Are Indian stocks in bubble territory? An interview given by Uday Kotak to The Indian Express (you can read it here) asks this question. Kotak is making valid points when he says that there is a wall of money coming at the market which does not have enough stocks to absorb the cash. A strong institutional flow is bringing Indian household money to the stock market through mutual funds, unit-linked insurance plans (Ulips), National Pension System (NPS) and the Employees’ Provident Fund Organisation (EPFO). This money is going into a few hundred stocks because the Indian market lacks depth. The market cap of the top stock is Rs6 trillion and that of the 100th stock is just Rs32,000 crore. The market looks overvalued on metrics of the current price-to-earnings (PE) ratio, which is much higher than the 10-year average. Valuations can go back down in two ways—markets can crash, bringing prices down or the earnings can grow; both bring the PE down. The wait for earnings has kept the market buoyant in the past few years and the wait is still on. Which will come first, the market crash or the earnings bump? As retail investors, we have no option but to give our money an equity exposure; see Table 1. But we will never have the relevant insight to time the market. We also know that markets go up and down, get overvalued, crash and then recover. See Table 2. So, is there a way in which we can ride out the bubble, if indeed there is one?
A guy I know wanted to retire when he was 25. He just didn’t have the money. If I get Rs1 crore, he said, then I’ll retire. Now, 30 years later, he’s still working and still not done with gathering the corpus he needs to retire. Anyway, he’s wiser and agrees that financial security and going to work need not be either/or. People can continue to work even if they are financially secure. But how much do we really need to save out of our incomes to know that we will hit retirement with enough to maintain our lifestyle for another 30 years? Every time I speak to a friend about buying a life cover, he tells me—the risk we have is not of dying too soon, but of living too long.
RRR exit, hmmm. Brexit, meh. Shrugging off plenty of bad news, the Sensex hit an 11-month high this week. What’s going on? The story for India is the thickening of the retail equity pipeline, not directly in stocks, but through institutions such as pension funds and mutual funds. Sustained flows of retail money is coming in. And it is coming in a staggered manner. Indian household money has traditionally been in real assets such as gold and real estate, in bank fixed deposits (FDs) and to some extent in life insurance policies. The organised sector contributed to their provident fund, which again went into bonds and other fixed return paper. Think about the change in our own investing behaviour—we swore by FDs and Life Insurance Corporation of India policies, but are now die-hard SIPpers (investors into systematic investment plans of mutual funds). What changed?
It always amazes me. The confidence with which people make such definitive statements. Gold is always the best investment. You can’t lose on real estate. Stocks are a gamble. People like me, who take a middle-of-the-road approach and talk of diversification, were hooted down when gold was the best performing asset class two years ago or when people swapped their multi-bagger real estate stories. To talk of investing in equity in the go-go years of gold and real estate, when equity was down, was to invite derision and disbelief. But now that gold is down, real estate is in decline (held up only by a frozen market), fixed deposit (FD) rates are down and equity is moving sideways, it is a good time for some non-exuberant talk. If the chatter on WhatsApp groups (when they tire of recycling the same pathetic jokes) is any indication, people are willing to listen to sense. One forward that has come on almost all of my WhatsApp groups is the one titled “Real estate: the fall has just begun”. I traced the forward to a blog by certified financial planner D. Muthukrishnan of Wise Wealth Advisors, http://mintne.ws/1MhqzZZ . Very sensible stuff; do read. And remember to build in the tax impact on the final average return numbers given in the blog of the FD average being inflation plus 1%, gold giving inflation plus 1.5%, real estate inflation plus 3% and equity, inflation plus 7%.
The markets are currently taking a breather but as we pull out of the economic downturn, they will get a fresh burst of energy. The ups and downs of the market in the past three months seem to unnerving investors who are seeking equity exposure to their money. All investors in equity need to remember that markets in the short term are capricious, but reflect the earnings of the corporate sector in the long run. The BSE benchmark equity index, the S&P BSE Sensex, has returned an average of 17% a year since its inception 36 years ago. If you had invested Rs.1 lakh 36 years ago in the Sensex, it would be worth Rs.2.8 crore today. Investors just have to get it out of their head that the stock market is a place to double money overnight. It is a place to double money, but not overnight. It is a slow cook that makes money stay ahead of inflation at best. Here are four things to not do when the markets are falling or rising.
They’re saying that the Sensex will touch 12,000?” She said in a hushed whisper. It is 2005 and I am talking to a senior citizen couple who have come as guests to get their financial plan made in my first television show called Show Me the Money with NDTV. I remember being unhappy with their 100% stock allocation at a time when their had unmet lifestyle costs. I had wanted a rejig of the portfolio towards some regular income products while leaving at least half the portfolio in stocks. But the thought that the markets will keep rising kept them from doing anything about their portfolio. The next decade saw the same index soar to just over 20,000 in January 2008, then drop like a stone in water to just over 8,000, 14 months later in March 2009. The Sensex is flying at almost 25,000 now and the question remains the same, with just a change in value. “They say the Sensex will go to 40,000 soon; will it?”
There is something about markets on a tear that gets people’s blood buzzing. My usually quiet desk on Monday was the place to stop by and ask: so good time to invest? Waiting for the lift. In the lift. On the phone. On SMS. Good time to invest? Huh? What just happened? Monday saw Nifty breaching 7,000! And Tuesday saw it staying above that level despite bad news on the industrial production and inflation fronts. But nothing seems to deter investors who want to now suddenly swing big. Wanting to invest right away when a market hits a life-time high is like trying to jump on to an aircraft just when it is taking off or, worse, trying to leap on, like James Bond, mid-way through the flight. If investors were airline passengers, they’d find the check-in, security, boarding process too tedious and boring to go through. If they managed to do it and the flight got delayed, they’d rather go back and travel another day. They behave as if this flight will never take off. But when the plane starts to taxi and take off—gosh the mad scramble! It’s as if the average salaried people had crores that they would shovel into the market maw and see it spit out double the amount in a trice.