Sensex In Stratosphere: Why This Is The Time To Rethink Asset Allocations

With the stock markets crossing the Sensex level of 85,000 and Nifty level of 26,000, the first thing investors should be worried about is safety of capital, not returns.

When the base for future index growth is so high in a world that has two unresolved wars and a lot of geopolitical conflicts and economic uncertainties ahead, investors have to rethink their asset allocations.

While predictions about which way stocks will move in the short to medium term are a mugs’ game, a better idea would be to examine the underlying factors pushing up share prices and which forces may counter this trend. These will provide clues on whether you must take more risks or less.

Share prices have stayed buoyant for three major reasons:

First and foremost is domestic money — or the huge shift in savers’ preferences from bank deposits and fixed income sources to mutual funds. According to the Association of Mutual Funds in India (AMFI), savers are shovelling close to $3 billion every month into mutual fund systematic investment plans (SIPs), with August 2024 recording a new high of Rs 23,547 crore in SIP inflows.

Compare this with barely Rs 3,000-4,000 crore a month in fiscal 2016-17. The huge amount of money chasing mutual funds (including stocks) is the primary reason why stocks have risen so high, and remained high, for so long.

Second, India is the last man standing when it comes to economic growth. Our economy could grow anywhere between 6.5-7 per cent, and the Reserve Bank is sticking to its high forecast of 7.2 per cent. Other major economies will not grow this fast this year or even in the next, and some could even fall into recession.

This means even skittish foreign money is now wondering whether it should be exiting India when the markets are doing so well. According to NSDL data, to date foreign portfolio investors have invested over Rs 92,345 crore in calendar 2024, with more than half of this money coming this month alone.

Third, the US Fed has started cutting rates, and it is only a matter of time before the Reserve Bank also does so. Since lower rates usually lead to a higher rerating of stocks, punters believe that the market still has a few more legs to stand on.

On the other hand, look at the cons.

First, prices are simply too high to yield good growth in the near future. The Nifty 50’s price-earnings ratio is at 24.2, which means current prices discount post-tax corporate profits by 24 times. Since future profit growth may not maintain past trends, stock prices cannot sustain without huge additional investment inflows.

Second, a Bloomberg report suggests that even stock pickers are finding it difficult to find new “buy” opportunities, again emphasising that stocks may already be in an over-priced zone. 

Third, there is now an excess supply of new scrips to invest in. According to a Business Standard report today (26 September), some Rs 50,000 crore worth of IPOs (initial public offerings) may hit the markets before Diwali, and fiscal 2024-25 could well become India’s best year for equity raising, topping 2021’s previous best of over Rs 118,000 crore.

The pipeline of already approved IPOs and those awaiting approvals now exceed Rs 150,000 crore. Here’s the takeout: when stock supply expands dramatically, prices should fall. They may not do so, but if primary equity offerings are booming, the secondary markets should feel the pressure.

Third, gold is hitting new highs as geopolitical concerns and falling interest rates in the US make it an alternative to over-priced stocks. Year-to-date, gold has given Indians a massive return of just under 30 per cent — much higher than stocks. Both gold, and fixed investment returns, which are yet to fall as the Reserve Bank is yet to cut rates, seem inviting vis-a-vis stocks in the short run.

Net-net, this is the time to rebalance your equity/non-equity investments, not increase your bets on equity — unless you are really thinking really long term. But don’t go by my understanding alone. It is time to seek professional investment advice, and not get moved by sheer momentum enthusiasm.