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“Ask and it will be given to you; seek and you will find; knock and the door will be opened to you. For everyone who asks receives; the one who seeks finds; and to the one who knocks, the door will be opened. Matthew 7:7-8

28 Feb 2018


If you have Rs 1 lakh and look to invest the entire amount in stocks in India, you need to think again. Though one must admit that the markets are still down a good 6 to 7 per cent from peak levels, they still do not merit large sums and please see the reasons. Indian markets are heavily priced Indian markets are well known to be the most expensive stock markets among emerging and developed markets. The Sensex trailing p/e is almost 24 times, which is way above other markets like China, Korea, Russia, Brazil etc., where you have p/e multiples ranging from 8 to 15 times. For long the story has been that India is a large market with a huge demographic dividend, and hence attractive. While the reasoning and logic is true, investors are paying a huge price and from large caps, to midcaps to small caps, nothing looks cheap any longer. Of course, there will be a case to invest but only at lower levels. Change in MSCI emerging market index The National Stock Exchange, BSE Ltd and Metropolitan Stock Exchange said last week that they would stop licensing products and data to foreign exchanges to prevent trading from migrating overseas. "The breadth of the restrictions announced were "unprecedented" and could lead to "unnecessary disruptions in trading or a potential change in the market classification of the Indian market in the MSCI Indexes", the MSCI warned. Indian stocks have a weight of 8.4 per cent weightage in MSCI Emerging Markets index. And, because of the exchanges move to stop licesing products, the MSCI could reduce the Indian weightage resulting in a pull out a few billion dollars by FPIs in India. This could add pressure in the short to medium term and also reduce inflows into the markets.  Earnings have still not picked up For almost two to three years now, we have heard analysts telling the same story, how there would be an earnings pick-up in India. Investors are still waiting, while the index has gone up, earnings have not. This has led to p/e expansion, making the markets even more expensive. As mentioned earlier, a trailing p/e of 24 times on the Sensex makes it extremely expensive at current levels. So, you would be buying into an expensive market. Even on a one year forward basis the markets are expensive at a p/e of 20 times.  Elections round the corner We have state elections through this year and probably one year from now, we have the elections to the central government. It is difficult to believe that the NDA government would better its tally than in 2014. In fact, markets have now got a bit jittery on where things could go in 2019. It may not be a cakewalk for the present dispensation. State elections in Karnataka, Rajasthan and Madhya Pradesh would provide cues to what could be in store in 2019. To that extent it makes sense not to take heavy exposure at least one year before elections.  Bond yields are rising Bond yields are also rising, putting pressure on stock markets around the world. In the US bond yields surged to near 2.91 per cent, while in India it hit 7.6 per cent and is now edging towards the 8 per cent mark. This allows investors to look at safe government instruments even while protecting their capital. Rising inflation has also been weighing on the markets. The recent Minutes of the Meeting released by the Monetary Policy Committee pointed to a very hawkish tone and we could see interest rates rising in the coming days. In all probability monetary easing has ended and we could see the first interest rate hike this year. It therefore makes sense to move at least a little money to debt from equities. 

1 comment:

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