Do the Indian equity markets now resemble a mug of beer that has been poured too quickly? What investors should do Periods of exuberance are often followed by reality checks. The best investment decisions are often made when youre swimming against the tide of popular sentiment. So, while the markets continue their upward trajectory, it might be wise to temper enthusiasm with a healthy dose of caution
Dhirendra Kumar
CEO, Value Research
I regret to inform my readers that in recent weeks, my personal market froth indicator has been triggered strongly. Are you puzzled by this statement? Let me explain. Do the Indian equity markets now resemble a mug of beer that has been poured too quickly? Will the froth on top deflate and settle quickly or does it have some staying power? How can one figure out whether the market has something solid and sustainable?
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} There are a lot of serious indicators that are generally used to answer such a question, such as valuations, profit growth, and so on. There are also some seemingly frivolous indicators that seem like jokes, but actually work well. For example, when headlines about rising stock market indices appear in white newspapers, instead of just the pink ones, stock prices may have overreached themselves.
I also have a personal froth indicator that has proven to be infallible over the past two decades. When investment bankers start cold-calling me to arrange an IPO for Value Research, I know that equity markets may be overheated. I’m serious. As the markets zoom higher and higher, IPOs get easier to get through and become more lucrative for investment bankers. At some point, investment bankers start getting desperate about luring business owners, who clearly do not need to go to the markets. Given the business Value Research is in and the way I have run it for three decades, we are not a capital-constrained business. To anyone who does even a modicum of background research, this can be easily gleaned from public information. So, yes, this froth indicator has been triggered.
Of course, I could be wrong; there’s always a first time. I’m not really asking you to sell all your stocks and equity mutual funds because investment bankers are calling me. Regardless of what the ‘fun’ market indicators are showing, it’s time to be a little circumspect.
This isn’t to say that a market correction is imminent or that all gains are illusory. Far from it. The Indian economy has shown remarkable resilience and growth potential. However, as seasoned investors know, markets rarely move in a straight line. Periods of exuberance are often followed by reality checks. Remember, the best investment decisions are often made when you’re swimming against the tide of popular sentiment. So, while the markets continue their upward trajectory, it might be wise to temper enthusiasm with a healthy dose of caution.
Let’s see what this could mean in practice. It’s during these times of heightened optimism that investors should revisit their asset allocation, ensure diversification, and get the basics right. For the average investor, whether you’re directly invested in stocks or prefer equity mutual funds, this doesn’t necessitate a dramatic overhaul of your portfolio or a rush to liquidate assets. Instead, it’s a good time to reassess your asset allocation and investment goals. Are you overexposed to high-risk, high-reward stocks or aggressive equity funds? Have you neglected your asset allocation strategy in the face of tempting market gains? Now might be the time to rebalance your portfolio, ensuring you’re not overly dependent on the continued bullish run of the markets. Stock investors could consider increasing their allocation to more stable, value-oriented stocks. Mutual fund investors might look at large-cap or balanced funds that offer more stability. It’s also worth revisiting your emergency fund; in times of market volatility, having a solid cash cushion can provide financial and emotional security. Remember, the goal isn’t to time the market perfectly, which is impossible anyway, but just to arrange your investments so that you can face a decline while still benefitting from long-term market growth.
(The author is CEO, VALUE RESEARCH)
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This story originally appeared on: India Times - Author:Faqs of Insurances
