The Sensex is reaching the stars and breaking all past records on its journey -- the latest is a historic high of 6719.
And you must be wondering whether you should join the party or not.
Should you sell your shares or hold on to them? Invest pre- or post-Budget?
When it is this high, play safe!
Remember Black Monday -- May 17, 2004?
The market plunged after the BJP lost the elections and investors started worrying about the Communist influence on the new government.
The Sensex stood at 5020.89 at the start of trading, and fell to 4227.50 in one day. The Sensex closed at 4505.16.
This was the second biggest fall in the history of the Bombay Stock Exchange (the first happened in April 1992 when the securities scam was exposed).
Let's say you had invested Rs 100 in the Sensex on May 17, 2004. Your returns today would have been Rs 149. Which means, you would have had a return of 49% in less than a year.
As a rule, it is never a good idea to enter the markets when they are at their historic highs.
The best time to enter is when everyone is disillusioned and the market is at a historic low.
But let's be realistic here: there is no formula that will help you predict a historic low.
It would be wise to wait till the Budget is announced and the markets react to the various policy implications. Till then, it would be a good idea to exit the markets (sell your shares) and hold on to your cash.
Pre-Budget days tend to be fun
Every January, all international funds take a fresh look at where their money is being deployed. They scout around for greener pastures where they can get better returns.
Local traders are well aware of this .So they artificially push up the prices from November-December to take advantage of the fresh money that will come in from foreign institutional investors.
Retail investors don't have a clue as to what is happening behind the scenes. All they see is a rising Sensex and end up being misled by these artificial build-ups. The result: they burn their fingers badly.
Post-Budget may just be the hangover of the party
If you think the rally will continue even after the Budget, it is better to sell just around 40% of your portfolio. With the market at such a peak, you should book good profits.
You may suffer a loss in terms of opportunity cost (profits you would have earned had you not sold the 40% now and had instead sold it when the markets went even higher). But it is always better to make hay while the sun shines.
Who knows if the sun will be shining on the markets tomorrow?
Historically, if there has been a pre-Budget rally, the markets have tumbled post Budget.
This does not mean the market will definitely come down. But it could happen. At least, that is what the data from the last 10 years seems to indicate.
So you can have the best of both worlds by selling just 40% of your shares now and gradually selling more if the market continues to climb.
If the market dips after the Budget, you have the option to reinvest the money you earned by selling now. In that case, you will get your shares at a much lower price.
Will the fun continue in March?
No amount of crystal ball gazing will be able to tell us clearly how the markets will react post-Budget.
The Budget-making process is torn between two extremes: a reform-oriented prime minister and finance minister on one hand and the backward-looking Left parties on the other. The Congress-led United Progressive Alliance government is surviving at the centre due to the support of the Left parties.
Dicey, is it not?
While Finance Minister P Chidambaram would like to hike foreign direct investment in sectors like banking, the Left parties would baulk at the formulation of such a liberal policy.
Remember, Black Monday happened because of the market perception that the Left's support to the UPA government will interfere with the formulation of a liberal economic policy (read pro-foreign direct investment and pro-foreign institutional investors). In retrospect, we can see how wrong the market's perceptions were!
Yet, the Left parties have ample potential to spook the party on Dalal Street.
Taking a long-term view
In the long run, the India story looks good. The robust GDP growth (estimated at 7-7.5%), stellar corporate earnings, a 29% savings rate and a reform-oriented UPA government all make India look very rosy.
If interest rates rise steadily, it will impact stock performance as corporates find borrowing more expensive.
If interest rates rise in the US, FIIs will not think twice about shifting their assets there to get a better return.
Further, high interest rates would signal an onset of a strong dollar vis-à-vis the rupee. FIIs would prefer a strong dollar (weaker rupee) (say $1=Rs 47 instead of Rs 45) when they enter Indian markets, as a strong dollar would give them more rupees (on conversion) to invest.
The final word
If you sell now, you should book some good profits. If the market dips after the Budget, you can reenter and buy some shares.
The markets, despite being volatile, will pick up as the year proceeds. So you can even consider staying invested and selling later. Or buy post-Budget (if the market dips) and sell later.
Either way, you win.