A MORE THAN 100 per cent surge in equity markets has encouraged many small investors to start trading or directly invest in stocks. They have also been encouraged by the wave of initial public offerings (IPOs) that have given stupendous listing-day gains. Over 10 million Demat accounts were opened in 2020, which is a record.
However, there is every chance that the easy gains of the past year may make investors complacent and prone to taking riskier bets. Here’s how they can be cautious and yet partake of the bull market gains.
The Bull Market
After six to seven years of weak economic growth, we are at the cusp of economic revival. Companies are reporting good numbers despite the nation suffering the deadly second wave of the pandemic. The BSE Sensex has risen 120 per cent from the lows of April last year that it had touched amid the announcement of the nationwide lockdown. “Eventually, all market levels are a function of two things—corporate profitability and valuations driven by fund flows. Despite the first wave and the stringent lockdowns in Q1 of last year, corporate India has reported record profits,” says Nilesh Shetty, Fund Manager, Equity, Quantum AMC.
Most companies reported record margins and strong revenue growth in FY21. The year saw 15 per cent top-line growth and 85 per cent bottom-line growth at the index level (excluding financials).
How Long Will the 'Bull' Run?
There is a strong correlation between GDP growth, corporate earnings, and equity returns. Expected double-digit GDP growth will boost corporate earnings. As long as corporate India continues to grow, share prices will keep going up, say experts.
The correlation between nominal GDP and Nifty 50 earnings growth, says Sujan Hajra, Chief Economist, Anand Rathi Securities, is about 0.7. Hajra believes nominal GDP growth of around 15 per cent suggests 20-25 percent-plus earnings growth in FY22. “Since corporate earnings are more pro-cyclical vis-à-vis GDP, earnings can expand even further.”
How to Invest
The aim should be to own good businesses. So, buy quality stocks, after thorough research. This is especially true in a bull run when everything looks attractive. “An investor should carefully select an industry that has large headroom for growth such as FMCG in the 1990s,” says Sameer Kaul, MD & CEO of TrustPlutus Wealth (India). New investors, of course, may need professional help for the analysis.
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