Equity markets rallied sharply post budget; between February 1 and February 15, the benchmark BSE Sensex surged more than 12 per cent. On Tuesday, the Sensex hit a fresh high of 52,516.76. The midcap and smallcap indices, too, have risen 11 per cent and 10 per cent respectively in the same period.
During the COVID-19 lockdown, lakhs of new investors took to equity investing in a big way and they have only seen the market trend upwards. Over the last few months, data from Association of Mutual Funds of India suggests long-term investors, who have seen profits after a long time, are now redeeming their money invested in equity funds. In January, investors pulled out Rs 9,253 crore from equity funds; seventh consecutive month of outflows.
A major reason markets have rallied is on the hopes that the worst of the pandemic is behind us and the economic recovery is gathering pace. But, the other major reason is also the corporate earnings recovery. The July-September quarter was the first time in many quarters that saw earnings expectations getting upgraded. The earnings in October-December have further strengthened for many companies.
So, if these two parameters are considered, then things are certainly looking up.
“A clear signal we are getting is that the earnings growth is going to be much better,” Arun Kumar, head of research at FundsIndia.com, told THE WEEK.
“In the last 10 years, we had average sub-six per cent kind of earnings growth. We had a low base, then the corporate taxes were cut, bigger companies have consolidated and taken market share, companies have also cut down their unnecessary expenses due to COVID... So, everything’s falling in place. Now the government has given a huge impetus for the cyclical part of the economy. So, if infrastructure is going to pickup, that part of the economy can also start doing well.”
But, valuations can’t be ignored either. So, what should investors do?
Harshad Chetanwala, a certified financial planner and co-founder of MyWealthGrowth says existing investors should continue with their planned allocations, including systematic investment plans (SIPs), but new investments should be staggered.
“If you have Rs 100 to invest in equities right now, you can consider investing Rs 30 at present. It will be good to hold on with equity investment for some more time as growth-oriented budget after a difficult year, pace of economic recovery and no adverse effect of Covid vaccination continue to bring more optimism in the market,” he told THE WEEK.
Equities globally rallied sharply after crashing in March 2020. But, investors can’t be expecting such stellar returns (BSE Sensex is up 96 per cent since March 24, 2020) year after year. A possible hardening of interest rates in the future and the huge borrowing programme of the government, which sent bond yields surging, means fixed income investors too may have to lower their expectations.
“We should definitely temper down the returns expectations. Debt returns also currently are around 5 per cent or sub-five per cent level. Similarly, on the equity side, if someone is coming into the market after what they saw in the last six-seven months, that was definitely a one-off case,” said Kumar.
Bond prices and interest rates are inversely proportional. When interest rates fall below the coupon rate of a bond, then it starts looking attractive due to its higher interest rate and therefore, its demand will rise and push up its price. Similarly, if interest rates start rising, the same bond, may start looking unattractive.
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Chetanwala says that debt fund investors should invest in low and medium duration instruments at present.
“For long-term goals the investors can continue to hold higher allocation in equities. Investors who need money in coming six to 12 months can plan to switch gradually from equities to liquid funds,” he noted.
With the government focusing on infrastructure development and corporate earnings likely to gather further momentum as economy improves, cyclical sectors like metals and infrastructure as well as banks, which have a larger share of the corporate lending pie, could be attractive bets from here on, say experts. Midcaps and smallcaps could also outperform as the economy recovers.
In this backdrop, Kumar advises investing across a basket of securities.
“We put a portion into mid and small caps and the second would be into value or contrarian bets, which will be the funds that play the cyclical theme. The third bucket would be quality as a theme, where, you predominantly stick to the consumer-led names, strong fundamentals, but they also come at a higher valuation,” he said.
One could also look at investing a portion in global markets, with a mix of developed as well as emerging markets, added Kumar.
