The benchmark BSE Sensex hit a record high of 40,651 this week. Every time Indian indices hit new highs, the same old questions pop up on the mind of investors.
Are the current valuations sustainable?
Is it time to exercise caution or gear up for more adventure?
Now that Indian markets are at a peak, what next?
This reminds me of a comment by a Bollywood superstar who reigned supreme for several years. A journalist once asked him in an interview. "Now that you have reached the top. What next?"
His reply "Once you reach the top, there is only one way to go. It's down."
This statement is true partially, looking at the fact that after touching a new high of 40,312 on 04th June 2019, Sensex went all the way down to 35,987 on 19th Sep 2019. However, the connection between the above comment and Sensex ends there. In a gap of 100 sessions between, Sensex corrected by over 4325 points but still managed to bounce back and touch new highs.
Before we answer the question that what should an Indian investor do now, let’s look at the reason behind the market correction first. One of the primary reasons behind this correction during the last few months can be attributed to the massive sell-offs by foreign portfolio investors amounting to over 15000 crores post the announcement of FPI tax in budget 2019. Timely corrective measures by the government ensured that issues had been sorted out, and foreign investors are back in the market.
Most experts believe the worst is over for Indian markets, and the only way to go is forward. Here are a few reasons which justify this belief:
- Trade tensions between USA-China have eased out considerably.
- The government has taken several positive steps to lift the economy, including a reduction in corporate tax rates which will boost the earnings of companies and eventually reflect in the Indian indices.
- GST on many products and services have been reduced substantially to boost consumption.
- Tensions in the middle-east between the USA and Iran which could have spiked oil prices have reduced.
- Additional reforms in the pipeline to simplify the tax structure on equity and make investments in Indian markets more lucrative.
For those who still have any doubts in mind, let's take a look at the history of Sensex.
Over the last 40 years, Sensex has grown from 100 to 40,000. And this growth has never been linear, i.e. a continuous straight line. There have been periods of outstanding growth, lull growth, slow growth, even de-growth and consolidation. In spite of this, Sensex has managed to generate an average CAGR of over 14.13% for the last 30 years.
We strongly believe this trend is expected to continue with a strong rally in banking, financial services, FMCG, infrastructure and capital goods sector which will boost valuations of Sensex over the next 5 to 10 years.
When Sensex was trading at 3500 levels in 2003, 35,000 seemed like a distant dream. Many said it was impossible. However, Sensex completed this journey of 10 times in 15 years. Now Sensex is at 40,000 levels. With the economy all set to reach $5 trillion from $2.9 trillion in the next 6-7 years, the growth will only become more rapid.
So you see over the next few years, you can only imagine the opportunities that will grow 5-10-15 times or even more during this phase. Exercising caution by waiting on the sidelines will give you relief while playing it safe; however, it will also result in missing out on the next bull-run. It is important to remember that not all sectors and companies will participate in the rally. Hence, it is essential to choose your investments wisely and prudently decide their allocation to gain the most out of this rally.