October 2014
Investor Dilemma – Invest now or later
Anxiety amongst investors has gone up with Sensex close to 28000 and 40% returns in the past one
year. In one of our blogs dated January 8, 2012 we have clearly stated the risk of underinvestment. In
the last four years we have seen investors preferring physical assets like gold and real estate over
bonds and equities. Latest data shows that Indian investors have invested close to 68% of their
savings in physical assets which is a historical high. Out of total savings of close to 36 Lac crores in last
one year Indians have invested close to 25 Lac crores in physical assets.
In the last 6 months we have seen a change in mood amongst investors as they return towards
financial assets like bonds and equities. This has been mostly on the back of markets gradually going
up and favorable election results. In the next one year we estimate that investor preference will veer
more towards financial assets over physical assets. We estimate that allocation in financial assets will
revert to mean from 32% currently to 45-48% which by a back of the envelope calculation means
that 16-17 Lac crores will flow into financial assets. With fall in credit growth to a 14 year low of 9%
and also deleveraging in economy we expect banks to discourage deposits by lowering interest
rates.
With improvement in fundamentals and a stable government at the centre stocks remain the most
attractive destination for investors. We estimate huge flows by Indian investors in equities through
mutual funds, PMS and direct equities. In the last 6 months we have seen inflows of close to 40,000
crores in mutual funds alone. At the same time we are seeing robust flows from FII’s. With every
incremental flow in equities we are seeing much higher levels for index.
We can see a significant outperformance by high quality companies in this environment. Some of
these companies have expanded their capacity from internal accruals without resorting to equity
dilution. In our PMS we have invested in such high quality companies. Leveraged companies (which
we have completely avoided) on the other hand are deleveraging by selling their assets which
sooner than later will reflect negatively on their stock performance.
The risk to this thesis is a large number of new IPO’s, volatility in crude prices and international market
volatility which can disrupt flow of capital. But in our mind new IPO’s will take time to hit the market.
Crude prices are finally weakening and can show much lower level. International market volatility will
be short term in nature and capital will flow to India as it is best placed to deliver attractive returns to
investors.
It’s always wise to buy before we see a gush of money flowing in and take prices higher. We clearly
see large flows of capital coming in and its more important than ever to invest intelligently, take short
term volatility in stride and wait for further buying to come. In the next few years we may see the
Sensex at levels which are difficult to imagine or comprehend today. Keeping this in mind we advise
our clients to invest today to divest tomorrow. Only caveat is that invest mindfully in few of the best
managed companies of India.
If you want to read our past views on the market you can read our blog below
http://investmentstrategyindia.blogspot.in/