Most Indians steer clear of the stock market. In fact, if one goes by comprehensive surveys done by the Reserve Bank of India, most Indians barely own financial assets. No wonder then we are witnessing high decibel campaigns by mutual funds and life insurance companies or the government.
‘Is it the right time to buy?’ is perhaps the most commonly asked question by anyone who reads a bit about equity markets or someone who knows a thing or two about them.
If the answer to this question was simple, the whole financial services industry would have been redundant. The timing is everything. We all want to buy when prices are low and profit by selling later when prices rise. This applies to property, gold, equity or any other asset class.
Equity markets are often driven by greed and fear. It is a battle between these two profound emotions. Profound, because a lot goes into arriving at the two emotions. You get greedy when you know future profits of businesses are likely to surge, but share prices are down. You fear when share prices rally even when profits do not show any sign of rising.
It takes a lot of reading. But it also requires you to be able to put two and two together. Any information can move share prices only when it connects to the future profitability of businesses.
If you plot a graph of the Sensex movement and the earnings per share or EPS growth of Sensex companies over the years, you will see that share prices move in tandem with the EPS growth. This is primarily the trend in profitability of Sensex companies.
The situation now is very peculiar. Over the next six months or so, equity markets are unlikely to go anywhere. There are these forces of greed and fear sharing exerting almost equal pressure.
Forces of greed
A lot of money is flowing into equity markets. Domestic institutional investors like mutual funds, provident funds, and insurance companies are together putting close to Rs 16,000 crore a month, according to the stock market data. This is an unprecedented development. It is a cushion against any pullout of money by foreign investors. Until recently, Indian share prices have always moved according to the inflow and outflow of foreign institutional investors.
So if foreigners buy Indian shares, they would rally. If they sell, they would fall. In 2018, major benchmark indices have inched up so far despite a net selling by foreign investors. Overall, investors expect the profitability of businesses to revert to a growth path. They believe that the government finances are expected to remain strong despite an impending general election and unlikely to put pressure on inflation. This shows that the RBI has the freedom to keep interest rates in line with the potential inflation outlook.
Forces of fear
Rising crude oil prices, a potential global trade war and political uncertainty ahead of 2019 general elections are some of the forces of fear. The hike in minimum support price for farmers is bad news from an inflation standpoint. High inflation results in high-interest rates. This makes aggressive equity investing risky. The appetite for risk usually goes down in a high-interest rates scenario. Share prices can rally only when interest rates show a secular decline.
That is possible only when inflation remains low. If analysts are to be believed, RBI could continue to raise borrowing rates. This is likely to continue till general elections. The other worry is that the government may offer more sops to farmers and other sections of the public to win votes. This could hurt future government finances.
What you can do
As an investor, you may have always wondered when to start investing in equity. The stalemate between the two emotions like greed and fear could continue for a while. Share prices do not have a reason to run away. They also do not have a reason to fall dramatically. This is perhaps a good time to make a beginning through a systematic investment plan of a mutual fund. You may also look at a Sensex or Nifty based index fund. Equity investing is all about patience. The more time you give to your investment, the more it would help you meet your objectives. There is perhaps never a better time than now to start your journey.
(The author is a publisher and founder at Simplus Information Services Pvt. Ltd.)
Rs 16,000 crore a month investment put by domestic institutional investors like mutual funds, provident funds and insurance companies together, according to stock market data.