Asset allocation is one of the main learnings so you can exit gracefully on the way down
At a time when the market is hovering around all-time highs, I believe, the current market resembles that of 1994-1995 market cycle which was the first bull market where FIIs were allowed entry into India and you had a massive liquidity boom from FIIs.
Just like that, we are seeing a big liquidity boom from local investors in this cycle. So what did I learn from 1994-1995 boom?
First, you will have to actually implement asset allocation. Once the market goes into bull frenzy, you have to practice asset allocation.
What do I as a CIO to practice asset allocation? We recommend dynamic asset allocation products, balanced advantage, equity income balance. This is my learning from 1994-1995.
The second learning that I learnt from 1994-1995 was that you do not move from good quality companies to bad quality companies just because they are cheap on price to earnings or price to book or things like that. That is something we as a house are trying to avoid at this point of time and we have a lot of debate within the company because the best quality companies have become pretty costly and now you are tempted to buy the cheaper companies so that is a debate which we are having.
The third is that you cannot believe that you will actually get an exit on the way down. In 1994-1995 boom, no one got an exit on the way down. So I believe that it is very important to maintain your asset allocation in equity but if people think that they will be the last person correctly exiting the markets that is not going to happen. Asset allocation means you actually maintain a certain fixed part of your net worth into equity in this cycle.
This all I have learnt from 1994-1995 cycle and that is what as a company we are trying to communicate to investors that equities is not a riskless asset class but having said that there is nothing to worry about the earnings cycle at this point of time. There is nothing to worry about capex cycle at this point of time and we think that the top of the earnings cycle is may be a year or two away.
Edited Excerpts from an ET Now interaction held on July 25, 2017