Dhirendra Kumar | Mar 25, 2014, 01.07AM IST | Times of India
As the sensex hits at a new high point of 22,000, there’s a surprising amount of uniformity in what one reads and hears about this in the media. There is a widely prevalent consensus view – to use the favoured phrase – about what is happening. This view is that this is something of a hope rally that has grown from the expectation that India is on the cusp of a turnaround.
One part of the explanation is supposed to be a more growth-friendly government after the elections, and another part that the economy has already turned around, as most clearly visible in the turnaround in the current account deficit. There’s also said to be an element of reversion of mean since, after all, for the last six years there has been growth in corporate revenues and profits but the sensex is where it was before the global financial crisis.
All this might be correct. And yet, it’s something that investors should not pay much attention to. It’s a highly selective view that hides, or rather, ignores some important things. Worse, it’s one that is focussed on almost a near-term tactical view rather than on what we may call the long and broad view. For one, there’s no depth to this 22,000 that is getting celebrated. There are a handful of large companies that are now at much higher stock prices than they were in 2008 and the new life-time high is entirely a result of large FII investments flowing into these companies. Even within the sensex, about half the companies are languishing at levels that are far below what the consolidated sensex number would suggest. Worse off – much worse off – are the mid-cap and small-cap indices.
Should you be excited by this scenario? It all boils down to what kind of an investor you want to be. Marketmen lament that the individual, retail investor disappeared from the equity markets in the aftermath of the global crisis of 2008 and then never reappeared. However, that investor is still there, even if in reduced numbers, in equity mutual funds. The total equity investments held in mutual funds is Rs 1.85 lakh crore and almost all of it is by Indian individuals, by people who are keeping the faith.
And what do these people have to look forward to? The answer doesn’t lie in what the next six months or even one or two years of strong FII interest will bring to a handful of companies. The answer lies in whether there is any future for what used to be called ‘The India Story’. It hardly matters which ten companies are raging bulls when GDP growth is below 5%, industrial production just won’t start rising, fractional declines in inflation are considered to be victories, and the main way to control CAD is to import less.
But even those are just symptoms. In the long run, the success of the Indian investor – his ability to get any real returns – depends on the basics. It’s not about which sectors’ stocks are going to be most improved next quarter. Instead, it’s about improvements in infrastructure, the legal system, education, public health, and the willingness of governments to try to spend only what is spendable and do only what is doable.
It’s a cliche that investment returns revert to a mean, but saying just that avoids the question of what that mean is. Within our lifetime, India’s mean has shifted decidedly higher, and then appeared to start flagging. Which is the mean to which Indians’ investments will revert. That’s an open question, and one that will stay open for some time to come.
Meanwhile, investors are wondering what the current spell of rising stock prices means and how they should respond to it. The answer is simple. No specific response is needed. Instead, those who want to benefit from the long-term rise of equity prices should always be investing regularly through an SIP into a small number of diversified equity funds. The rollercoaster of the last few years has meant that fewer people are doing so. There are those used to do so, but then got overexcited during 2006-07, burnt their fingers in 2008 and then ran away for ever. Then there are those who could never convince themselves that the equity markets had anything useful to offer. And of course, there are those who always get interested only when the markets are at their peak. The best thing to do is to ignore the gyrations and start investing steadily. Month after month without getting too excited or too depressed. That’s the only way to benefit from whatever is going to happen.
Source : http://goo.gl/YfpuyH