The other day while taking the webinar on personal financial management, one of the Officers asked me, Sir, “What is the biggest risk in the market today?” I thought for a second and replied, the biggest risk in the market today is exiting the market too soon.
Stock markets all over the world have been doing exceptionally well over the last one and a half years or so and Indian markets are no exception. BSE Sensex recovered from its low of 25000 made in Mar last year to 62250 in Oct this year, thus giving whopping returns of 149% in a span of one and a half years. NSE Nifty too rose from lows of 7500 to recent highs of 18200.
This ferocity of recovery in the stock markets has left many people in a state of disbelief and many of us have started taking the prudent and conservative approach on our investments by booking out on the profits. I think the biggest mistake we will make now is to take out our cash and sit on the sidelines expecting markets to correct quite significantly. Markets seldom fall because of the known risks, be it a tightening by the US Fed/expected rise in the interest rates or the inflation. Markets fall because of unknown risks like the unexpected outbreak of Corona during January last year. There is no unknown risk which I can think of now.
Short term corrections are part and parcel of the markets, and such corrections are healthy for the overall good of the markets. The present ongoing correction in the market may last for a few days/weeks but are not going to be durable corrections. Infact, such corrections are a big opportunity to invest more. We are in a strong bull market and this trend is likely to continue for a long time. Indian markets have underperformed for a long period of 13 years since making a high of 6100 on Nifty in January 2008, giving 5.35% CAGR, much lesser than bank FD. Despite massive gains during the last 18 months, Nifty has only given 8% of CAGR since 2008, much less than the long term averages of 14%. A long way to go indeed…
Let’s analyse a few of the economic factors which are going to fuel Indian stock markets in the times to come:
- Recovery in the Earnings Growth of Corporate India. Almost after a decade, Indian companies have started showing better earnings from the last two quarters. The share of corporate profits in our GDP today stands at approx 2.1% whereas during the peak of the previous bull run from 2003-2008, it was around 8%. India is on the cusp of a long term corporate earnings recovery cycle.
- Investment in the Private Sector aided by PLI. Private sector investments are getting a major boost, primarily because of recently announced incentives by the Government of India in the form of production linked investments(PLI), full capacity utilisation due to massive increase in consumer demand, prevailing low interest rates, and deleveraged balance sheets of corporate India.
- Boost to creating National Infrastructure. The National Infrastructure Pipeline (NIP) for FY 2019-25 is a first-of-its-kind, whole-of-government exercise to provide world-class infrastructure to all of us and improve our quality of life. Under this theme, a total of 2482 infrastructure projects are already under development at a total outlay of $1966.21 billion. This massive spending by the Government would not only create many million jobs for the youth but will also contribute towards GDP significantly.
- GDP Growth. From a $15 billion economy at the time of independence in 1947, we have now become almost a $ 3 trillion economy and expected to reach a $ 10 trillion dollar economy by 2030. To achieve this feat, we need to grow @ 12.5% in nominal GDP terms (7-8% of real GDP growth and 4-5% of inflation) for the next ten years. Indian real GDP is expected to grow at the rate of 9.5% during the current financial year as expected by RBI and 8.5% as announced by IMF. India is the fastest growing economy in the world today.
- Speedy Policy Implementation by the Government. Major reforms (like Demonetisation, GST, etc) undertaken by the government of India during the last 5-6 years have started showing positive results towards the overall Indian economy. Welfare measures by the Government now can directly reach the beneficiaries thus saving huge amounts of money on leakages (courtesy opening of 30 crores of Jan Dhan bank accounts during demonetisation). Any policy decision can be implemented in a very short time frame by the Government due to linking of bank accounts with PAN, 100 crores of AADHAR and 100 crores plus of mobile connections, the recent example being the corona vaccination to 100 crores of people in less than six months.
- China + Factor. Ever since the outbreak of Coronavirus in January last year, there is a growing consensus in the world to reduce dependency on China and have an alternative supply chain. With our vibrant democracy and demography in place, India is a preferred place to establish an alternate supply chain to China. With corporate taxation reduced to almost the best in the world during Sep 2019, and now with the additional incentives in the form of PLI, we are almost certain to capture the world’s best manufacturing facilities getting created in our country in the times to come.
Consumption Boost. With the rising per capita income, there is going to be a massive boost in discretionary consumption, especially in rural India. There is a large scope for spending on these discretionary items as shown by the following data
- The biggest risk in the market today is to book out on your profits too soon. Remain invested in good quality businesses and good quality equity mutual funds.
- Maintain your asset allocation. Generally, with such massive gains in the stock markets, asset allocation needs a relook and rebalancing.
- Always invest keeping in mind your financial goals. If the goals have been achieved, book out from the equity funds and re-deploy this money in fixed income assets.
- Invest through Systematic Investment Plans(SIPs). This is the only way to capture market volatility and cost average the purchase price.
- Cut down on the market noises. If investing yourself, have a conviction on your selected picks, otherwise, take professional help. Trying to save a penny on commission/fees by not taking professional help may prove to be counter productive.
Need to talk more about this or any other issue related to personal finance? Please feel free to call or book a no-charge consultation with me on this link. (https://calendly.com/rakeshgoyal) Confidentiality is assured.
Disclaimer: This content is purely for academic purposes and not any kind of investment recommendations. Please do your own due diligence or take advice from your financial planner before making any investments. Mutual Fund investments are subject to market risk. Kindly read all the related documents before making any investments.