Should you invest more in stocks on bull run optimism?

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It’s been a dream run for stock investors in the past few weeks. The fireworks started by Narendra Modi’s emphatic victory have made investors richer by Rs 11,57,200 crore. But many believe the best is yet to come. Market experts and analysts have proclaimed that this is the start of a multi-year bull run. Morgan Stanley’s Ridham Desai insists in a report that “the Indian market is moving from a cyclical downturn to a structural upturn”.
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The only thing that sets brokerage houses apart right now is the degree of their optimism. CLSA believes that over the next 12-24 months, the Sensex will touch 39,707, an upside of nearly 60% from the current level. Brokerage firm Motilal Oswal sees the Sensex touching 50,000 in the next three years. Karvy Stock Broking is more bullish and pegs the Sensex at 1,00,000 by 2020.

ET Wealth reached out to experts from diverse areas of the financial services industry and sought their views on where the markets are headed and what should investors do now. Most of the experts we spoke to feel that the stock markets are on the cusp of a structural bull run, a market rally that could last for several years. After nearly six insipid years, investors can finally feel excited about their stock investments.

What has changed

What’s behind this overbearing optimism? The euphoria is primarily due to the overwhelming mandate to a political outfit widely recognised as reformist and development-oriented. For the first time since 1984, a single party has got absolute majority in the Lok Sabha. This means no more pandering to the whims of a motley group of political allies. “The big change is that we have a pro-development government with a majority, which gives it the power to execute. The positive results of this over the next 5-10 year period can be dramatic,” says Dinesh Thakkar, founder chairman and MD, Angel Broking.

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Analysts expect the new government to undertake sweeping reforms which will remove the hurdles to economic growth. “If the government can change even half the factors plaguing the Indian economy, we are in for structural bull market,” says Nitin Jain, CEO, Capital Markets, Edelweiss Broking.
Should you invest more in stocks on bull run optimism?
Should you invest more in stocks?

If equity markets are expected to deliver handsome returns in the years to come, should investors make tactical changes in their asset allocation and invest more in stocks? Most experts believe so. Given the strong shift in sentiment and expectations of a structural bull run, many brokerage houses and fund managers are now recommending a tactical change in the asset allocation in favour of equities. Should you bite the bait? “Investors must certainly enhance their allocation to equities if they haven’t done so already,” insists Sandesh Kirkire, CEO, Kotak Mutual Fund.

While a strategic allocation requires that you set specific allocation percentage to each asset class, a tactical allocation allows for a range within which asset mix may be maintained. So if your current strategic allocation requires you to maintain equity exposure at 50%, a tactical allocation strategy will allow you to increase your allocation up to 60%. This strategy essentially implies timing the market by deliberately hiking allocation towards equities at an opportune time. It may require that you step out of your comfort zone.

 
Not everyone is comfortable with this approach of tweaking the asset allocation in favour of equities. “An investor’s portfolio takes into account several factors, including his age, life-stage, risk profile, horizon for financial goals and macro economic factors. He should not tweak his asset allocation just because one of these factors has changed,” says Amit Kukreja, financial planner and founder of Wealth Being Advisors.

His views are echoed by Jayant Pai, financial planner and head of marketing, PPFAS Mutual Fund. “Investors who indulge in ‘tactical changes’ at the drop of a hat are only traders who are deluding themselves. Changes should be undertaken either closer to the goal or on a fixed date every year. They should not be influenced by the level of the indices,” he says.

Some investors would argue that the stock markets have already run up quite high and cannot afford much upside from current levels. However, experts insist that there is ample scope for an upside. “We believe investors should hold their nerve and increase their allocation to equities even now. This is because equities may be at an all time high, but valuations are nowhere near the previous peaks,” asserts Harsh Patwardhan, executive director and head of equities, JP Morgan Asset Management (India).

Other experts also feel that investors should not try to time the markets. “Investors who are in a dilemma given the recent surge in valuations should focus on the long term prospects of the economy. Using the SIP route offered by mutual funds helps in maintaining discipline while managing the pitfalls of market volatility,” says Harshendu Bindal, President, Franklin Templeton Investments (India).