{"id":21731,"date":"2021-08-04T15:49:32","date_gmt":"2021-08-04T10:19:32","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=21731"},"modified":"2021-08-05T13:02:12","modified_gmt":"2021-08-05T07:32:12","slug":"what-to-do-when-equity-markets-hit-all-time-highs","status":"publish","type":"post","link":"https:\/\/fundsindia.com\/blog\/mf-research\/what-to-do-when-equity-markets-hit-all-time-highs\/21731","title":{"rendered":"What to do when equity markets hit all-time highs?"},"content":{"rendered":"\n
\"\"<\/a><\/figure>\n\n\n\n

“Buy Low, Sell High”, is the general market wisdom. <\/p>\n\n\n\n

Going by the same logic, when markets reach all-time highs, should you reduce your equity allocation or stay invested? <\/p>\n\n\n\n

Here is how we approach this often asked question.<\/p>\n\n\n\n


Perspective No 1: All-time highs are a normal part of long-term equity investing<\/span><\/strong><\/h3>\n\n\n\n
\"\"<\/a><\/figure>\n\n\n\n

For any asset class<\/strong> that is expected<\/strong> to grow<\/strong> over the long run<\/strong>, it is inevitable<\/strong> that there will be several all-time highs<\/strong> during the journey <\/strong>as seen below.<\/p>\n\n\n\n

\"\"<\/a><\/figure>\n\n\n\n

Perspective No 2: All-time highs don\u2019t mean that markets will crash immediately<\/span><\/strong><\/h3>\n\n\n\n

For the last 20 years, we checked for all the periods where the Nifty 50 TRI index had hit an \u201call-time high\u201d level. We then checked for the 1-year, 3-year and 5-year returns following those \u201call-time high\u201d levels.<\/p>\n\n\n\n

\"\"<\/a><\/figure>\n\n\n\n

The Nifty 50 TRI gave positive returns 73% of the time on a 1-year basis, 87% of the time on a 3-year basis and 100% of the time on a 5-year basis, if we had invested during an all-time-high. <\/strong><\/p>\n\n\n\n

The average 1Y returns when invested in Nifty 50 TRI during an all-time-high is ~13%! <\/strong>(for active funds with 20Y+ existence – HDFC Flexi cap fund and Franklin Flexicap fund – the average 1Y returns was even higher at 17% and 20%).<\/p>\n\n\n\n

In fact, almost half the instances were followed by 1-year returns of more than 15%. 6 out of 10 times – the 1Y returns exceeded 12%. <\/strong><\/p>\n\n\n\n

This clearly shows that \u201call-time highs\u201d automatically don\u2019t imply a market fall and in fact, the majority of times, market returns have been strong post an all-time high. <\/p>\n\n\n\n

The recent rally of 30%+ from the previous all-time high of 12000 levels in Nifty 50 is a good reminder of this. <\/p>\n\n\n\n

The below chart shows the number of times Nifty made new highs each year vs the returns for the entire year. <\/p>\n\n\n\n

\"\"<\/a><\/figure>\n\n\n\n

As can be seen from the chart above, years with more all-time highs have often ended up with good returns for the calendar year. <\/strong><\/p>\n\n\n\n

Takeaway<\/span> <\/strong><\/h3>\n\n\n\n

All time highs in isolation do not predict market falls and historically investing at all time highs has led to good short term return outcomes majority of the times.<\/span><\/strong><\/h4>\n\n\n\n

While there\u2019s no way of knowing what lies ahead in the near term, history shows us that equity markets tend to move higher over the long term. New highs are a normal occurrence and don\u2019t necessarily warn of an impending correction. They may in fact signal that further growth lies ahead.<\/p>\n\n\n\n

So when should you actually worry?<\/span><\/strong><\/h3>\n\n\n\n

Irrespective of whether the markets are at all-time high or not, if the following conditions occur together, then you should worry about higher risks in the markets and evaluate your equity exposure –<\/p>\n\n\n\n

  1. Very Expensive Valuations<\/strong> (tracked via FundsIndia Valuemeter)<\/li>
  2. Top of the Earnings Cycle<\/strong><\/li>
  3. Euphoric Sentiments in the Market<\/strong> (Strong Inflows from FII & DIIs, large no of IPOs, leverage, new investor participation, very high past returns, new themes collecting large money, momentum etc)<\/li><\/ol>\n\n\n\n

    We continuously track the above via our Three Signal Framework and Bubble Zone Indicator (which tracks 35+ indicators). You can read our entire approach explained in detail here<\/a>. <\/p>\n\n\n\n

    At the current juncture, our in-house Three Signal Model indicates that markets are currently in: <\/p>\n\n\n\n

    Expensive Valuation<\/strong> + Bottom of Earnings Cycle<\/strong> + Mixed Sentiments<\/strong> indicating NEUTRAL ALLOCATION to Equities <\/strong>\u2013 i.e., continue to invest as per long-term equity allocation. Eg: If your Asset allocation is Equity 50%: Debt 50% – stick to the 50% exposure levels to equities and do not increase or lower your exposure.<\/p>\n\n\n\n

    This is an evolving indicator and for a regular monthly update on our evaluation of the equity markets via our Three Signal Approach and Bubble Zone Indicator please get in touch with your relationship manager. <\/p>\n","protected":false},"excerpt":{"rendered":"

    “Buy Low, Sell High”, is the general market wisdom.  Going by the same logic, when markets reach all-time highs, should you reduce your equity allocation or stay invested?  Here is how we approach this often asked question. Perspective No 1: All-time highs are a normal part of long-term equity investing For any asset class that […]<\/p>\n","protected":false},"author":1,"featured_media":21764,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[506,509],"tags":[690,200,517,587,289,691,681,36,67,518,247,567],"yoast_head":"\nWhat to do when equity markets hit all-time highs?<\/title>\n<meta name=\"description\" content=\"Irrespective of whether the markets are at all-time high or not, if the following conditions occur, you should worry about higher risks\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.fundsindia.com\/blog\/mf-research\/what-to-do-when-equity-markets-hit-all-time-highs\/21731\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta 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