Markets are up 30% from the bottom what should an investor do plus more
These are some of the questions that I face every day. I believe that the answer to all of them is not very simple, however let me try to address them one by one in brief.
1. Industrial production growth is at 14 year lows and markets are rallying, what explains this?
Markets will typically bottom out before the economy bottoms. As such although we continue to see poor economic growth numbers the movement of the markets seems to indicate that the worst for the economy is now over and there should be a rapid revival over the next few quarters. If we go back in time markets started falling much before the Industrial Production data showed the slowdown in the economy.
2. Most experts said do not invest in the markets before the elections….
Yes there is uncertainty because of the political scenario in India, especially today when there is so much economic growth uncertainty. However in my view, although it is an important event the odds of the UPA or NDA in power are above 75-80%. Under the circumstances a severe correction of the kinds we saw in 2004 post election results should be unlikely and even if it occurs the bounce back might also be like 2004.
3. Most analysts who were giving bearish comments on business channels one month back are now giving positive statements –
I think it is high time that investors realize that the free expert opinion of business channels is of very limited value. Most analysts are trend followers and give comments which support the trend. The right strategy over the 15 month period ended March 2009 was to sell on every rise of the markets and that is what made money. Under the circumstances most analysts will keep on giving that kind of view well after the trends have changed.
4. More than 90% of Mutual Fund schemes have underperformed the markets and more than 75% by greater than 10%
Having being a MF Fund Manager for so many years this is the question that I most often face these days. The question of high cash holding or most of the money in fixed income products is something that not only retail and HNI investors face today but is also a problem with Mutual Fund Managers who are sitting on cash levels that are at multi year highs, insurance companies that have collected huge amounts of money in the current quarter and have to deploy it, hedge funds that have a cash pile of over USD 294 billion to be deployed and are record low net invested levels (The kind of redemptions these funds were expecting at the end of the first quarter also have not fructified and now they are in an unenvious position).
The question that lot of people are asking is that why could fund managers not see value at lower levels and deploy their cash. The answer to this is not very simple. I think most investors had become so pessimistic and paranoid that they just could not see value when it was at its maximum.
5. Technical chartists who were saying that markets can go to 7500 levels are now saying it can go to 13000-14000
Like I commented on Technical Analysis in a previous article, I had mentioned that it is a science which requires lot of empirical experience. As such one should take the views of a large number of inexperienced chartists with a pinch of salt. Most such chartists tend to be trend followers and have the inability to point out change in trends.
6. Most experts said that mid caps are dead and concentrate only on large caps, but mid caps are up as much as large caps
The issue of Mid caps was discussed by me in a previous article where I mentioned that this is a very good time to invest into high quality mid caps. Although I will discuss this issue in detail in one of my forthcoming articles all I will say at this stage is that there is lot of value in both mid and large caps today and as such restricting oneself to only a particular segment of the market can lead to suboptimal asset allocation for the futures.
7. I exited my positions when the markets went up 20% from the bottom, expecting a correction but the markets are up 10% from there also
A number of investors who were either able to catch the bottom of the markets or were invested in the markets exited their positions as the markets rallied 20%. These investors are now caught in a situation where they are unsure when to come back into the markets. For these investors my suggestion will be that now there seems to be a trend change in markets and wherever there is value investors should start building up positions slowly. The next few weeks are the one to accumulate for the long run.
8. I am still holding lot of cash. I have missed the rally, should I pump in the money now
This is true of not only you but most investors in the markets. So do not worry, no one can catch the bottom. Although the markets are up 30% from a Sensex levels of 8000 it is just around a 2000 point rally and incidentally 2000 points is just 10% if one looks from the top of the markets of around 21000 index. As such one should not be too much worried by the current move as it is just a correction of a grossly oversold market. Start investing slowly now and increase purchases as the markets correct.
9. Most global houses like UBS (UBS target of 13100 Sensex today), Morgan Stanley( MSCI Emerging Market Index to rally 33% from current levels) etc. are coming out with positive statements on Indian stocks and emerging market stocks now after the big rally, they were so negative a month back
Well, that’s how things are. We will see more global brokerages turning positive over the next six months. Most analysts will stick their necks out only after they are sure of a trend.
10. Sectors like technology, steel etc. which are supposed to be facing pricing and volume pressures have also done well and infact steel is one of the best performing sectors
As the markets rally after a big bottom formation, typically the most oversold sectors will do well. Technology has held on due to perceptions of a defensive sector and falling value of the rupee. Lot of commodity and capital good stocks had got battered badly and had huge short positions. The reversal of these positions has led to big gains. Key to performance of technology stocks from here on will be the guidance given by Infosys and the result of the Satyam sale both of which are out next week.
MY RESPONSE TO MORE SUCH QUESTIONS LATER 🙂
I am writing a note on what kind of stocks/sectors to buy now in my articles over the next week.