Explained: What to make of market rally

Whenever the market has scaled new highs in the past, as is happening now, investors have found it too expensive to enter. Only with time have many investors realised it was a mistake not to have invested then.

The rise of equity markets over the last 20 days has not only taken investors by surprise but also led to uncertainty. If there are some who are unsure whether to remain invested or book profits, there are many who are wondering if they should enter the markets at such high levels.

Who is doing what?

Data show that foreign portfolio investors (FPIs) are taking medium- to long-term positions in the Indian market. They have pumped in a net of over Rs 42,000 crore in November alone, so far. In fact, FPI inflows this year are set to be the highest ever — the net FPI inflow for FY21 has already reached Rs 138,107 crore, marginally short of the Rs 140,032 crore in FY13.

So, if you were to follow FPIs, there is a clear signal to invest or to remain invested. On the other hand, if you look at the trend of domestic investors, it would emerge that they have been busy booking profits amid the sharp rise in markets. Trade data of domestic institutional investors including mutual funds show that they have pulled out a net of close to Rs 30,000 crore in November. It is important to note that DIIs don’t invest or book profits for themselves — if mutual fund investors start redeeming their units, the fund house will have to sell stocks in the scheme to honour the redemption.

What is fuelling the rally?

The rally is clearly driven by positive news flows. The outcome of the US Presidential election in the first week of November fuelled FPI inflows into emerging markets and led to a sharp rally in equity markets worldwide including in India. This was followed by successive announcements of promising results in Covid-19 vaccine trails by Pfizer & BioNTech, Moderna and Russia, boosting equity markets over the last 10 days.

The result has been that FPIs have pumped in large sums of money into Indian equities in November, and the Sensex has rallied by over 4,100 points or 10.6% in the same period.

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Will the rise in markets continue?

For now, the markets are flush with liquidity — and since money will find its way into the equity markets, they are likely to remain strong. Market participants, however, remain cautious, and there is a feeling in the market that the investment stories will keep changing — from large caps to mid- and small caps, from pharma and IT to banking and finance, and then to infrastructure-oriented sectors, etc — and so, investors need to do their due diligence while parking their funds.

Fund managers with mutual funds as well as brokerage houses say investors must look at quality companies and not get swayed by the rally.

While FPIs have been investing, many say that once retail investors start investing, so will domestic institutional investors. 📣 Express Explained is now on Telegram

So, should one invest at current levels?

Investors should never look at levels to invest. While it matters for traders, it doesn’t matter for disciplined monthly investors who are willing to invest for 10, 15 or 20 years. Investments should be done in a disciplined manner, and there is no harm in starting now. One must remember that whenever the Sensex has hit a new high or landmark — be it 10,000, 20,000, 25,000 or 30,000 — each of these levels has seemed expensive at that point of time. However, with time, investors have concluded that it was a mistake not to have started investments then.

With the Sensex having rallied swiftly by 4,180 points or 10.6% in a matter of 14 trading sessions, there is always a possibility of some profit-booking, and thus a dip in the market — but that does not mean it will not achieve new highs. In fact, dips should be utilised to invest further.

C J George, MD, Geojit Financial Services, said, “We are advising our clients to not get carried away by the exuberance and, instead of chasing the rally, they should chase quality companies or invest through mutual funds.”

Caution is necessary, however, for investors who are nearing retirement, and who cannot afford to remain invested for much longer. They would do well to book some profits at these levels, and start parking them in safe debt instruments.

And even they should not pull out all their equity investments. Given the average longevity, if someone is 55 years old, they may start booking profits on some investments that may be critical for the post-retirement monthly income, and leave the rest for another 10 years or 15 years, and withdraw when they turn, say, 65 or 70, depending on the need.

Those who have been looking to book some profits to utilise the money for any of their financial goals can do so at this time as the markets are trading high.

It is important to understand that interest rates are certainly not going to go into double digits, and so equities could be the best bet for protection against inflation.

What are the concerns to keep in mind?

Even as three vaccines have reported high efficacy in phase 3 trials, and are expected to be made available over the next couple of months, many feel that the impact in India will be slow in comparison to low-population countries, as it will take a longer time to cover the massive population. There are also concerns over the pace of economic recovery, as India is among the countries hardest hit by Covid-19 in terms of economy.

While the markets have had a significant rally, George said, “I do not see that the economy will jump in the immediate future to justify the market levels… However, FPIs are taking a call on the Indian economy and investing in the market.”

In fact, a report by Oxford Economics on Thursday said that India’s growth equilibrium will worsen over the medium term, and potential growth would average at 4.5% over 2020-25, as opposed to its pre-coronavirus forecast of 6.5.

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