economy has not recovered from the sub-prime crisis.

Ashfaque Kazi on Wed, Sep 22nd, 2010 7:55:19 pm

I completely endorse your thoughts. What worries me is the speed at which the market has moved up. The "Goras" have diverted nearly $3 billion into Indian equities in September, taking the net inflow to $15.8 billion in 2010. The BSE index is up more than 14 percent in the year to date. Retail investors who think they have missed out on the rally are rushing in,some still waiting on the fence and almost majority sitting and gasping.

Sanjeev on Wed, Sep 22nd, 2010 6:47:44 pm

While it is true that this rally has been fueled by strong FII's inflows but it is worth noting that it has taken 32 months for the Sensex to come close to its previous high. Sensex PE in Jan'08 was @27 and is now @20 for FY 10-11 earnings. It would be prudent for the investors to follow asset allocation approach rather than look at the index levels. Some so called smart investors are feeling left out of entire rally since March'09 since they were extremely skeptical or surrounded by pessimism. Where the market will head from here is difficult call to make, so it is advisable to take exposure in the market in a systematic manner for someone who is looking invest at current levels.

Srinivasan R on Wed, Sep 22nd, 2010 6:29:51 pm

Ms Uma U are right. I had an seasoned investor with 50 plus years of investing!!, tell - "Srinivasan, Exit the market, when your milk man starts talking about the market" - Sure he DID !! Srinivasan R Trekone Consulting Group Trekone , Peoplepoint (Integrated Outsourcing, Staffing, Training Service Providers for SERVICE Industry) 304-18|1st Floor|Vasavi Towers|714-716| Raja Street|Coimbatore-641001.

anil nair on Wed, Sep 22nd, 2010 5:57:05 pm

I would want to protect my appreciation on my investments by pulls out the profits and re-deploy the same over a period of time (6-12 months) since i don't believe in tweaking the asset allocation. Yes PEs in excess of 23-24 is definitely alarming and raises eyebrows for more than one reason.

Abhishek Bansal on Wed, Sep 22nd, 2010 5:44:18 pm

A question for everyone.... Can anybody predict the market movement? In my view, no one. Nobody can actually tell when will the correction start, what will be the extent of decline? And same is the case with market rally. I think, one should keep in mind prospects for growth available with Indian economy. Be it Infrastructural development, Health services reforms, Banking reforms, Energy sector reforms - slowly but surely India will emerge as a world leader. My simple advice - Identify your goals & stick to the habit of Disciplined investment using asset allocation principle. That will be the apt way to deal with volatility & uncertainity in the markets.

Shalini on Wed, Sep 22nd, 2010 5:40:07 pm

totally agreee...am also asking clients to pare down equity exposure

arvind on Wed, Sep 22nd, 2010 4:02:29 pm

Sensible & lucid advice,thanks Uma....I'm reaching for redemption slip to book profits :)

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