The pre election rally in Indian equities is in full swing with the Sensex and Nifty closing at record highs of 21919 and 6526 respectively today. I can just about imagine what your market intermediary would be telling you.
Buy into the rally before it gets away from you as Modi led NDA will form the next government and everything will be all right in India, right from government debt position (that has grown over 3x in the last six years) to banking sector NPAs (that has grown over 25% CAGR over the last five years) to GDP growth that is at decade lows of 4.9% (expected for fiscal 2013-14) largely driven by inflation running at close to double digit levels (CPI averaged 9.5% over the last five years).
The intermediary will even tell you to get out of quality stocks that have outperformed indices by a wide margin. Looking at todays top losers it included great stocks such as Sun Pharma, TCS and HCL Tech while gainers include debt ridden DLF and Jaiprakash associates.
This rally is built on hopes as of now. Hope of election results turning out as expected, which in India can be a very bad bet and hope of Modi, who has no track record on running a country and a coalition government, leading the country out of the rut.
My sincere advice to you is do not change your investment behaviour in this rally. If you own a portfolio of strong and sound stocks that has done well in the last five years, continue to hold it. If you want to buy stocks, buy stocks with strong balance sheets and good growth prospects even if the economy itself is not doing great.
Please do not chase the high beta stocks, as the punters would call it. Let it go up, you can always take a more calculated risk when times are calm and elections are past. Volatility is bound to go up and there will be sharp upticks and dips leading into 16th May 2014, when election results will be out.
Traders should not carry excess leverage. A single sharp move in a stock or index will wipe out all profits and take positions into deep losses. Play the volatility instead. Going long volatility will be a good strategy, as when markets rise further, volatility will become higher. Hence go long volatility using options.
The rally in Sensex and Nifty has not been accompanied by a rally in China, Hong Kong, South Korea and Brazilian equity indices. These indices are far from highs seen in 2007-08. Hence the global economy is still uncertain and markets have become highly segmented with Dow, S&P 500 and Dax at record highs and Nikkei and Nasdaq at multi year highs.
India has become part of the better performing crowd and the credit goes to a few great companies such as TCS and Sun Pharma leading the gains in market capitalization. Good companies with far sighted managements will continue to do well, focus on those and you will not get burnt in sentiment driven markets.