October 2014

Investor Dilemma – Invest now or later

Anxiety amongst investors has gone up with Sensex close to 28000 and 40% returns in the past one year. In one of our blogs dated January 8, 2012 we have clearly stated the risk of underinvestment. In the last four years we have seen investors preferring physical assets like gold and real estate over bonds and equities. Latest data shows that Indian investors have invested close to 68% of their savings in physical assets which is a historical high. Out of total savings of close to 36 Lac crores in last one year Indians have invested close to 25 Lac crores in physical assets.

In the last 6 months we have seen a change in mood amongst investors as they return towards financial assets like bonds and equities. This has been mostly on the back of markets gradually going up and favorable election results. In the next one year we estimate that investor preference will veer more towards financial assets over physical assets. We estimate that allocation in financial assets will revert to mean from 32% currently to 45-48% which by a back of the envelope calculation means that 16-17 Lac crores will flow into financial assets. With fall in credit growth to a 14 year low of 9% and also deleveraging in economy we expect banks to discourage deposits by lowering interest rates.

With improvement in fundamentals and a stable government at the centre stocks remain the most attractive destination for investors. We estimate huge flows by Indian investors in equities through mutual funds, PMS and direct equities. In the last 6 months we have seen inflows of close to 40,000 crores in mutual funds alone. At the same time we are seeing robust flows from FII’s. With every incremental flow in equities we are seeing much higher levels for index.

We can see a significant outperformance by high quality companies in this environment. Some of these companies have expanded their capacity from internal accruals without resorting to equity dilution. In our PMS we have invested in such high quality companies. Leveraged companies (which we have completely avoided) on the other hand are deleveraging by selling their assets which sooner than later will reflect negatively on their stock performance.

The risk to this thesis is a large number of new IPO’s, volatility in crude prices and international market volatility which can disrupt flow of capital. But in our mind new IPO’s will take time to hit the market. Crude prices are finally weakening and can show much lower level. International market volatility will be short term in nature and capital will flow to India as it is best placed to deliver attractive returns to investors.

It’s always wise to buy before we see a gush of money flowing in and take prices higher. We clearly see large flows of capital coming in and its more important than ever to invest intelligently, take short term volatility in stride and wait for further buying to come. In the next few years we may see the Sensex at levels which are difficult to imagine or comprehend today. Keeping this in mind we advise our clients to invest today to divest tomorrow. Only caveat is that invest mindfully in few of the best managed companies of India.

If you want to read our past views on the market you can read our blog below

http://investmentstrategyindia.blogspot.in/

 






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