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SENSEX @ 60000: What Is The Way Forward?

15 December, 2021 0 Comments

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SENSEX @ 60000: What Is The Way Forward?

'Don’t try to predict the future, Prepare for it. Predicting rains doesn’t count, Building the ark does'

Warren Buffett wrote this in Berkshire’s Year 2001 Annual report, and he admitted that he had expected certain risks but he hadn’t acted to mitigate them

If we remember year 2001, it was one of the most euphoric equity markets globally led by Tech stocks. In India, Infosys and Wipro were traded at 200, 300 PE and Interestingly it took 20 years for Wipro to reach the peak which it did in 2001.

While trying to find the answer for this puzzle, first let us understand what caused this massive rally in Indian equities for past 19 months.

Earnings Growth

Low Interest Rate

Massive Liquidity

In this context, now SENSEX is hovering around 60000 levels and whether we are in such a euphoric stage right now and everyone is trying to understand and trying to prepare in case of any major correction from here onwards. There were some concerns that we had addressed in our last blog The prime thought in everyone’s mind is What investors should do at current levels of the markets?

Is There Really One Answer To This?

Any generic answer will be incorrect and let us understand how each group of investors
should do according to their life stage.

Any generic answer will be incorrect and let us understand how each group of investors should do according to their life stage.

Investors near to the retirement (within 1-3 years) – Investors in this group can consider current levels of the markets to partially book some profits from their equity portfolio, rebalance it and move the funds according to their need to debt. (Example: If an investor is just 1 year away from retirement and his current monthly need is around ₹2 lakh & he has the portfolio of equity with around ₹3 Cr, it is fine to create the cash to the tune of next two years requirement and move the same into debt).
Investors who are mid of their life / career (age 35 to 45) – In this scenario, investors can decide according to their risk profile and financial need (Example, if an investor requires the funds for children education in next 1-2 years according to Financial Plan, current markets provide better opportunity to create the cash and rebalance the portfolio to debt to the extent of fund requirement. Apart from this, if an investor is personally risk averse and he/she would not like to see their portfolio bleed by 25%-30% from current levels, they can rebalance their portfolio. The extent and mode of rebalancing to be done can be checked with the Sinhasi Team.
Investors who are in early stage of their life/career (age 20-35) – It is better to continue the SIPs and STPs during the ups and downs of the market since it is impossible to time the markets.

Conclusion

In General, markets are trading at their peak valuations multiples supported by massive liquidity, low interest rate, strong earnings growth. Current valuations of the market as well as FED tapering are the major concerns right now.

However, current valuations of the market is alone not the deciding factor for correction and there should be some trigger which will cause the markets to mean revert and we do not know when it will happen and what it is. The triggers were Sub-prime crisis in Jan-2008, various scams in Nov-2010, introduction of LTCG in Jan-2018, the ILFS collapse in Aug-2018 and Covid in March-2020. But every time the trigger was different… basically, there has to be a trigger for the markets to correct and we cannot know what it is likely to be right now … nobody predicted the earlier triggers.

We need to remember the following quote of Mr. John Keynes. According to this, markets can be in over-valued territory for long period of time until some trigger happens.

“Markets can remain irrational longer than you can remain solvent”.

Hence, investors have to check their financial plan, asset allocation first and then need to decide about profit booking, continuation of SIPs etc. Financial advisors are the best one to guide in such scenario.

Most good advisors prepare a sound long term holistic financial plan for you based on your risk profile, define your financial goals along with you… do an asset allocation (with contingency plans built in) with you. They are in the best objective position to help you navigate the markets.