Stock Markets: Time To Book Profits Now?

On FY ’09 basis and beyond, select stocks (not sectors as a whole) in all types of market capitalisation are attractive. (But) capacity constraints and effect of higher interest rates on earnings will cease to be significant variables.

The expansion in the universe of large-cap stocks to more than 100 from about 30 three years ago, the deepening of the mid-cap category, now straddling a multitude of sectors, and an increasingly robust small-cap universe have enhanced the attractiveness of India for foreign portfolio investors.

It does not matter whether the BSE Sensex is at 15,000 or 30,000 - what matters are the fundamentals on the economic and corporate fronts, which remain on a solid footing.

What you just read are three seemingly different thoughts, courtesy missives sent recently to unit holders by various fund houses. For all the difference, you may well feel that an invisible cord ties all three together. Thoughts such as these are coming thick and fast these days, all of them perhaps leading to one question: Will the bull run sustain?

That question, as fund circles see it, may be asked a bit differently. As Franklin Templeton puts it, investors all over want to know whether they need to book profits or whether they should modify their asset allocation.

There is, in fact, one readymade answer, and that applies to investors with a long-term perspective. This set, it has been advised, need not necessarily fine-tune their plan just because the market has gone up so much. Nevertheless, one can consider options, considering the finer and positive aspects of investing in fixed-income products.

Here is more from Franklin Templeton: “We believe that in a fast-growing economy like India, market levels are meaningless. A few years back, very few could have bet on a 15,000 Sensex level… while valuations look expensive relative to other emerging markets, one should also keep in mind that growth prospects are strong and India has emerged as an ‘asset class’ in recent years”.

Now, before you start buying this logic completely, check out some of the risks that our markets broadly face. One, there is always a possibility that the liquidity flow into India may get stalled because of changing perceptions of the overseas investor. Two, earnings recorded by local corporates may weaken because of systemic changes (interest rates?) within the country. Three, runaway raw material prices may play the spoilsport, which again may impact corporate profitability a great deal.

Given this possible downside, what are our fund managers trying to say? Well, the asset management community is telling investors to adopt a really long-term approach. That is because the short-term scenario can be severely volatile.

Let us at this stage refer to another interesting school of thought. This relates to the sustenance of the bullishness. Equities, we are being told, have been scaling up for the last four years or so. Will this sustain for a few more?

There is no straight answer. Fund managers, nevertheless, are advising clients to pare their expectations, at least temporarily. As a particular fund house has recently noted, investors may well consider exposures across the capitalisation spectrum, with a bias towards large-caps.

Whether you actually want to follow their counsel is for you to decide. But before you decide, here are a few wise words from Sundaram MF. “To base investment decisions on the magnitude of returns we have experienced over the past four years can lead to inappropriate selection of stocks and funds, higher transaction costs and tax effects”.