Sensex at 21000: Staying away may not be the right thing to do

The Sensex at 21000 is almost at life time highs. The last time it reached this level was in November 2010 after which it tanked all to way to 15500 levels. The first time the Sensex touched 21000 was in January 2008 after which it went all the way down to 10000 levels. The market participants were euphoric in January 2008, circumspect in November 2010 and are downright frightened in October 2013.

The reason for fear at 21000 is that there is nothing positive on the horizon. The Indian Rupee is down 13% since April 2013, the economy is growing at decade low growth rates, RBI is expected to hike repo rates in its policy review on the 29th of October, corporate results are showing slowing sales and profit growth (except for a few select sectors and companies) and the world economy is stuttering. India is facing elections in 2014 and there is no guarantee of a stable government at the centre. The country is rife with corporate and political scams.

[caption id=“attachment_1140499” align=“alignleft” width=“380”] It is right to fear the market at these levels and that is what the market commentators will throw at you. Stay away is what you want to hear and is what you will get at current levels of the Sensex. Reuters.[/caption]

The government had to infuse capital into state owned banks as these banks were facing the prospect of falling short of capital adequacy with rising non performing assets. The outlook for the future is actually more uncertain than it was when the Sensex was at 15,500 levels in December 2011.

It is right to fear the market at these levels and that is what the market commentators will throw at you. Stay away is what you want to hear and is what you will get at current levels of the Sensex.

What you want to hear is usually not what you should actually hear. Staying away from equity markets should have a clear reason behind it and the reason is not “the Sensex is trading at record highs”. If you have savings to invest, you have many choices and each choice is an opportunity cost. For example let us assume that you stayed away from equities from December 2011 and instead invested in fixed deposits or FMPs. You would have earned around 8.5% to 9% on your investments while equity markets would have earned you over 30% returns. Your cost of staying away from equities is 21%.

Similarly, staying away from equities at 21000 levels on the Sensex may or may not cost you. You will have to work that out for yourself. The alternatives to equity are fixed income investments that would earn you around 8.5% to 9% at current levels of yields for a one year period and maybe 9.3% to 9.5% for a two to three year period (assuming that you invest in high safety credits). Going down the safety scale you would probably get low double digit returns.

Apart from fixed income, you have gold and real estate. Gold will outperform equities if the equity markets tank as gold is seen as a safe haven asset. But if equities trend higher, gold will underperform as seen over the last one year where gold has given negative returns. You must have a view that equities will tank to shun the asset and buy gold.

Real estate is too expensive and you may not have money for real estate investments that are also illiquid, opaque and prone to black money.

Investing abroad through mutual funds that run global schemes or directly into global equities is an option. However the INR at Rs 61 levels is down close to 25% over the last two years and may not really fall much further from hereon. If INR actually appreciates, you could lose out on the gains earned in foreign equities.

Maybe it is not wise to stay away from equities after all, even with the Sensex at 21000!!!

Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors