As the Nifty and the Sensex scale new highs, the key question is whether it time to book profits and move out. There may be no clear answers as these decisions are largely driven by individual trading strategies and individual goals. However, there are 9 things that traders and investors need to remember before taking a decision to book profits just because the Nifty and the Sensex are at a new high…
9 things to consider before booking profits at new highs…
- A market high is not necessarily a signal that the market is overpriced just as a market low is not a signal that the market is underpriced. For example back in 2008, after the initial correction in March and April, the markets did appear to be cheap in valuation terms. But then Lehman happened and the markets went down much further before bottoming out in March 2009. The same logic applies when the market is at a high.
- Indian markets are at a new high because the earnings are finally beginning to grow after remaining almost flat since 2010. This is absolutely contrary to the situation that we had since the early nineties when the corporate profit growth was always buoyant. As profits get into a new trajectory, there could be strong case for re-rating the Indian markets.
- Foreign portfolio investors (FPIs) are again getting interested in India. Firstly, the reforms process may be back on track and the stability at the centre is adding to that confidence among investors. With China still likely to grow a full 1% lower than India, that will propel a lot of FPIs to continue to invest in the Indian markets.
- The Indian rupee may be the real trump card in the coming years. In fact, there is a clear shift in stance of currency analysts. From talking about INR at 72/$, analysts are not ruling out the possibility of INR now hitting 55/$ in a best case scenario. A strong rupee will not only be a magnet for portfolio flows into India but also will make oil cheaper and ensure that the dividends of cheap commodity prices continue to prop up the balance sheets of Indian companies.
- In P/E terms India may be nowhere close to the froth zone. Back in 2008 and 2010 when the markets touched their long term peaks, the valuations were at around 27-28 times earnings. Comparatively, current markets are very cheap at around 17-18 times forward earnings. To add to that, if the earnings also start picking up then the P/E may actually begin to look attractive.
- Retail euphoria is still missing from the markets. There was a time in 2008 and 2010 when retail investors used to invest in equities like there was no tomorrow. Today, most of the retail participation is coming via mutual fund SIPs. That is hardly an indication of frothy markets. In fact, as long as there is scepticism, markets are unlikely to correct too sharply.
- Sector rotation is yet to happen in a big way. For example, if you look at this rally it has been largely led by sectors like private banks, select auto stocks and downstream oil. That is not the way markets top out. They typically top out when the froth is visible across all sectors. There is still a lot of sector rotation to happen. We still need to see the lagging sectors like IT and pharma participate in the rally. The top of the rally still appears to be a long time away.
- Liquidity is abundant in the system, both domestically and globally. Domestic liquidity has got a major boost from the demonetization drive. That liquidity is likely to stay on. Even global liquidity continues to remain buoyant and as per the latest indications from the ECB, tightening is unlikely any time soon. This also points out to markets being comfortable at these levels for some more time to come.
- Lastly, your decision to book profits can be more specific where momentum is missing. You can even book a loss in such cases. But where you find the momentum in earnings and investor interest sustaining, you do not have to be in a hurry to book profits. Of course, you can always hedge your risks with derivatives to take care of the volatility.
To cut a long story short, it may not be the time to run for the exits. The markets may be preparing for a long term take-off. Exiting the markets at these levels will mean missing out on the best phase of the market. Of course, one cannot discount short term volatility, but the long term outlook for equities still appears to be quite robust.
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