Markets are at a record high. What should you do?
Q. Are markets expensive?
The only paramenter to judge the valuations of markets is the earnings of Indian corporates (listed on Stock Markets).
Sensex has grown 40% from pre-covid levels. But have earnings grown?
Fun-Fact 1: Indian Companies are earning higher than they did pre-covid
Indian Companies have reported the HIGHEST EVER QUARTERLY PROFITS in spite of the pandemic.
Fun-Fact 2: Though GDP growth was negative in 2020-21, profits of top 50 Companies listed on markets have INCREASED by 14.8%!
Valuations are generally defined by PE Ratio (Price of Markets/ Earnings of Companies)
This means, if you look at the past corporate earnings, PE ratio looks high (and hence, markets look expensive). But, as soon as you factor in the earnings expected after 1.5 years (FY 22-23), markets look fairly priced!
What should you do now?
Indian Economy & Markets are entering a new cycle. And hence, do not invest looking at the past returns
(Graph: Showing return profiles of different portfolio)
Majority of the investors look at the past returns and invest their money in Orange/ Light Blue Portfolios
What happens when you invest looking just at past returns?
Just after they invest, even after staying invested for as long as 3 years, the orange and light blue portfolios are giving huge negative returns!
Indian economy, in a new post-covid environment with a new set of challenges and opportunities, is in an economic bull cycle, fuelled by fiscal & monetary stimulus and incentives like PLI schemes provided by the Government.
Hence, it is recommended for investors to churn their portfolios and invest in the next set of growth pockets.
But, it is contradictory to the belief of staying invested for a long term in equities?
We still recommend staying invested in equities for the long term, but a portfolio churn at the correct time can increase your returns multifold! See this video to know what we mean.
Again, What should you do now? And invest where exactly?
These are some of the pockets we are currently bullish on. It is recommended to create an equity portfolio (through MFs, Small cases, AIF, PMS) with these themes -
Due to the recent challenges faced by Indian companies (Covid, GST, demonetization), the strongest companies have been able to capture market shares in their respective industries and hence, are expected to outperform the markets.
PS: Sector leaders DO NOT mean only large bluechip companies. A lot of mid and small cap companies are also market leaders in their respective industries.
2. Companies in the Home Improvement Space, Housing Finance Companies
With all-time low housing loan finance costs, and covid-induced work-from-home triggering consumers to buy bigger better houses, companies working in the home improvement space are expected to outperform.
Just like any other economic bull cycle, this time too, financials (the backbone of the economy) are expected to perform really well esp. large private sector banks, financial intermediaries, insurance companies, etc.
Conclusion: Markets are NOT in a bubble. They are already pricing in the earnings growth of companies for the next 1.5 years. It'll be a mistake to stay out of this bull market. But, investing in the right pockets is extremely important which is going to make the difference.
If we can help you invest, please contact us on -
Email - arpita@NiveshMitr.com
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