Personal finance magazines, including this one, believe that the Indian investor is typically underexposed to equity. This is partly because he is scared of the fluctuations in the equity market. But, if you put money into the index—preferably through low-cost ETFs—then over a sufficient period of time, equities outperform every other financial asset class (excluding real estate, which is much more difficult to both manage and measure).
I support this view—entrepreneurial and corporate activity create the bulk of the fruits of economic progress, and equity markets represent our best route to participating in this prosperity. I believe that the majority of one’s assets (except for one’s home) should be in equity. If you invest less than 50 per cent in equity, you are being unfair to yourself.
Once you have decided to up your equity exposure, you bang against two big questions. One, should we buy individual stocks rather than the index? Two, should we time the markets? My answer to both is—I do.
“Why shouldn’t I buy the 50 most valuable companies in India?” a correspondent asked me last week, when I suggested he ditch his Nifty BeEs. Well, these 50 companies include about 10 public sector companies. This is a historical accident as they occupy many sectors where private entry was banned for decades. Whenever the private sector was allowed to enter, they were swiftly beaten back—think Indian Airlines, or MTNL. The government shouldn’t be running companies; when it does, it takes forever to take decisions; and then there is the devil of politics. For example, oil marketing companies are being bled to death to keep prices of kerosene, diesel and petrol artificially low.
So, if there were a new Nifty—private sector only—would I buy it? Probably not. My second big reason for not buying is I don’t like commodity stocks. World commodity cycles are very volatile, and as India integrates closely into world markets, so will earnings in these companies. Those who understand these cycles make a handsome living off trading them, but I prefer to stay away from metals, cement and sugar. The Nifty includes three cement companies and three private sector metals stocks. And then there’s banks. With interest rates edging up, I think it makes poor sense to buy banks—the Nifty has two private sector banks, plus the housing finance company, HDFC. In other words, a good 40 per cent of the Nifty companies are a no-no. So, while I remain largely invested in the markets, holding the Nifty would seem like an
awful compromise. If I were to take a call on the Nifty, I would sell it.
Which brings me to timing the markets. In some ways, timing is more important when you are buying an index. Warren Buffett, for example, rarely sells stock he owns. But broader markets are very sensitive to macroeconomics, and if one is buying the index, it makes sense to look at these. In my experience, the most important determinant of economic activity is the interest rate. When I decided to devote the bulk of my time to equity markets, in 2003, it was because interest rates in India were at an all-time low, and I foresaw several years of bullish activity. Today, with the government committed to fighting inflation, it may continue hiking rates, which are nearly twice what they were in 2003.
The full impact of high interest rates takes several years to cascade through the system, and we have just finished some sectoral research, which shows how this pans out. If you are seriously interested in equity, do take a good look at it. But, if you don’t have the time or interest to do this kind of detailed study, it doesn’t make a huge difference in the long run. Buy the Nifty whenever you have money to invest
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