The most common question posed to me nowadays by friends, acquaintances and even strangers is whether they should buy equities given that the Sensex and Nifty are at record levels. The Sensex and Nifty closed at record levels of 23,000 and 6865 respectively on the 9th of May 2014 in anticipation of Modi led NDA victory in the 2014 general elections, the results of which are scheduled to be declared on the 16th of May.
The same friends, acquaintances and maybe different strangers were asking me whether to sell equities when the Sensex and Nifty were at lows of around 16,000 and 4800 levels respectively, a couple of years ago.
My answers to both the questions are the same. Are you overweight or underweight equities in your investment portfolios is what I ask them? All of them were underweight equities in 2012, after having dumped stocks in the aftershock of the market slump in 2008 on the back of the global financial crisis.
All of them are still underweight equities as they had refused to believe that markets had value despite the gloom and doom of falling growth and rising inflation exhibited by the Indian economy.
The only ones who were overweight equities throughout the gloom and doom period were the paid subscribers of investorsareidiots.com. The reason the paid subscribers of investorsareidiots.com were overweight equities is that they chose to educate themselves on markets and investments through our tutorials and training programs, read our analysis on domestic and global markets and economies thoroughly and went through our model portfolios carefully.
Now back to the question, should you buy equities now? My answer is look at your investment portfolio and check your weight in equities. If equity weight is well below fixed income, you should buy equities. Do not take real estate values into account when checking your portfolio as the high value automatically makes all other asset classes underweight.
I am not saying that at all points of time you should be overweight equities. There are times when you should be extremely underweight equities such as time before the 2007-08 market crisis. However the current period is not a time to be underweight equities as a lot of positives are visible for the market.
The positives include the fact that many corporates have restructured business to survive a tough economic environment and that is adding value to the stocks. Restructured businesses gain the most when business environment looks up as for the same level of operations, profits jump.
Globally, liquidity is very high in markets as Fed, ECB and Bank of Japan are maintaining ultra accommodative monetary policies. US economy is expected to strengthen while the Eurozone is slowly limping back to stability. China is one large economy that is stuttering with growth rates at well below rates seen in the 2000-2010 decade but a weak Chinese economy is depressing commodity prices, aiding countries like India that is struggling to keep down inflation.
The prospects of a stable government at the centre post the 2014 general elections is also driving the equity rally. To some extent this is speculative as markets are expecting Modi, the front runner for the PMs post, to work wonders for the economy in a short period of time. However, given right policies, the economy can well come back strongly and that is highly positive for equities.
