“Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years. Those who seek short-term profits should look elsewhere.”
– Warren Buffet
This Warren Buffet quote is very relevant in the present context of the raging bull market in India. We don’t know where this market is headed; we don’t know when it will end; we don’t know how it will end.
But, we know that this bull market too will end since all bull markets end at some time. Meanwhile, how can investors profit from this rally without burning their fingers?
We know from experience that stock markets have a remarkable ability to surprise. Bull markets have surprised even the incorrigible optimists. The 2003-08 bull market, which took the Sensex from around 3000 in early 2003 to above 20000 by the end of 2007, is a classic example. In that rally, Sensex multiplied almost seven-fold surprising even the market gurus.
The drivers of bull markets can be different at different times. In the ongoing bull market, new retail investors are playing a major role. In the last financial year (FY21) 14.2 million new demat accounts were opened. This trend continues. Majority of these new investors are newbies whose knowledge of the markets leaves a lot to be desired. Most of them are merrily trading in the market using modern trading apps. They are buying stocks, particularly mid and small-caps expecting the rally to continue. And the markets have been largely rewarding these newbie investors. Strong global markets are providing support to the rally. Market fundamentals and valuations have taken a back seat.
But, history tells us that valuations cannot be ignored. When valuations go beyond safe limits, markets will correct. The higher the valuation, the sharper will be the crash. At 16500 Nifty the market is valued at 110 % of GDP against the long-term average of around 77 and the FY 22 forward PE is around 22 against the long-term average of around 16. Clearly, the markets are over-valued if we look at the traditional matrixes of valuation.
So, should investors sell and get out?
The answer is an emphatic NO.
This rally may further surprise on the upside. Globally, the markets may be indicating a robust growth recovery. In India, if we succeed in sustaining the high growth of 9.5% expected in FY22 with above 6.5 % growth in the years after that, high valuations may sustain. Tapering announcement by the Fed, perhaps by the end of this year, and monetary tightening by the leading central banks in late 2022 or early 2023 will cause corrections, but the bull market may continue.
So what should investors do in such a confusing context?
The answer will depend on what kind of an investor you are:
· If you have invested with certain goals in mind and if those goals can be realized now, sell/redeem your investment for the realization of those financial goals.
· If you an investor with a long investment time horizon focused on long-term wealth creation, stay invested. Continue with SIPs.
· Bulk investment may be done, ideally, through STPs.
· As a measure of abundant caution in this richly valued market, move some profits to fixed income assets even if fixed income returns are low.
· Do some portfolio churns from mid and small-caps to high quality large-caps that offer safety in these turbulent times.
Stay safe; stay safely invested.