Should You Fear 20K ??

Surge Amid Skepticism !!!

In a stunning show of resilience , markets climbed many wall of worries ( no dearth of them in any case ) to reclaim the much hyped 20K mark . Such a surge would be a cause for jubilation in normal times . Time is nothing but  normal now  . With no fireworks flashing in the sky , the mood is distinctly skeptical . Behind the glittering rise , signs of nervousness abound underneath . The weakness in the broader markets ( small and midcaps ) over last couple of weeks when Sensex was busy scaling new highs confirms the visible distress underneath . The rush to redemptions from retail investors( from equity funds)  points to  this dichotomy . What explains such an untimely divergence . 

The source of this distress can be traced to the nature of investor behavior ( esp. of retail) that normally occurs when market tries to break the earlier bull market tops , more so after spending prolonged time much below that level in a bear market . This last wall of worry is the key challenge for any markets . Indian market is no exception .  Level of 20K has instilled a scare in retail investors who suffer from “once bitten twice shy” syndrome , rather ignoring conveniently the huge  valuation difference between now and then.  Markets are now at 14-15 PE on one year forward while it was at an unsustainable 22-23  PE in 2007/08 top . In terms of market-cap to GDP , market is currently trading at 0.67 times while it was well over GDP  at  2008 peak . Tactically too ,  market is less vulnerable now to any sudden fall  as local institutions who have been sellers  in the entire rally will do the balancing act  in the event of any major sell-off  by FIIs . In the same fashion , technical indicators like open interest and derivative positions do not ring any alarm bells . 

That said , It is going to take a while for markets to navigate this particular wall of worry , as the shares change from weaker hands ( from panicking retail) to stronger long-hands . Such a gradual churn is extremely positive for stability in the next break-out as and when happens.

The above prognosis does  not mean that risks have  gone away completely  . Macro is still murky with election risks looming in the next year  . That does not  automatically make CY13 bad for the markets as markets are ahead of the curve and they tend to discount the economic and political prospects far in advance .  In the current  situation when visibility and conviction levels are weak , the prudent approach for the investors is to avoid taking bet on the market direction and instead take a longer view and build portfolio of individual stocks thro’ bottom-up process . This can prove to be a winning strategy as the portfolio can target to get the big upside from the eventual market turn ( as and when the macro /  economic cycle takes a sharp turn ; it is not the question of whether it will turn , but when) , while eking out reasonable returns in the interim on individual stock performance. Market continues to reward individual stock stories as reflected by the increasing number of stocks that have out-performed the benchmarks  . This trend is likely to continue .   Cashing out of the market fearing 20K level  or macro instability , is not a wise strategy and could prove to be an expensive error  as the market is bound to take that big turn eventually.

Happy Value Investing !!!

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