DON’T LOSE FAITH IN EQUITIES
The problem with us is that we are all impatient. The investors are impatient to wait for the future and valuations are already deep in to the future. The domestic investor population is growing and they have offset the withdrawals by the foreign investors. We are probably moving away from extreme dependence on the FII crowd. The market is awash with liquidity and everyone seems to be searching for new ideas to engage their money with. Leverage of a big magnitude is visible in this market, as the lure of quick riches draws people to the market, with a feeling that they will get out before it gets over.
To me, all this speaks of one thing: Confidence in the future. Everyone is certain that we are on the right path, the clutter notwithstanding. Otherwise, we will not see so much liquidity coming in to the capital markets.
The government, I believe, will respond. GST implementation in some countries has taken up to two years to stabilise. However, we expect things to stabilise in 30 days. About demonetisation, the one thing it has done is to bring down the usage of cash. Yes, the government’s indulgence to the gem and jewellery industry is puzzling, but these aberrations are what we are used to.
The government is in a hurry to kick start and accelerate the pace of awarding infrastructurerelated contracts. The domestic financial system is awash in liquidity. New projects from private sector are being announced. Debt on company books has come down. I see more rating upgrades happening and all these point to better health. I will be banking on few things:
An increase in RoCE for the companies that will have the impact of suddenly making valuations look reasonable;
Growth that is in the region of more than 10 to 12 per cent on the top line;
Increased ease of doing business — ironing out wrinkles in GST, better labour laws, the doing away of regulatory ‘fear’.
While I maintain that all this does not tell me to go and buy all the available stocks, it also makes me think that the multiples and measures of stocks need not tell the whole story. Easy availability of capital (through private equity and stock markets) also seems to bring about explosive growth in the services sector. Expansionary personal credit (while it sounds risky) is also fostering consumerism on a scale not seen before. Infrastru-cture projects pick up is also reflected in better capacity utilisation by cement, steel and other ‘smoke-stack’ sectors in the economy.
As investors, at this stage, I prefer to be predominantly in large-cap diversified equities rather than in mid caps. Because mid caps will not allow you to take your eye off the screen. A rapid rise in prices, which are typically affordable, is also a risk when someone falls out of favour. So, I will limit myself in moderation to the mid level. For staying invested, my bias is clearly in favour of large cap, diversified portfolio.
How much cash should I keep? That depends on how close you are to needing the cash out of your investments. If you are very close to your goals, it could be a good thing to cash out most of it. If you are still somewhere halfway or lower in your journey, stick to your SIPs and your investments. Long cycles will work in favour of staying invested. And one thing. Avoid leverage. Never borrow to invest in stocks. It generally causes more grief than joy. Most importantly, do not lose faith in equity. The economy will grow at five to seven per cent, irrespective of governments.
The writer is a veteran analyst. He can be reached