With the Sensex at 16,000-odd levels, is this the time to buy or sell stocks?
Even at 16,200 (the Sensex rebounded on Thursday from the previous day’s market massacre), stocks are not a screaming buy, according to several market experts. Given the local economic problems and global turbulence, there’s a good chance the Sensex could tumble further to 15,000 in the short term; in the worst-case scenario, it could plunge all the way to 12,000. The rupee has also hit a new all-time low of 54.56 against the US dollar, and bets are increasing that it could tumble to 60 in the next 12 months.
Only an investing braveheart would decide to wade into the market right now — and there are very few of those around at the moment.
Besides, what's the case for investing right now? The Sensex has gained just 3 percent in 2012, after nursing a 25 percent loss in 2011. Given that the economy is going nowhere in a hurry, and that possible austerity measures may be on the way (possibly further crimping consumer and investment demand), there’s little hope of the benchmark index accelerating course in a hurry.
So, recommendation #1 is assess your asset allocations in the wake of the market fall. As this Firstpost story points out, it's possible you might need to lower your equity allocations, depending on your risk profile. However, that doesnt' mean you should dump stocks altogether. As Suresh Sadagopan, a financial advisor, tells Economic Times: "My only advice to such people would be to at least hold on to your investments in stocks. It would be suicidal to book losses and take money out from the market at this point."
Why suicidal? Well, the general theory goes that barring short-term instances of traumatic turbulence, equities typically outperform most asset classes in the long term. So it would be a mistake to dump stocks in rough times. A fact that the newspaper is eager to highlight in a quick edit: “For long-term investors, the market slump is an opportunity to buy. The India story is too strong to be crippled by external turbulence or incompetent political leadership internally. Of course, we can do with more coherence and boldness at the top to restore macroeconomic balance and free up economic activity.”
The big question is, how long is long term? Once, 'long term' used to mean holding on to a stock for life. But in today's volatile times, even ace investors like Rakesh Jhunjhunwala don't see much merit in holding on to stocks forever. “Value investing is also buying a stock, keeping it for 12-18 months and selling it at a handsome rate. Value investing is buying value where it may not (always) be lasting value. That value could be encashed over two or three years," he told a newspaper late last year.
For individual investors, the decision on how long to wait before cashing out depends a lot on risk profiles and patience levels.
In compounded annual growth rate (CAGR) terms, the Sensex has returned 16 percent over the past three (calendar) years, and just a piddly 2 percent over the past five years. However, in the past ten years, the Sensex has grown by a healthy 17 percent (CAGR).
Not exactly sterling, but not too bad either.
Which brings us to recommendation #2: Unless you believe in miracles, don't put all your investment eggs in equities. Diversify.
Even in equities, it's time to become extremely selective. As the Firstpost report notes, avoid stocks of public-sector companies, because "a politically weak government will use everything in its power to avoid making tough economic choices, and so it will squeeze public sector profits to make ends meet. So companies like ONGC, Coal India, and government-run banks are best avoided. This is not to say they won’t give you gains, but the risk is higher".
If you are currently under-invested in stocks, try to pick stocks that are reasonably priced or are good market recovery plays. Focus on companies that are strong on operational execution, have good return ratios and no management-related concerns.
You may still need to wait awhile before returns come pouring in. As Dhiraj Agarwal, director of institutional sales with Standard Chartered Securities, tells CNBC- TV18, while there may not be a big market crash from here on, "a breakout on the upper side will not happen until we see concrete signs of macro variables improving in India”.
That might take some time, so be prepared to ride it out.