Capital Allocation Key To Success When Market At All-Time High!
Dalal Street Investment Journal|October 25, 2021
Capital allocation when the equity market is at its life highs can be a strategic decision that may decide how fast your money grows. Asset allocation, we all understand, is the key to wealth creation in the long run. What should be your capital allocation strategy when the equity market is at all-time high? Yogesh Supekar with the help of sectoral trends provides direction on the optimal capital allocation decisions
Yogesh Supekar

With markets at all-time highs the most intriguing question that majority of investors have in their minds is whether the rally is going to continue or is the trend going to reverse from the top? Most importantly, investors must decide if it is worth taking some money off the table or should one deploy more cash into the equity markets at this juncture? Says Abhay Kulkarni who has been an active investor in the markets: “I started investing aggressively in the equity markets late last year i.e. 2020 because I sensed that the equity markets will outperform. I switched or reallocated some of my long-term portfolio money from fixed income securities and gold to equity.”

“I was proven right because gold prices fell and I made more money in equity than I would have made in fixed income investment. In hindsight it was a masterstroke. Now I am faced with a similar dilemma. As markets have gone up so high so fast, I am wondering if I should take money off the table from the equity markets and park again in a fixed income portfolio and even gold for that matter. While I am a long-term investor, the current level in the markets is what is making me think of reallocation. But then I don’t want to be in a situation where I sell my quality stocks only because the market is at all-time highs and then repent my decision if the market heads higher,” he adds.

“I am a little confused right now. Also, what about the fresh investible money that I have? Should I deploy it at these levels? Or should I wait for a market dip? Will the dip come? When will the market correct and how much? As I don’t have answers to these questions, I am not able to enter the market confidently at this point of time,” he concludes. Investing at all-time high is unnerving a lot of investors as the lure of extra returns remains irresistible but clearly the risks are visible as we are at the top. The best way to approach this situation is to identify the triggers that are driving the markets.

Following aspects should be considered while investing at all time highs:

1. Find out what institutional investors are doing. Institutional investors are buying even at the current levels. There is no shortage of money flow into mutual funds by investors in India and the SIP mode of investing is getting more and more popular as we speak. The SIP money is stickier in nature and augurs well for the markets. It is always helpful to find out quality stocks that institutional investors are buying. The quality stocks where the institutional holding QoQ is increasing can be considered positive. That said, the rising power of retail investors cannot be ignored; hence if there is institutional selling, it does not mean that the stock will fall for sure.

2. Earnings growth highlighted by revenue growth is what is supporting the markets right now. Whether to allocate fresh money in equity market should be driven by the conviction on earnings growth. If you are confident on the earnings growth going forward, invest in equity. Wherever the earnings’ growth seems patchy, avoid investing. Overall, the trend in earnings growth is healthy and as we move into a festive season the demand scenario promises to be fruitful for corporate India. Q2FY22 is expected to meet market estimates.

3. Liquidity can be a function of multiple factors including interest rates. RBI’s policy stance has been supportive of markets and does not look like we will have an increase in interest rates any time soon. The liquidity is here to stay in the market and one can expect more liquidity to pump into equity as the earnings scenario strengthens further.

4. On the macroeconomic indicators front, with the inflation figures in control, positive exports data, industrial production on rise, privatisation in full swing and GDP growth well on track we can say that Indian economy is doing relatively much better than most of its peers. Such outstanding macroeconomic performance is catching global investors’ attention and hence we can expect money flow into the Indian equity markets to continue, thus pushing markets higher. According to Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, “India’s Industrial Production (IIP) expanded by 11.9 per cent YoY in Aug 2021 with a gradual revival in industrial activity.

“However, the momentum of such revival has clearly dropped as evident from the slight sequential contraction in the index vis-à-vis the strong uptick seen in the months of June-July after the peak of the pandemic’s second wave. On the user-based side, broad-based expansion was recorded with primary, capital, intermediate and infrastructure registering double-digit annualised growth. Encouragingly, consumer non-durables have seen a growth YoY versus a contraction last month, raising hopes for a recovery in rural demand. The sequential growth in infrastructure index also indicates the positive effects of higher capital expenditure by the government.”

5. The global market outlook is steady with the US markets taking the lead. The rally in US markets is no more restricted to the FAANG stocks and is broad-based. The earnings’ season in US markets is already hinting at extremely strong earnings season for the markets. The liquidity is here to stay, and the sentiment is cautiously optimistic on equity as an asset class. One of the major reasons why the performance of global equity as an asset class stands out is the lacklustre performance of the other asset classes.

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