Nifty 50 at record high; time to increase exposure to equities or turn cautious?
Nifty 50 hits record high as risk appetite grows following India's Q2 GDP surpassing expectations and exit polls pointing towards political stability.
Nifty 50 hit its fresh record high of 20,291.55 in intraday trade on Friday, December 1, as the risk appetite of investors grew stronger, following India's Q2 GDP surpassing expectations and exit poll of the five state elections pointing towards a probable landscape of political stability.
India's Q2 GDP grew 7.6 per cent, significantly exceeding the expectations.
Also Read: India Q2 GDP: Indian economy poised for strong growth in FY24? Here's what top economists say
Meanwhile, Several media outlets have declared the exit poll results for all five states i.e. Madhya Pradesh, Rajasthan, Telangana, Chhattisgarh and Mizoram.
Experts hold a positive outlook on the long-term prospects of the domestic market. However, with most variables already accounted for and the market having reached its record high, investors are facing a dilemma: Whether to increase their allocation to equities or adopt a more cautious approach.
Investment in equities largely depends on the risk appetite and investment horizon of investors. Since the market is at its record high, one may wait for some correction to increase allocation to equities. Similarly, one can consider booking some profit at this juncture.
"Asset allocation principle along with an investor's investment horizon will guide if trimming is warranted or not," said Chintan Haria, Principal – Investment Strategy at ICICI Prudential AMC.
Haria believes while some positives may be factored in by the market, these positives are likely to remain for India for the foreseeable future due to positive demographics, continued momentum in manufacturing and infrastructure, etc.
"Interim corrections could occur, but eventually Indian equities will benefit from all round growth leading to higher sectoral earnings which will lead to higher market capitalisation," said Haria.
Along similar lines, Ashish Naik, Equity Fund Manager at Axis Mutual Fund also underscored that the decision to trim or increase exposure depends significantly on individual risk appetite.
Naik pointed out that while certain segments might be overvalued, it is crucial to recognise the enduring opportunities that persist across various sectors.
"The strength exhibited in corporate earnings during Q2 provides a solid foundation, indicating the resilience of businesses and macroeconomic indicators further support a positive stance. This is reflected in various aspects such as companies focusing on RoCE (return on capital employed) and free cash flows, GDP growth, inflation rates under the upper limit of RBI and confidence of FDI; all contributing to a favourable backdrop for equity investments," Naik said.
"Markets inherently come with short-term uncertainties, and in the current scenario, crude oil prices and upcoming elections pose potential risks. These elements can influence market dynamics in the near term. On a broader horizon, the medium to long-term view remains optimistic, primarily driven by the sustained strength in corporate earnings. This indicates that despite short-term fluctuations, the overall trajectory of the market may remain positive," said Naik.
Deepak Ramaraju, Senior Fund Manager at Shriram AMC says one should invest in equities if he/she has a long-term investment horizon.
He is bullish on equities as inflation is heading lower globally due to which the regulators may be under pressure to reduce the interest rates. Typically, lower interest rates and adequate liquidity drive equities.
"There is the probability of the equity market rallying is higher in the medium to long term and hence one can stay invested and increase allocation incrementally," said Ramaraju.
"Given the elevated valuation of Indian equities, it would be prudent to increase allocation to equities incrementally or at every fall or opportunity. However, if the investor has an appetite to stay invested for the long term and doesn’t need immediate returns, then the investor can have more than 50 per cent exposure to equities. However, investors have to seek the guidance of a certified financial planner before allocating more than 50 per cent to equities," said Ramaraju.
Chandraprakash Padiyar, Senior Fund Manager at Tata Mutual Fund also believes equity as an asset class can deserve a larger allocation in an investor’s portfolio over the long term.
Padiyar pointed out that the Indian Equity market, over the past few years, has been a mixed bag with large caps delivering low single-digit performance whereas mid and small-cap segments of the market outperforming by a wide margin.
Manufacturing, corporate capital expenditure, infrastructure investment growth from the government, strong real estate demand including realisation improvement, and healthy banking sector balance sheet leading to higher credit growth are some factors leading to positive sentiment towards earnings growth for corporate India and hence the equity markets.
Padiyar believes that all these factors continue to be tailwinds for the markets going ahead.
He added that there is an option value which is, if and when China + 1 picks up materially for India from a manufacturing perspective, there can be a large uptick in growth for the economy for a longer period.
"There certainly is an execution risk that one needs to keep in mind hence taking this aspect as an option value for the markets. We are optimistic and believe that opportunity is real for the long term," Padiyar said.
Moreover, Padiyar said valuations for the markets have moved higher but continue to be around long-term averages – within all segments of the market some pockets of high valuation are starting to emerge on account of very high earnings growth expectations which could be a risk and hence stock selection is the key for returns to sustain.
Lastly, return expectations need to be in line with the past and one should not chase returns with a recency bias. Also, one needs to keep in mind that equity as an asset class is always volatile and will go through up and down cycles and one needs to keep an asset allocation approach over the long term, said Padiyar.
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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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