Polls or not, invest in equities for long term

The markets have rallied significantly and the common feeling among retail investors is of being ‘left out’. Many large investors and institutional investors are experiencing a similar syndrome. The reason is very clear because no investor has ever been able to buy at the bottom and sell at the top. In this market, initial moves are sharp and swift and not with much delivery volumes. In today’s age of ubiquitous information and analysis, more or less everybody reaches the same conclusion at the same time. If one analyses performance of any successful stock investor, it is more through ‘prudent asset allocation’ and ‘discipline of time’ and less by ‘timing the market’ of stock picking. The stock markets witness cyclical gyrations and no bull market gets over in a few weeks.

Let us look at market fundamentally and technically. Fundamentally, India is a great long-term investment story that can deliver 18-20% per annum returns to a prudent equity investor. The returns will mimic the earnings growth of largely industrial and services sector in nominal terms. A sustained GDP growth of 7-8% per annum with inflation of 5-6% can let many corporates sustain 18-20% yearly earnings growth. Technically, markets were sluggish for six years and seem set for a cyclical uptrend. The broader markets underperformed in the last six years with slowdown in economic and investment activities. The investment slowdown was not caused by lack of demand or non-availability of capital but due to policy logjam and confusion in the wake of a few scams. These things can be set right easily and we can witness a beginning of a new bull market for next five years.

No doubt, euphoric run-up will witness sharp corrections. Therefore, while I advise increased allocation to equities, I do not recommend leverage or trading in futures and options. Invest in stock markets with a long-term view and restrict exposure to an amount which need not dip into at least for three years. Also, do not make the mistake of selling too early to book small profits. When one tries to make up for the lost rally by investing more than what they can hold for longer term, one invariably gets trapped in down cycle and lose all their positions at a loss.

For instance, if you have bought good quality stocks, you should not fear even if NDA falls much short of the expected majority. India is on a gust of a major breakthrough on all parameters. With or without the positive elections results, the macroeconomic conditions are improving. We are seeing the rupee stabilizing and appreciating and the current account deficit coming under control. Although it is too early to see whether there are actual green shoots of recovery in the economy, clearly the worst is behind us.

Our advice to the retail investor is not to get carried away by the sensex gyrations in the short term. Post actual results of polls on May 16, depending on the outcome, there will be volatility. But soon after, the markets will again focus on macroeconomic fundamentals, which we believe are improving and that is the basis of the rally over the next three-five years. A new stable, pro-reforms government can further boost the growth rates. For those investors who cannot invest in research, large cap diversified equity mutual funds are the best bet. For those, who can spend time and energy researching stocks, build a diversified portfolio of quality names. Do not panic – the party has not ended but has just begun.

The article first appeared in Times of India on May 14, 2014