There is lots of low cost money floating around globally –searching for good investment opportunities. US, EU, Japan, Australia, S Korea, and many more countries including India have reduced their interest rates or maintained low interest rates since Jan 2013. This low cost capital is an opportunity for companies to borrow at a low rate and invest in creating productive assets (read capacity expansion) –which will in turn create economic growth. It is happening to a small extent – but most of this excess cash is ending up in speculation and in high risk assets like stock markets. A part of this cheap money is coming into Indian stock markets through the FII route and this is the reason for the highs that we saw yesterday.Globally - most stock markets are at a high right now. What is happening in India is a global phenomenon and we are just bystanders – we can see it, but we are not the real players.
In India, the retail investors (people like you and me) are wary and not investing in stock markets right now. In fact even the Indian Mutual funds, are selling stocks over the past 3-4 months.
So what should you do? Do nothing – just watch.
The markets will be choppy this year. I expect the Indian markets go higher than ever before in 2013. Currently, our market PE is around 17.5 - our PE was around 21 in 2008-09 before the crash. So we are not too over priced yet. There is scope for the Indian markets to go higher and with the cheap money sloshing around, I expect the markets to go further up in the coming months.
We should be wary of entering stock markets now – do not invest when the markets are high. If you want to exit and encash your profits – do it, but not today. Wait for some more time. Even though we cannot “time” the exit – I believe the market is destined for higher levels. You can exit then.
I do not plan to exit though.
Keeping a 3 year time frame, I am wary of investing in stocks currently. I intend to keep most of my liquid capital in debt funds (long term debt funds where we need to have a 12 month lock in). I will surely keep some cash at hand – you never know – life is full of opportunities and something always turns up round the corner.