As we bid adieu to 2017, here are 3 questions for investors to ponder on: IV Subramaniam

Ponder # 1 -- Where is the value?

The valuation of the Sensex and the Midcap index look expensive on a P/E basis. For the statistically inclined, the current P/E is two standard deviations from the mean. In simpler terms, it means the current P/E is substantially above the long-term average.

On the previous occasions, whenever the P/E was close to 1 standard deviation (SD) or 2 SD, the returns over the next two to three years have not been good (See table below).

While this is a view on the overall market, there is no denying that individual stocks may be attractively valued.

Similarly, poor returns can be seen in Midcap index whenever the PE ratio has crossed 1 standard deviation (SD) or 2 SD from the mean.

Ponder # 2: Where to invest?

With equities appearing a little worrisome, how about moving to debt was the next question to ponder?

With the fiscal deficit already reaching 97 percent of the annual target, worries about slippage in deficit more than what the government had planned for i.e. 3.2 percent and the consequent impact on interest rates cropped up.

Stress on the rural economy and small business could exercise further strain on the economy as the government tries to guide them out of the stress.

Slippage in the deficit could also result from lower tax collections as the teething issues of GST rollout are not yet complete. Any increase in oil prices could exercise pressure on the current account deficit and also bring in inflationary threat. All of the above means, a risk of an uptick in interest rates.

What is the problem in an uptick in interest rates?

Much of the flows into India has come into debt market (see graph and table above), and a spike in interest rates may spook the bond market investors.

Any sell-off by foreigners holding bond investment may cause the currency to depreciate and prompt the equity holders to sell as well.

Ponder # 3: Does residential real estate look attractive?

Builders in large cities are reporting slower growth in the real estate sales. This view is counter to the numbers reported by home loan companies. Maybe there is an appetite in smaller towns for residential properties, hence the loan growth.

Despite the slower sales in the larger cities, prices have not declined to levels to make it attractive. So, the real estate is also out.

Maybe it is just a good time to keep investments in cash funds.

Part of the reason for asset prices to look expensive is the easy availability of money globally. This has pushed up asset prices, and in some categories/products to levels that defy conventional wisdom.

Elsewhere bubbles are formed?

The easy flow of money maybe creating bubbles across the world. I don’t understand much on Bitcoins though, but I am fascinated by the concept. However, when my well-experienced colleague Ajit looking at the below-mentioned chart says “it is time to close the window and go to sleep", I would be wary of advising anyone to venture into this.

Conclusion:

Net for retail investor, it makes sense to keep SIP investment on, and relook at the portfolio and maybe reshuffle it towards the largecap and less towards small cap or mid cap

Disclaimer: The author is MD & CIO Quantum Advisors and Director, Quantum AMC. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.