TNN | Jul 8, 2014, 06.00AM IST | THE TIMES OF INDIA.
The markets have run up considerably and the BSE sensex is at a new high of over 26,000. India is now perceived as one of the most expensive equity markets in terms of price-earnings ratios. What should investors do at these levels? While some caution might be warranted, I believe investors would do well to stay invested in Indian equities. We are in a structural bull market!
In bull markets, stock prices run far ahead of earnings and for fairly long periods of time. Markets choose to ignore adverse possibilities and react with zest to favourable possibilities. This is evident in the continued rally despite real issues such as oil prices and inadequate rainfall. The rally that began with hopes of a strong and stable government at the Centre continues to be hope-driven.
The hope now is that the new government will begin delivering and the markets would be keenly watching for policy directions in the upcoming Budget. What if the finance minister disappoints? Well, while he might disappoint on some counts, he will deliver on others. As bull phases go, the markets could choose to ignore the disappointments and focus instead on what he delivers.
I am not recommending mindlessly jumping into equities merely on hope. No, I am merely saying that we have seen markets behaving irrationally for considerably long periods. In fact, it is during these phases that seasoned investors make the most money! So, do not be in a hurry to sell, especially if you have chosen your stocks with care.
When earnings of Corporate India revive — and revive they will — Indian equities may no longer appear expensive. I believe formation of a strong and stable government is a long-awaited catalyst and India will return to the growth path during its reign. The earnings-driven rally that should follow could be far stronger than the hope rally we have witnessed thus far.
For the uninitiated who wish to make fresh investments, a relatively safe option would be to start a systematic investment plan (SIP) in an index fund. For the more seasoned investors, who wish to invest in stocks directly, there is still a wide array of ideas to choose from. When building your portfolio, however, remember to focus on business fundamentals.
Even in bull markets, there are periodic corrections. Some issues that could drive corrections are already evident — rise in global oil prices, continued high inflation, a grim monsoon outlook, among others. Why, there could be a correction, post Budget too. At the current juncture, I would view such corrections as opportunities to buy.