Pouring Cash into Equities? Keep Expectations in Check...

Nov 10, 2015

In this issue:
» Samvat 2071 Ends on a Dull Note
» For How Much Longer Will Gold Remain in the Doldrums?
» ...and more!

I have been getting a lot of phone calls from unknown numbers trying to sell me investment products and services. They are marketing calls, mainly from the city of Indore, with the telesales guys asking me to subscribe to their employers' services - both fundamental and technical analysis, as well as F&O.

I have engaged in fairly long conversations with them whenever I have had the time. The discussion can be quite entertaining. What amazes me is the confidence with which they sell and promise - but not guarantee - very good returns. Try our F&O product, they say. Very little money required to be invested, they say. But the payoffs are marvelous, they say...

The frequency of their calls tends to correlate highly with market sentiments. The last year and a half has been good for the markets, and that's when these calls started coming in. Prior to the market run up, these guys had pretty much disappeared. But considering retail participation has made a comeback, I'm not surprised to hear from them more.

Money continues to pour in...

'Equity schemes see inflows of 18th straight month' read a headline in the Business Standard. Some interesting lines from the write up:

    The equity segment has seen inflows of Rs 62,000 crore so far this financial year. This includes Rs 20,000 crore in inflows in April and May, despite foreign brokerages scaling back their year-end Sensex targets.

    Nearly 12,000 investors have opened equity accounts per day so far this financial year till September. Put together, in the first half of the current financial year, the fund sector added 2.15 million folios, a little less than the whole of last year's. In August and September, the sector added a million equity accounts, despite a sharp correction in the markets.

It makes me wonder if such a trend - that of retail investors continuing to pour in capital into equities - can persist for long. Other assets classes are not doing great. It seems there are no better alternatives. Real estate is a mess, with uncertainty marked all over. The gold and commodity euphoria is seemingly behind us. Interest rates are on their way down, reducing the real returns on bonds and other debt instruments.

While the equity inflow trend is exciting, it is scary at the same time. Exciting...because the inherent 'power of compounding' of equities to create huge wealth over long periods. Scary...because of the simple fact that so much money is pouring in when stocks are not actually attractive. There has been a lot of study done which indicate that long term returns remain subdued when investments are made in expensive markets.

Infact, my colleague, Rahul Shah, recently wrote that, despite the overall run up, more than half of all the listed stocks were trading at lower levels than their prices five years ago!

It would be worth mentioning that back then (in the year 2010), overall market valuations were somewhat comparable to what they are today. In short, stocks were not cheap then. They don't seem attractive now.

A key learning is that valuations play a key role in long-term returns. And with market valuations not favourable, it wouldn't be surprising to see investors disappointed by the returns on their investments over the medium term.

I am not suggesting investors stay away from equities altogether. However, it would be a bad idea to be fully invested right now. Partial exposure is a good way to go. That's the approach we apply in our Megatrend investing service - The India Letter.

Are you fully invested in this market? Or have you set aside a good amount of cash to take advantage of opportunities as they arise? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
Samvat 2071 is about to end. It's time to take stock of the year gone by. One thing is clear if we look at the numbers. All those who entered the markets last Diwali, are an unhappy lot. They expected big returns last year. Unfortunately, the markets have not obliged.

As per the Economic Times, this is the third worst performance in a decade and fourth worst in the last fifteen years. The BSE Sensex has lost about 3% this Samvat and about 6.5% in US$ terms. The hype surrounding the NDA government's ascent to power in 2014 has certainly died.

Today's chart offers a telling reminder to all who expect quick returns from the markets. Time in the markets is more important than timing the markets. All who embrace this eternal principle of the stock market achieve good returns.

Much delayed reforms are important for a bounce back in the market. However, we believe investors will be far better served if the focus is on individual stocks by following a bottom-up approach to investing.

As always, we recommend buying stocks with solid fundamentals only when they are available at a discount to their intrinsic values. Time will then work in your favour and provide you satisfactory returns.

Negative returns this Samvat

Equity investors aren't the only unhappy people these days. Spare a thought for those holding Gold. The yellow metal has fallen for three years in a row now. As per the Business Standard, Even two consecutive years of losses last occurred twenty-five years ago!

Even the short-term does not look bright. The US Fed is increasingly likely to start raising interest rates in the US soon. This does not bode well for Gold. Even in India, demand has been weak. The Government's Gold schemes may also divert some investments away from physical bullion.

Things don't look good for Gold investors. However, we do not agree with the news of gloom and doom when it comes to Gold. The yellow metal is a proven store of value and holds its own during a crisis.

Thus, holding about 10-15% of your portfolio in Gold as a hedge against economic uncertainty is a good idea we believe. Besides, no one can be certain that Indians will be lured away from physical Gold to the government's new schemes.

With the US economy seemingly showing signs of a pickup in recent times - with job unemployment rates decreasing - expectations of rate hike have started to make a comeback. As reported by Newsmax - 'Nonfarm payrolls increased 271,000 last month, the largest rise since December 2014, the Labor Department said on Friday. In addition, average hourly earnings rose a respectable 9 cents. The payrolls jump followed tepid gains in August and September.'

With such a development, the rate hike expectations have risen for the Fed meeting, which is scheduled for December 15-16.

However, if Euro Pacific Capital's CEO Peter Schiff is to be believed, this optimism is likely to be short lived. As per him, Americans are broke and loaded with debt. Thus, their spending spree will be capped, which will result in poor sales for the retailers this holiday season; as a result of which, he expects layoffs to start picking up towards the end of the year beginning with the retailers.

His views on the rate hike are in tandem with those of Bill Bonner's, which he has been sharing for a while now. Given that the US recovery is one that is phony, the Fed will come under pressure and succumb to reversing its rate hike decision to keep the financial market stable. In other words, the near zero interest rate scenario is likely to continue for a while.

In the meanwhile, the Indian equity markets were trading below yesterday's closing levels with the BSE-Sensex trading lower by 160 points (down 0.6%). Weakness was seen in stocks across the board with those from the oil & gas and metal sectors leading the pack of losers. Selling pressure was seen in stocks from the mid cap space as well with the Mid Cap index trading lower by 0.7%. The Small Cap index, on the other hand, was trading marginally higher.

 Today's investing mantra
"We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person." - Warren Buffett

Editorial note: Please note that there will be no issue of The 5 Minute Wrapup on the 11th and 12th of November on account of Diwali. On behalf of the entire Equitymaster team, we wish our readers a very Happy Diwali!

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).

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1 Responses to "Pouring Cash into Equities? Keep Expectations in Check..."

Subramanian Ram

Nov 10, 2015

It seems that the retail investor is not left with many options.The yellow metal is no longer attractive, Interest rates on bank deposits are coming down,Real estate is extremely risky and Equities seem to be only alternative. But valuations are very expensive & the stock market is wholly controlled/manupalated by FII Flows which is not reliable. Looming rate hike by the FED As & When it happens will definetely have an impact on our market.So it is better to adopt a wait & watch attitude. Retail investors can enter after the inevitable correction is over.

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