Time to Book Profits

Time to Book Profits

It would be prudent to partly exit stocks as valuations are stretched, and a correction may be around the corner.

For the past seven months, the Indian equity market has been on a roll. The BSE Sensex has surged 30 per cent from 22,494.61 on February 29. There were several reasons for the uptick. The recent rally between August 25 and September 8, however, was dominated by liquidity flows. In nine trading sessions, the Sensex gained nearly 5 per cent, crossing the 29,000 mark for the first time in 17 months to touch 29,077.28 on September 8.

"There was no particular reason for the market to go up. You can't fight liquidity. When the markets are driven by liquidity, it drives stock prices crazy and if you do not want to burn your fingers, you just have to stay on the sidelines and be a spectator," says a fund manager, on the condition of anonymity. The market has since corrected 2 per cent and closed at 28,412 on September 15, but the volatility has left retail investors wary.

"Book profits and stay put. This market is not cheap. If you exclude IT stocks, the market has crossed its historic peak and the Nifty is trading at 30 times earnings," says Ambareesh Baliga, an independent analyst and market veteran, who advises corporates on equity investments. "February was a great time to invest in Indian equities, but the rise since then has come without a significant correction and, therefore, it is overdue. In fact, a correction would be healthy for the market."

Baliga has been advising his clients to book profits up to 25 per cent of their equity exposure. "With every rise I would keep on booking profits," says Baliga, who has, in fact, asked some of his clients to exit certain scrips.

The reason, he says, is that people who had missed the rally have now got into mid- and small-cap stocks, which have more than doubled in the past seven months. Therefore, if there is a correction, these stocks will correct sharply. Says Baliga: "Retail investors do not buy large-caps. They buy more of mid- and small-caps, and if there is a small correction in the index, which I expect to be 6-8 per cent from the current levels, mid- and small-caps can lose up to 50 per cent of their value. Thus, it would be better for investors, particularly retail investors, to book profit and stay put."

Despite the warning from industry veterans, historically it has been observed that when everyone on the Street is cautious, the market does not correct, more so, if it witnesses continuous flow of funds. "Valua-tions in the market may look stretch-ed and it may correct on external events. But overall, the story is about India and money is certainly flowing into Indian markets, including in fixed income assets," says a senior official of a foreign bank. "With interest rates being negative in developed markets, there are very few markets in the world that can attract flows, and India is among the top countries that are being favoured by foreign investors."

But it must also be noted that liquidity has its own risks, when it is not backed by fundamentals. Therefore, it would not be prudent to think that the market will continue its rally just because foreign investors do not have enough opportunities in terms of returns from other asset classes, and are considering the Indian stock market as one of the few bright spots among global equity markets. In fact, there is an impending risk of a bubble burst if this market does not witness a healthy correction.

While the market does not expect the US Fed to hike rates in its September policy announcements, all eyes will be on it to gauge the future course of the US central bank's action. This will have a huge bearing on the market.

The movement of the domestic equity market will also depend on the performance of India Inc. and, more importantly, an uptick in volume growth. Until last quarter, corporate India was enjoying the advantage of a fall in raw material prices and low input costs. For the market to surge higher, it will need Indian companies to deliver as most of the good news, including GST, implementation of the 7th Pay Commission, one-rank-one-pension (OROP), government spending on infrastructure, and cuts in interest rates, are largely built into the current stock prices.

Says Baliga: "While the positives are already priced in, the market has still not discounted the negatives, including the implementation of GST among small traders that may be suppliers to bigger companies or, for that matter, the fact that there are no signs of private spending because capacity utilisation has still been low for many." Nilesh Shah, MD and CEO, Kotak Mutual Fund, agrees: "Markets are finding a reason to correct, as currently prices are ahead of fundamentals. Keep a watch on trends from abroad as we are a part of the global market. However, if you believe in continuity of the government's economic policy post-2019, buy during corrections." Shah feels factors that can lead to corrections are the possibility of a Fed rate hike, with indications of further hikes - something that the market has not priced in yet. And two, elections, especially the Uttar Pradesh assembly polls, that might create doubts over the continuity of the present economic policies.

With the mood being cautious and no large positives in the market, it would be better for investors to take some money off the market and stay on the sidelines. Wait for the market to throw up an opportunity to re-enter at a better price.