Top 10 rules to follow when Sensex trades @ record highs

It is also possible that the environment may change suddenly facilitating a Bear ambush, in which case, we will see a ‘lot of blood in the small and midcap street’. What should investors do in such an uncertain environment?

For getting a satisfactory answer to this question, let us get the issue in perspective. First, let us appreciate the fact that the present Bull Run is a global trade. As on 26th May 2017, the MSCI world index is up 10.9 percent on a year-to-date (YTD).

The EM Index is up by 17.5 percent in dollar terms and 13.5 percent in local currency. With the exception of Russia, all major markets are doing very well. Of course, India has done very well with Nifty returns of 14.6 percent, but Argentine, China, and South Korea have done better than India.

So, make no mistake about this: this is a global trade powered by global liquidity, which, in turn, is facilitated by the shift of funds from bonds to equity. There is a near consensus that the bond party is over and consequently funds are moving to equity.

There is justification for this shift, because, for the first time in almost 9 years, we are witnessing a synchronized global economic recovery with almost all regions doing well. PE multiples have expanded everywhere in anticipation of a recovery in earnings. This ‘hope trade’ may very well play out as optimists expect.

Presently, the Sensex and Nifty are trading around 19 times forward earnings. This is higher than the historical average, but by no means in bubble territory. Of course, there are bubbles in many mid and small caps. This segment is likely to witness major correction soon.

Since this is a global rally, the trigger for the correction is likely to come from global events. North Korea is a major source of worry.

Presently, there is a lot of hope for global economic recovery. Anything that negatively impacts global economic recovery will trigger a correction.

Even though markets are at high valuations liquidity is likely to support the valuations. Low and down trending interest rate is another supporting factor. But investors have to be cautious. Investment strategy should be, ideally, on the following lines:

Do’s:

- Stay invested in blue chips, good large caps.

- Stay invested in quality midaps, even if expensive.

- Invest in small and micro caps through mutual funds.

- Continue with SIPs. Don’t stop SIPs. Perpetual SIPs are ideal.

- For one-time bulk investors, STPs are desirable.

- For investors wanting to make a bulk investment, Debt-oriented Balanced Funds are ideal, if they have a long-term time horizon. Bulk investment in small and midcap space is not desirable now. SIPs are ideal.

- Investors, who are sitting on big profits in mid and small caps and who need funds in the near future, may consider some profit booking. Profit booking may be considered in segments that have run up too fast on “hope trade”.

- Get out of small and midcaps not supported by fundamentals.

Don’ts:

- Avoid bulk investment in mid and small caps.

- Don’t chase “cats & dogs.” There are bubbles in some segments.

Disclaimer: The author is Chief Investment Strategist, Geojit Financial Services. The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.