Do not get attached to all the stocks that have given you a decent return, diversify according to geography and asset classes
In a song by Rajnikant Padayappa, the hero urges you to climb to the top and, after scaling the top, climb to the sky – Freshdesk Founder and CEO Mathrubootham cited this as his inspiration, after the public issue of $ 1.03 of his business and his Nasdaq listing. This is not an option for the Sensex.
At 60,000, the Sensex represents the valuation of Indian stocks with an 80% premium over other emerging market peers. It is not sustainable, and there has to be a correction, regardless of the specific trigger. Investors, who are taking advantage of this exhilarating surge, would be well advised to diversify into fixed income securities in India and other regions.
India’s history is strong, although at the end of the current fiscal year the economy is not quite the size it was at the end of the 2019-20 fiscal year. Analysts expect profits of companies that matter to Sensex or Nifty to rise 35% in the next fiscal year.
The pandemic is stabilizing, new infections are declining, and vaccination is progressing rapidly, although it could have prevented tens of thousands of deaths in Wave 2 if the government had ordered vaccines at least when the Serum Institute began. to invest in increased capacity to produce the AstraZeneca vaccine at the end of last year.
But the stock market has not risen only because of the strength of the Indian economy and the likely profitability of Indian companies. One of the main drivers has been liquidity, sweeping through Indian stock exchanges from where it was created through fiscal expansion and bond purchases by central banks, totaling trillions of dollars in the United States. , in Europe, Great Britain and Japan.
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Interest rates are depressed in the developed world, and vast reserves of capital are scouring the world in search of higher rates of return. In calendar year 2020, $ 14.035 billion of net portfolio investment came to India. The figure so far reaches over $ 12 billion this year. Some of these flows would reverse when extra-accommodative monetary policies in the West and Japan lose this surplus and become accommodating. And that could create a chaotic drop in stock prices in India.
The US Fed said earlier this week it could start cutting back on asset purchases – it has bought, since June 2020, $ 80 billion in Treasuries and $ 40 billion in mortgage-backed securities every month – later this year, and liquidate the asset purchases by the middle of next year. This would tighten rates, even if there is no direct action on the Fed’s key rates. The European Central Bank has already reduced its asset purchase program and the yield of some German Bunds has come out of negative territory.
As the yield on risk-free government bonds in rich countries increases, some reallocation of the portfolio occurs among global funds: to maintain the same overall rate of return, they must now be exposed to less risk in the markets. emerging, and they would make some money from risky places for the security of their own domestic markets. This would remove liquidity from emerging markets such as India and put downward pressure on stock prices.
Then there are risks such as those emerging from China’s Evergrande, a giant real estate developer that owes bondholders, creditors, sellers and home buyers $ 300 billion. Chinese authorities seek to distract people from investing in real estate, which appears to be a Chinese obsessive-compulsive disorder.
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According to one estimate, 96% of urban households in China already own a house, and many are looking to invest in another. To destroy the idea that investing in real estate is safe and rewarding, the easiest method would be to allow another large developer to default on their home delivery and debt service obligations. However, if the scale of the default value is huge, it might cause the system to crash.
The Chinese authorities would hopefully strike a balance between systemic disruption, which would spill over into other markets, and shock therapy for compulsive real estate investing.
As of now, Evergrande has missed its coupon payment of $ 83.5 million on its dollar bonds due Thursday. However, there is a one month grace period for making the payment. Only if it turned out that the company would default at the end of the grace period, would investors abandon the dignified and frozen panic and trigger a stampede.
It’s not just foreign liquidity that is pushing markets up. Domestic liquidity creation has also been abundant.
The RBI is currently developing new reverse repo routes to absorb excess liquidity and uses dollar futures transactions, rather than outright buying the greenback which pushes the counterpart rupees into the system, to contain the rupee’s volatility triggered by excessive capital inflows. .
Low interest rates mean that bank term deposits have lost their appeal to middle-class savers, small savings plans are less liquid and have seen their yields gradually decline. So, savers turned to mutual funds and got straight into stock trading.
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When the markets are on a secular rise, everyone is an investment magician. Those who make money when the markets also go down are the real wizards. Separating the wheat from the straw will not leave the straw particularly wrinkled. So it is better to leave the magic to wizards and ordinary investors to diversify their investment portfolios.
A Morgan Stanley podcast, Market thoughts suggests that European stocks are relatively undervalued. Geographic diversification is an option. Diversifying into debt mutual funds or buying government bonds directly is another option. Ideally, the government should offer savers an option such as a bond that protects their principal and interests from the corrosive effects of inflation.
Remember that half-forgotten advice from the past, to run away from attachment in order to find happiness. Don’t get attached to all the stocks that have given you a decent return, diversify geographically, across different asset classes. So, book your profits, conquer the stars of Mount 60,000 from SpaceX tourists, and climb to the lowly bonds, real estate investment trusts and mutual funds that invest overseas.