Investors' patience to be tested going ahead

A majority of fund managers are bullish in the market and a few are even ready to blindly invest with a three-year horizon. Such optimism is always a concern as it brings back the horrid memories of 2008 when fund managers went overboard and fund houses and companies were tapping the market to raise money from retail investors.

However, the Lehman Brothers' debacle changed the entire financial world and its aftermath is still felt even after six years with major economies in the world still struggling to stabilise.

Interestingly, the numbers of phone calls from trading houses from Indore and Ahmedabad have started to increase with assurances that they will help make Rs 3,000 to Rs 4,000 on a daily basis depending on the money invested in the market. Such phone calls in the past have seen the market tank. So, has the good run come to an end or is it different this time round and are fund managers getting it right this time?

The eighth edition of the Business Today-Morningstar Asset Allocation Survey witnessed no fund manager is bearish. In fact, 60 per cent of them are bullish at the current levels in the market. None of them expect the Sensex to fall below 26,000 points. While 58 per cent of the fund managers expect the Sensex to be around 30,000 to 32,000 points in the next six months, 25 per cent of them expect it to be around 28,000 to 30,000 points.

The reason for bullishness in the market is that the downside is restricted and the risk for market going down is far lower than it is for going up. Secondly, valuations are still not very high. The Sensex is trading on one-year forward earnings at 14.5 times. This was 22 to 24 times in 2008.

Though valuation is a comforting factor, is it a good reason to take a blind call as the street has never obliged expectations? For instance, no one expected the US housing crisis in 2008-09 or the double dip in the US economy in 2012 or the sharp 45 per cent crash in crude oil prices in 2014.

The BSE Sensex must have gained 30 per cent in 2014 on the back of Narendra Modi coming to power.

Though not much has happened in terms of reforms since the new government took over, what's happening is the wins in the state elections is slowly assuring that the BJP-led government is gaining strength in the Rajya Sabha, which will help smooth passage of policies.

In the meanwhile, the government through ordinances has been able to clear some key reforms. The intent has been good that they want development and so the market too has given it a thumbs up.

Going ahead, patience will be tested. There is no place for weak-hearted investors in the market. The Indian market will not be as smooth a ride compared to 2014.

In the near term, results for the third-quarter ended December 2014 will be keenly watched. The base effect of 2013 is expected to spoil the party for India Inc which some believe will be the worst quarter for the companies.

Secondly, India will be impacted with the global events especially in the euro zone and the US. India may be a safe bet but certainly not isolated and it will go through the pain on sour global events, which includes a rise in US interest rates in the middle of 2015.

On the domestic front if investment cycle doesn't pick up, it would be a matter of time that the India story fades away. Already, the chieftains of India Inc have been complaining of consumption slowing and current environment not suitable for investments. Until government spending doesn't come by, it would be difficult to expect investments from corporate India.

However, the immediate trigger for the markets will be foreign institutional flows in January 2015 and the Budget towards the end of February. Today, though the market is buoyant about the future but all their expectations heavily depend on the government's policy decisions. In the meantime, investors should be careful in choosing stocks. Sticking to blue-chips will be the safe bet and certainly one can't blindly follow optimist fund managers as they too are human and greed can sometimes take over compassion.