Investors should resist the temptation to reduce their equity exposure despite two years of sideways movement in Indian markets, as historical trends, sectoral valuations and investor sentiment point to a more favourable risk-reward equation, Devina Mehra, Founder, Chairperson and Managing Director of First Global, told CNBC-TV18.
Mehra cited historical data showing that when markets have remained largely flat for two years, they have risen between 5% and 55% in the following year, with the average gain at 25%. She also noted that markets have more than doubled over the subsequent five years in such instances, although she cautioned against treating historical performance as a prediction of future returns.
“My advice would be that the downside is much more limited than the upside,” Mehra said, recommending that investors remain invested in equities in line with their asset allocation rather than reduce their exposure or sit out the market.
Sectoral valuations offer support
Mehra said investors should look beyond headline index valuations when assessing the market’s attractiveness. Changes in the composition of indices over time can make comparisons misleading, she said, pointing to the changing weight of banks, lenders and public sector undertakings in the Sensex and Nifty.
Instead, she favoured examining valuations at the sector level. On that basis, she said Indian equities are not trading at extreme valuations across most sectors.
“In most sectors, we are actually below average if you’re looking at something like the P/E ratio,” Mehra said, adding that a few sectors may be slightly above their historical averages but remain well below their previous peaks.
Her assessment challenges the broad perception that Indian equities are expensive, suggesting that valuations vary across sectors and should be evaluated individually rather than through headline index multiples.
Negative sentiment could create opportunities
Investor sentiment is another factor underpinning Mehra’s outlook. Citing research, she said periods of negative sentiment have historically been associated with a higher probability of above-normal returns in the following period.
“It is when making money appears very, very easy that you should be careful,” she said.
Mehra argued that sharp upward moves often occur when fear and uncertainty dominate the market, rather than during strong rallies when investors feel confident about making money. Investors who exit during periods of anxiety risk missing these recoveries, she said.
To illustrate the potential cost of trying to time the market, Mehra cited the long-term impact of missing the market’s 10 best trading days over a period of more than 40 years. Investors who missed those days, she said, would have given up two-thirds of their returns.
Her recommendation to remain invested does not mean allocating an entire portfolio to equities. Mehra cautioned against being 100% invested in the asset class and said equity investments should be limited to money that investors would not need for seven to 10 years.
For investors concerned about the market’s sideways movement, her argument rests on the combination of historical performance, sector-level valuations and investor sentiment. While none of these factors guarantees a recovery, Mehra believes they support staying invested rather than attempting to time the market.
Watch accompanying video for full conversation.
Markets have moved sideways for two years. Devina Mehra sees a reason to stay invested
After 2 years of flat returns, Devina Mehra explains why she’s still bullish on equities