The Equity market recently touched all-time high globally. The Nifty traded at 15,869 on 15th June and the S&P 500 in the US market closed at 4,255 on 14th June. In the backdrop of the pandemic, these high market valuations are worrying investors.
The US has done a reasonably good job with the vaccination and is hoping to get the economy back on track soon. India went through the brutal second wave of the COVID with a huge loss of lives. The vaccination process in India has been slow and there is no guarantee that a sizable population would get vaccinated before the possible onset of the third wave. The economic impact of the second wave while muted compared to the first wave has further pushed the full recovery of the economy.
The world is slush with the money from the fiscal stimulus from the governments and the purchase of the bonds by the Reserve banks all over the world to support the business and the economy. Since the interest rate is low globally, the investors have no other place but to double up on their investment in the Equity market. India continues to generate significant interest and commitment from foreign investors. This has further stretched the valuation of the Indian Equity market.
Too much money in the system and the bottlenecks in the supply chain is causing the increase in inflation globally. The inflation numbers in India has gone up in recent months with the May month retail inflation of 6.3% which is above the RBI comfort level of 6%. The recent inflation reading in the US is 5% which is way above the US Fed long term average inflation target of 2%. We will have to wait to see whether the inflation is transitory or permanent. The Reserve Banks all over the world continue to keep the accommodating stance on the interest rate to ensure that the change in monetary policy does not impact the business and economy adversely.
The biggest question lurking in the minds of investors is what they should do?
From India standpoint, the second wave and possible third wave will further push the economic recovery to 2022. The Indian market is currently expensive and discounting the earnings way forward in future. Any money which is invested for the short term in the Equity market may not yield the desired return. In the long run, the Indian story is intact as the government has shown its intent and commitment to spend the money to invest in infrastructure and grow the economy.
For our investment strategy for the Equity market, we will go back to the basics. The exposure to the Equity market should be in line with the current asset allocation. The money needed for the short term goals should be kept aside in the conservative asset class even if it is not giving the desired return because of the low-interest environment. Investment in the Equity market should only be done for the long term (10+ years preferable). So let the boring SIP continue. If you are itching to take a timing call, at best you can pause your SIP and restart once the valuation comes down. I have never been a good timer of the market so I stay clear.
The writer is a SEBI Registered Investment Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services. If you want to reach him, click on https://finmyn.com/contact/.