Stock market: No time to book profits

Continuing with its new-found impetus on reforms,the government further went ahead with the much-delayed decisions on allowing foreign direct investment (FDI) in multi-brand retail,aviation and the broadcasting sectors on Friday. While a combination of these events are positive in the near term and may boost the equity markets,experts say that the momentum in the equity markets is likely to sustain in the longer term. Hence investors could look to stay put in the markets and go ahead with their regular investing plans.

What has this quick rally done for you?

If you invest in the systematic investment plans of mutual fund,then this brisk rally over the last eight trading sessions would have made good your entire investment over the last one year. For example if you invested R 5,000 on the 15 th of every month beginning September 2011 in the Sensex,then with the benchmark index closing of 18,464 on Friday,your investment of R 60,000 (over 12 months) would stand at R 65,379 — a tax free return of 9 per cent. This is much better than your return from fixed deposits that attract the marginal tax rate. This offers the benefit of investing through the systematic investment plans for the long term as your cost of investment averages out and when the market rises,your return jumps sharply.

Will the rally sustain?

It has been a slow but steady gain for the markets over the last eight trading sessions where the Sensex has gained 1,150 points or 6.7 per cent. While the sustained rally on the back of the German Court ruling in favour of the euro zone bailout got a push on Friday after the Indian government’s announcement on Thursday to hike the diesel price by R 5 and limiting the subsidised LPG cylinders to 6 per connection in a year,as further fillip has come in the form of the Quantitative Easing (QE3) announced by US Fed on Thursday.

Market experts say that the steps taken by the UPA government on the diesel and LPG are more than encouraging and they have certainly lifted the market sentiments. “The rally is likley to sustain as the government is moving in the right direction and we may expect more actions from the government going forward,” said S Naren,CIO,ICICI Prudential Asset Management. In an additional boost,the governments decision to allow FDI in multi brand retail,aviation and boardcasting are likely to be taken as another positive driver by the markets.

However,Thursday’s actions alone may not be enough to sustain the rally and much more will be required from the government in order to convert this sentiment led movement at the markets to a more concrete rally that is driven by strong economic fundamentals and investment led growth. “It is a good beginning but the government needs to work on improving business and investment environment in order to sustain it,” said Raamdeo Agrawal,joint MD,Motilal Oswal Financial Services. “The issue is that the hard core economics has to play out and look at ways to attaract project investment of R 10,000 to 15,000 crore by corporates. Otherwise we will reach a situation that even to get domestic investment they will have to do road shows.”

So,in effect,the government will have to transform the liquidity driven and sentiment driven move into an investment led growth that is sustainable for the long-term. Some feel that a repo rate cut by the Reserve Bank of India on Monday will further boost market sentiments and will help the rally to sustain. “While a rate cut will further boost the sentiments,the government should not roll back the diesel price hike,” said Naren.

The risks?

While a QE3 and diesel price hike has come as a welcome gift to the beleagured stock markets,the excess liquidity that will be created by the QE3 is likely to push up the commodity prices,which may hurt the Indian economy in the long run. India is a net importer of various commodities,including crude oil and gold,and a rise in their prices will hurt the country’s trade deficit. Also a hike in diesel price will lead to a rise in inflation,which the RBI has been looking to contain through its monetary policy measures. The rupee however may end up gaining some of its lost ground against the dollar

What should you do?

While the Sensex at the Bombay Stock Exchange has hit a 13-month high,it is not a time to book profits and exit the markets. Market experts are of the opinion that the excess liquidity in the market as a result of QE3 will push the equity markets for a while and hence the markets are likely to rise further. Even the domestic policy actions will provide strength to the markets. Systematic investment plans of mutual funds should be the way to invest in equities. However asset allocation should be maintained at all times. “Just because gold has risen sharply to over R 32,500 per 10 grams in the recent past does not mean a large portion of the investment portfolio should be routed into it,” said Surya Bhatia,a Delhi-based financial planner.

—sandeep.singh@expressindia.com