Confused about investing when the stock market is at an all-time high?

With the stock market at an all-time high (Nifty at 10,300 and Sensex at 33,000), any investor with even a little interest in the Indian Stock Market would be in a dilemma, “Should I buy more at current prices?” For those who entered the market lower and with handsome gains on the table, the question “should I book some profit at current levels and then re-enter when the market goes lower or should I wait for it to go higher before selling?” would be on top of the mind. And those who are new to the market would be wondering “is it foolish to enter at market highs?”

These very valid doubts if you are an investor, especially when the market is at its peak.

Hopefully, by the end of this article, you will have some clarity on what to do.

To begin with, I don’t think anyone really questions the long-term growth story and potential of India or of India’s Stock Market. Almost everyone accepts that the Nifty/Sensex will be much higher than what they are today in the long term.

But what about the short term?

What could be possible reasons for the market to correct? While there can be many, the most relevant today are:

1.       Domestic company earnings continue to disappoint

Indian corporates earning’s story is similar to the one about the boy who cried wolf. The expectation that earnings will ‘start picking up very soon’ has been in existence for over 5 years now and there is still no clear sign of a pickup. Yet, each quarter’s results are met with hope and even this time around (results of Q2FY18) the same optimistic sentiment remains. However if corporate earning’s disappoint yet again (or fail to show a recovery over the next 2-3 quarters), one can expect a correction in the market.

2.       State election results disappoint

Over the next few months, the states of Gujarat and Himachal Pradesh go to polls. If the BJP doesn’t win both states, it will signal a weakening of public confidence in the Modi government and a correction in the market is likely. However, based on early forecasts, BJP should win both states comfortably.

3.       Global geopolitical tensions, especially concerning North Korea

The ongoing stand-off between Kim Jong Un’s North Korea and Donald Trump’s the United States is a major geopolitical overhang the world is facing today. No-one can really predict if North Korea is going to launch a nuclear missile or if the US will attack first, but expect plenty of noise from both leaders. A good indicator of this crisis in South Korea’s stock market, which surprisingly hit an all-time high recently. So for those closer to the action, a blow-out scenario seems to be a very low probability event but expect some volatility in the markets going forward.

4.       US stock markets sell off, either due to disappointing corporate earnings in the backdrop of steep market valuations or due to the inability of Trump to push through business-friendly tax and economic reforms.

The US economy looks good today with healthy corporate earnings and economic growth. No signs of stress as yet. But going forward, one needs to keep an eye on the earnings story to spot any nascent signs of trouble since valuations are quite high. Rising interest rates are a concern but one can expect the fed to manage it well. We also need to closely watch for the final version of Trump’s reforms that actually get passed into law.

5.       Indian banking sector balance sheets under stress

Banks are the backbone of any economy. Unfortunately, in India, the banking sector NPA problem is still prevalent. One hopes it will get sorted soon. The rate of fresh NPAs have declined but recognition and provisioning of older debts is still a concern. The government’s mega recapitalization plans will boost public sector banks but the devil lies in the details as the size of the problem is quite large. RBI is also taking steps to clean up the mess but there is still some pain left in the system.

6.       Private sector investments and capital expenditure missing

India has always been services and consumption-led economy. Our demographics and population ensure a base level of 4%-5% GDP growth. But if India aims to enter the 8%+ GDP growth range (just like China did for many years), capital investments, especially from the private sector, are a must.

Current problems such as highly levered corporate balance sheets, slowing exports and slow pace of demand pickup resulting in existing capacity underutilization have throttled the pace of fresh investments.

However, this has been compensated by some extent through significant capital expenditure by the government (both central and state) and quasi-government entities over the past couple of years. Their focus is strong in areas such as Roads, Metros, Water, Railways, Smart Cities, Housing etc. However, in the longer term, government spending will be limited by its fiscal deficit targets and it is necessary that the private sector takes over the mantle of driving growth.

7.       The weak job market and limited employment opportunities for the youth

A structural challenge for a country with approx. 1.2 Crore young Indians joining the job market every year. The current govt. is under immense pressure to solve this demographic challenge. While some steps have been taken in this regard by the government via their flagship schemes, the Pradhan Mantri Kaushal Vikas Yojna, Pradhan Mantri Awas Yojana, Saubhagya Scheme, Smart Cities Mission, AMRUT, Bharatmala project etc., much more needs to be done. The private sector needs to play a larger role as the principal job creator but is hampered by some of the challenges discussed above. One also needs to be aware of the role technology will play in increasing efficiency thereby putting even more pressure on jobs. We need a comprehensive action plan on job creation that is broad-based and productive

Many other factors which drive equity market performance such as FII flows, RBI rates and liquidity outlook, government policies, Inflation trajectory, Current Account Deficit, Fiscal Deficit, monsoons, global commodity prices, global growth outlook, high market valuations etc. were considered but were found to have a limited negative role in the near future.

However, on the positive side, the last few years have witnessed a spate of reforms that have improved the macroeconomic fundamentals of the country and future growth prospects. Two important reforms that will be very beneficial over the medium to long-term (Demonetization and GST), have had some negative impact on growth over the last few quarters. This slowdown should be seen as temporary and there are enough reasons to believe that the economy will bounce back strongly in the next few quarters. It is quite possible that the 5.7% GDP growth number seen in Q1FY18 is a bottom.

1.       Domestic retail liquidity and financialization of retail savings is a long-term structural story and will limit the downside to the market

2.       Discretionary consumption is on the rise and is linked to the rising wealth in the hands of Indians

3.       Technology and innovation set to transform many traditional businesses. New age companies focused on improving productivity, replacing inefficient incumbents, or even creating new sectors, will play a dominant role in the future.

4.       Tax compliance is on the rise, both indirect (due to demonetization) and indirect (due to GST) taxes. Tax revenues as a % of GDP will go up and the extra revenue will help boost the economy. The government focused sectors would benefit.

5.       Current fall in GDP growth is a short-term phenomenon. Once net exports pick up, and with a good monsoon, GDP growth will go back to 6%+ in the short term (1-2 quarters). With increasing tax revenues, GDP growth will rise to 7%+ in the medium term (4-6 quarters). And once private sector investments pickup (10-12 quarters), GDP growth will go beyond 8%+ for a sustainable period.

On assessing the different risks and their potential impact, our view is that none of them are very serious threats as of now. However, all these risks need to be closely monitored and if any materialize, quick remedial action needs to be taken

A maximum fall of 10%-12% (approx. 8800-9000 on the Nifty) can be expected in the worst case. And every price closer to those levels needs to be used as a buying opportunity.

Many sectors/companies have already run up over the last 18 months such as auto and auto ancillaries, retail and FMCG, and financial services such as housing finance companies, select private sector banks etc.

However, there are many undervalued opportunities still available in the market, some of which are connected to the themes mentioned above. Whether you are a Mutual Fund investor or a Direct Equity investor, it is important to pick the right sectors/companies and if possible, at the right price.

Investing in the stock market, even at this price, still makes a lot of sense, given the upside vs. downside potential. You need to get your investment thesis and personal risk capacity right.

After that, in the words of a popular internet meme, Keep Calm and Carry On.

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Disclaimer: This article is solely meant to guide you in your decision-making process and should not be construed as investment advice. Investments in the stock market are subject to market risk. Please consult your investment advisor at Orowealth before investing or signup on www.orowealth.com to receive customized investment solutions with actionable advice and recommendations.