The question now on every investor’s lips is “Is this the right time to invest?”. Sensex & Nifty are close to record highs with many stocks trading at all time highs or 52 week highs while ten year government bond yields are down to 7 year lows below 7% levels. Investor worry is natural at these levels as last time Sensex & Nifty touched record highs, they promptly fell and stayed down from more than a year before starting to climb. Similarly, the last time ten year bond yields went down close to 7%, it promptly rose sharply on worries of Fed tapering of QE.
Looking ahead, risks from the US could turn markets volatile. The Fed is expected to hike rates either this month or by end of the year given strength in the US labour market, that has seen unemployment rate at 4.9% down from levels of 10% seen a few years ago. US Presidential Elections in November too could turn markets volatile if the results go against market expectations.
On the other hand, the second quarter FY 17 results is likely to be positive as managements in many sectors are providing positive guidance. The monsoons have largely been normal and that is expected to drive consumer demand in the festive season. Low interest rates too help in driving up consumer demand.
Global liquidity is easy and cheap with ECB and BOJ pumping in close to USD 150 billion of liquidity through asset purchases every month even as they keep interest rates at negative levels.
Topping it all are valuations that have run up for both stocks and indices. Sensex & Nifty valuations at levels of around 25x are at levels where they have fallen sharply in the preceding years. Many stocks are trading at multiples of well over 30x going upto to 70x and 80x and clearly growth expectations are running up very high.
So, is this the right time to invest? It is a tricky question to answer as if the answer is no, then the risk of markets shooting up is high and if the answer is yes, then the risk of markets correcting sharply is also high. However, in this scenario, it is best to look beyond the short term and see how things will pan out in the next couple of years.
The outlook for markets definitely looks positive from both the macro and micro level. On the macro side, government deficits and inflation are in control while at the micro level, managements are sounding positive going forward. Three years back both the macro and micro were negative. Valuations tend to keep readjusting as companies over deliver on guidance and markets are expecting better than expected corporate growth and giving higher valuations. A continuation of the trend would keep pushing markets higher and higher as valuations get readjusted.
However given risks, it is best to focus on the right investments rather than get carried away by speculative plays. Leave that to the traders.
On the fixed income side, interest rates will stay down for a while going forward on positive macros and while return expectations should come down, the best investments will be in bonds or bond funds rather than in low yielding fixed deposits or liquid funds.
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