It was a stellar run for the Indian capital markets in 2017. The Sensex and the Nifty both ended with more than 27 per cent gains.
Looking back at 2017, the stock market run has purely been on account of the huge flows into equity mutual funds. Domestic investors are increasingly looking at investing in mutual funds, which is driving stock prices higher. Investors are beginning to see limited investment options, apart from equities.
No returns from other asset classes
Other asset classes either offer poor returns or no returns at all. Gold has gone nowhere since the start of 2017, while debt can at best offer 7 per cent returns. Real estate is fraught with risks and post demonetization demand has been subdued. Investors are hence increasingly seeking investment in equities, as allocation to them has already been very poor.
Whether there would be enough and more inflows into equity mutual funds in the next few months would be something to keenly watch.
Will equities deliver in 2018?
If you think that the Sensex in 2018 is going to rally another 27 per cent, you are probably wrong. At best returns might be more tepid and closer to 5 to 10 per cent on the Sensex.
However, if liquidity is strong at best you may end up getting 15 per cent . However, if one does see a substantial rally from the present levels it maybe a good idea to move money to debt from equities. This is because as an investor you would also want to protect capital.
In fact, buying into gold too may not be a bad idea to hedge against losses that might arise from equities.
Markets are over priced?
Benchmark indices are clearly overpriced at these levels. The Sensex trailing p/e multiple is at around 2 times. Even if earnings do grow at 10 per cent, the p/e multiple of the Sensex would be at 22.5 times one year forward earnings, which is way above the historical average of 17 times.
Clearly, markets are over priced at these levels and anybody intending to buy should be very cautious. We suggest only a buy on decline strategy or adopting a systematic investment plan whereby we invest small sums of money in a more systematic way into equities.
Time to play the contrarian
It is time to play the contrarian, if an individual wants to make serious money. Let us cite an example. We had been recommending the stock of RCOM for a while, believing that there could be a potential sale of assets. The stock has now jumped from Rs 16 when we recommended to current levels of Rs 35.
It is time to play the contrarian and look at stocks that could be takeover targets and are prices cheaply at the moment. For example, there are many shares that are under Strategic Debt Restructuring and could be up for sale.
In fact, there is a pharma company that is under SDR and has solid assets, which could be a potential takeover target. One needs to look for such companies. There is another infra company whose shares are in single digits and which has good road assets,but is under SDR. Such companies could be risky bets, but their prices are so low, they could be good bets for the long term.