Indian stock markets witnessed a mixed performance last week. While major indices like the Nifty 50 hit a new all-time high, extending their winning streak to seven weeks, broader markets like mid-caps and small-caps faced a correction, snapping their six-week rally. When markets reach all-time highs, investors often feel uneasy and worry that it may fall from the current levels.
And the big dilemma is this: What if you decide to reduce your equity exposure but the market goes up further to hit a new all time high? What if you don’t reduce your equity exposure and the market falls?
Does a market high automatically mean a fall?
The short answer is no. Historically, hitting new highs hasn't necessarily signaled an imminent drop. In fact, data suggests that the market often continues to climb after reaching new peaks.
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FundsIndia's research indicates that in 57% of cases, the one-year returns following an all-time high were positive.
All Time Highs automatically don’t imply a market fall. The average 1Y returns when invested in Nifty 50 TRI during an all-time high, is 14%
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According to Jiral K Mehta, senior analyst at FundsIndia, all-time highs are a normal and inevitable part of long-term equity investing. Without all-time highs, markets cannot grow and generate returns. For any asset class that is expected to grow over the long run, it is inevitable that there will be several all-time highs during the journey as seen below.
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"If you expect Indian equities to grow at say 12% per annum (in line with your earnings growth or GDP growth expectation), then mathematically it means the index will roughly double in the next 6 years, become 4X in the next 12 years, and 10X in the next 20 years. In other words, the index will inevitably have to hit and surpass several all-time highs over time if it has to grow as per your expectation. So there’s nothing special or frightening about all-time highs," said Mehta.
Equity Markets tend to break out and rally sharply after a few repeated patterns of “all-time highs followed by a fall” to reach higher all-time highs. There have been frequent phases in the past where the Indian stock market gets stuck in a range for a while and tends to fall every time it hits an all-time high. During such phases a lot of investors get frustrated and start to assume that every all-time high will lead to a market decline. But that’s not always the case. Over time, however, after a period of stagnation the market eventually breaks out, surpasses the previous levels, continues to grow, and reaches a new all-time high.
Flashback 1: Between 2008 and 2011, Nifty 50 was stuck at 6,000 levels for some time…
"As seen above, the Nifty 50 between 2008 and 2010 hit all-time high levels around 6,000 levels two times in Jan-08 and Nov-10. In both instances, Nifty 50 fell 60% and 28% after that. Again in 2014, the market hit all-time high levels, and a lot of investors were already scarred by what happened in the previous two instances and assumed this would lead to another large fall. and then came the surprise – Nifty went up by a whopping 73% and went on to hit new all-time highs," said Mehta.
For the last 24+ years, FundsIndia checked for all the periods where Nifty 50 TRI hit an “all-time high”. FundsIndia then checked the 1-year, 3-year, and 5-year returns following those “all-time high” levels.
"The Nifty 50 TRI gave positive returns 100% of the time on a 5-year basis if we had invested during an all-time high. The average 1Y returns, when invested in Nifty 50 TRI during an all-time high, is ~14%! (This gets even better for active funds with 20Y+ existence – HDFC Flexi cap fund and Franklin Flexicap fund – the average 1Y returns were much higher at 18% and 20%)," said Mehta.
- For Nifty 50 TRI, 47% of all-time highs were followed by 1-year returns of more than 15%
- 57% of the times – the 1Y returns exceeded 12%
This clearly shows that “all-time highs” automatically don’t imply a market fall and in fact, the majority of times, market returns have been strong post an all-time high.
So what should an investor do right now?
Mehta has the following advice for invstors:
- Maintain your original split between Equity and Debt exposure
- If your Original Long Term Asset Allocation split is for eg 70% Equity & 30% Debt, continue with the same (do not increase or reduce equity allocation)
- Rebalance Equity allocation if it deviates by more than 5% from the original allocation, i.e. move some money from equity to debt (or vice versa) and bring it back to the original asset allocation split
- Continue with your existing SIPs
- If you are waiting to invest new money
- Debt Allocation: Invest now
- Equity Allocation: Invest 30% now and stagger the remaining 70% via 6 Months Weekly STP
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