Indian main indices touched all-time high yesterday – Sensex at 41,000, Nifty at 12,000.
Is your portfolio valuation at an all-time high level? Ours is not and most probably you are also witnessing the same.
Is this normal? Have you invested in the right schemes? Have you been advised correctly by your advisor? Is it time to do something now?
These are common questions, you must be grappling with now. Before we go ahead to find answers, let’s see some data points –
While Sensex and Nifty made new highs yesterday, a reasonably broad-based index BSE 500 had touched its all-time high in the month of August 2018 and is currently 2% lower than its highest mark.
NIFTY Mid Cap 100 index (an index of 100 medium size companies) had made its all-time high in January last year. Right now, it is 22% lower.
Similarly, NIFTY Small Cap 100 index had also made its all-time high in January 2018 and currently, it is 40% lower.
Clearly, Small and Mid Company indices have underperformed. If you have your investments in schemes, which have a majority of small and mid-size companies in their portfolios, obviously you would not have witnessed an all-time high portfolio valuation.
A temptation to think of course correction is natural in these circumstances. You may call your advisor and ask him to do something. It will sound logical to switch your investments from your existing underperforming schemes to those schemes, which have large companies in its portfolio.
Some of you may also think otherwise. You may argue that large companies’ valuations have gone up so small and mid-size companies will have a catch-up phase. Hence, it is time to aggressively step up investments in Small, Mid Cap oriented schemes/stocks. Opinions supporting this theory are already floating around.
Both can be fatal.
Mid and Small-cap indices are underperforming the main indices – Nifty and Sensex, because of two main reasons :
(a) Mid and Small companies’ valuations had reached absurdly high levels in January 2018 and they were not sustainable. Hence prices have corrected.
(b) There is a serious slowdown in the Indian economy as well as in the global economy. Mid and Small size businesses find it hard to grow during slowdowns. Markets note this.
Indian GDP growth rate has fallen to approximately 5%. World trade is also contracting due to increased regionalization and falling globalization.
As per the data released by CPB Netherlands Bureau for Economic Policy Analysis last week, world trade for September month again witnessed negative growth. This is the fourth consecutive year-on-year contraction and the longest period of falling trade since the financial crisis in 2009.
If you see the chart below, the last 10-11 months, this data is exhibiting negligible to negative growth. What should be more alarming is that major central banks have infused an unprecedented amount of liquidity (their last weapon), brought down a large portion of bonds to negative interest rates, yet world trade has refused to revive. US-China trade war is also a major contributor to this slowdown, so closely watch the tweets by President Trump.
Data Source: CPB Netherlands Bureau for Economic Policy Analysis
Coming back to Indian markets, while in 2017, there was surely an investor frenzy towards Mid and Small size companies; in 2019, similar behavior is being witnessed towards Large Companies. 2017 phase was unsustainable so even 2019 will. Hence, a switch from underperforming schemes to schemes with major allocation into large companies is not a great idea.
So, what should you do?
First, don’t get over-excited by these all-time high levels and strictly stick to your previously charted out plans. Globally as well as locally, the equity momentum is robust but heavily polarised. This is uncomforting and any act of over-allocation may backfire. Do not withdraw from equities. Continue with your SIPs, if you have any. Maintain some cash levels, have some gold and debt in your portfolio.
In a soaring market, not doing anything is the most difficult thing to do. Cash, gold, debt hardly earns anything meaningful. However, it keeps you prepared to handle sharp corrections to your advantage.
To create meaningful wealth, your investment has to pass through the phases of corrections, consolidations and temporary underperformances. Never forget, it is your discipline and patience over a long period of time, which creates wealth and not the smartness of the fund manager or an advisor. We at Arthabodhi say the same to our clients. We attempt to shape financial behavior while keeping a sharp eye on their portfolios.
An ever-growing equity market in an era of falling growth is a perfect set up for strong corrections. Corrections are healthy. It should have already happened but central banks have not allowed it to happen. These new highs are on the back of unprecedented global liquidity and not backed by economic growth. Economic and Business growth are non-negotiable in Equity investing. There is a belief that central banks will keep supporting the markets. Similar beliefs were prevalent in 1929 as well.
Some smart investors globally are cautious.
Mr. Buffet had said once “Be greedy when others are fearful and be fearful when others are greedy.”
He continues to remain invested in good quality businesses. But he is also increasing his cash pile which he earns via business profits. His current cash plus short term holdings are worth $128 billion (Yes, Rs. 9.1 Lakh Crores).
He has patience. He is participating as well as prepared. What about you?