Many of the investors we talk to would like to invest more in equities – once the markets undergo some correction. While people have become more comfortable with the idea of buying common stocks vs. investing in low yielding FDs / gold / real estate, yet the long rise of equity prices we have seen over the last year or two, leaves most people afraid - that they will suffer immediate losses if they invest before the markets correct. For many people, the obvious answer has been to wait for a correction.
Q. However, does it make sense to wait for a significant correction before investing, or should we invest whenever we have the chance to do so?
The waning effects of glitches in GST and Demonetisation
With GST and demonetization behind us, and easy compares on earnings ahead, we believe the relative attractiveness of India will stand out in 2018. We expect the reform agenda pursued by the government to deliver sustainable growth in 2018 & beyond. Ground level green shoots are visible already. Sectors that were a drag on earnings at the index level are repairing themselves, such as PSUs, Telecommunications, Materials and Real Estate. The government’s wave of reforms will yield multiplier benefits.
The transition from ‘unorganized’ to ‘organized’
With an Aadhaar driven economy where every bank account, mobile phone, demat account, investment account and bill payment history is centralized, the government has effectively transformed the domestic economy in a matter of months from largely unorganized and unreported, to organized and reported. The benefits are, in our opinion, likely to be substantial, with lower costs of capital, greater transparency, increasing tax collections, rising productivity & an improvement in operating efficiency.
Q. Why 2018 will be a year the Indian economy will experience the pro-growth benefits from a wave of reforms which will prove to be the basic fuel for steady uptick in stock prices?
- Strong demographics on account of 400 mn millennials
- Reform driven agendas
- Measures to curb nation’s systemic banking risk
- Growth platform in place
The Sensex currently trades a little over 21xs FY18 consensus earnings, which is slightly above its last 10-year average. Our view is that investors often tolerate high valuations, if earnings growth is expected to be strong. As a rule, valuation is not a significant problem for equities until growth begins to slow. Thus, investors who wait to invest until they can buy at “reasonable” prices often miss out on some of the strongest market rallies.
Q. Against a backdrop of continuing growth and indications of tolerable valuations, how much might equity prices decline?
Distinctions between a correction and a bear market:
Corrections tend to be much shallower & end more quickly than “bear markets,” where prices often fall 20-30% and more and can remain depressed for an extended period as the economy works to recover from a recession. So far, none of the macro indicators both for the Indian economy or for the world economy at large indicate a case for a bear market.
Based on our years of investing experience across business cycles we read the current situation as follows:
- As far as the expectation around the quantum of correction goes, stock price declines of around 5-10% are relatively common and probably can be expected. While they are sometimes associated with economic or other fundamental worries, many times they simply reflect nothing more than brief pauses in ongoing rallies that temper the excessive investor enthusiasm that builds as prices rise.
- Fundamental concerns can be a catalyst for mild corrections, but they are more likely to be linked to the shorter-term shifts in the balance of supply and demand. These corrections typically consolidate price gains after the market has rallied for several months.
- Concerns about changing trends in the economy or in earnings can be part of the worry that precipitates these consolidations, but, again, anxiety about a significant downturn is not expected to be as prevalent in these corrections.
Q. So, this leads us to our final question, what then is the best strategy for an investor seeking wealth creation?
Avoid timing the market:
'Timing' the market is usually a recipe for losing money. This is because to ace market timing strategy you must ace its 3 components as well: Getting in at the right time, getting out at the right time & knowing what to do in the interim.
Time in the market always pays off:
You can’t control timing the market. But you have control over time. Therefore, time in the market is a better option than timing the market. You are likely to have more success in the market if you decide to stay in for a long period of time. By long we mean ‘YEARS’, NOT MONTHS. This is known as HOLDING or Buy & Hold.
Power of compounding:
In the long run your holdings will survive through all the cycles of market and you will enjoy good rate of returns for your patience along with the power of compounding which is the only confirmed way of wealth creation. And if you choose to invest via SIP mode you can turn market volatility into a long-term wealth creation opportunity.