State of the Economy. What to do (and not to do) at index highs

Shyam Sekhar, an entrepreneur and the past President of the Tamilnadu Investors Association, is a highly accomplished equity investor in his individual right. In the last five years, he has donned a new hat as the Founder and Chief Ideator for i-thought Advisory Services, helping individual investors with mutual fund selection and running a successful Portfolio Management Service. Aarati Krishnan, Consulting Editor with businessline, caught up with Shyam on a day when the stock indices hit new highs, to know how retail investors should deal with such milestones.

Asked about how retail investors ought to react to milestones such as Sensex hitting a lifetime high of 64,000 or the Nifty50 touching 19,000, Shyam said that milestones made by the indices should not matter much to investors who followed a bottom-up approach for their stock portfolio and invested in the larger universe outside the index stocks. He explained that he didn’t see any need for action on such occasions, as long as the companies in his portfolio were keeping to the earnings and business trajectory he had envisaged at the time of investing.

Asked if investors should be booking profits on stocks now, he recommended that investors should do so only if they felt valuations for specific stocks they owned had become too frothy, beyond their expectations. “In long-term investing, you get the best results by reducing the number of decisions you make and not interrupting the compounding on the good stocks you own. So, I try not to react to index levels or what’s happening to the market sentiment at the index level,” he said.

Shyam, however, observed that certain sections of the market had turned frothy on too much money chasing too few stocks. He made special mention of the mid-cap segment, which has had too much institutional money flowing into a narrow set of stocks, bidding up valuations to expensive levels. “Investors who have a high exposure to mid-caps may like to take money off the table,” he said.

He pointed out that since the SEBI categorisation of large, mid and small-cap stocks for mutual funds in 2017, the mid-cap investment basket had become quite narrow and had attracted too much institutional money. Large mutual fund SIP books led to too much money chasing the limited set of mid-cap stocks. The large-cap segment, ironically, is the one where valuations today are more reasonable, he felt.

He pointed out that the recent string of block deals in marquee stocks where promoters, top management and long-standing private equity investors exited their holdings, while domestic institutions bought into these names, hinted at this being a good time to exit these stocks. These domestic institutional investors may pay the price in the long run for their high entry valuations, he felt.

On whether investors ought to fish in the small and micro-cap segments because mid-caps were too expensive, he said that the best time to invest in small or micro-caps is when both liquidity and market sentiment is bearish. During sustained bull markets, too much HNI and mutual fund money tend to flow into small-caps. This leads to very little pressure on holders of small-caps to sell what they own, leading to one-way moves in small-cap stock prices. These could come crashing down once the buying interest wanes. However, he said that retail investors keen to allocate to small-caps can do “test SIPs” in the segment to understand the companies they own.

They can increase their exposures once valuations turned more reasonable. “Some investors are investing all their SIP money in small-caps and they shouldn’t be doing this”, he cautioned.

On market bubbles, Shyam felt that the bubble in private markets and unlisted stocks due to the global easy money phase has already burst, while froth was still evident in public markets. He said that the meltdown in the valuations of start-ups like Byju’s showed that private market investors were far more ruthless in marking down valuations and adjusting quickly to the global reality of withdrawing liquidity, than public market investors.

Asked if managing other people’s money was a different ballgame from managing one’s own portfolio, Shyam said that managing others’ money was infinitely more challenging as one had to be conscious of the fiduciary role that a portfolio manager played, in ensuring a smooth journey and good return experience for retail investors. “The kind of investors entrusting their money to PMS managers today are very different from those who did so say 15 years ago. Today we have investors who are relying on us for their wealth creation, they don’t put money they’re ‘willing to lose’ in equities”.

(Host: Aarati Krishnan; Producer: Jayapriyanka J)

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About the State of the Economy podcast

India’s economy has been hailed as a bright spot amid the general gloom that seems to have enveloped the rest of the world. But several sectors continue to stutter even as others seem set to fire on all cylinders. To help you make sense of the bundle of contradictions that the country is, businessline brings you podcasts with experts ranging from finance and marketing to technology and start-ups.