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Why you should tread cautiously as share prices rally

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We may not be out of the woods yet. Macro headwinds continue to persist globally as well as back home in India, yet, the benchmark indices like the Nifty, S&P BSE Sensex, and small and mid-cap indices have gained ground sharply in the past month. Indices in Europe and the US have also rallied. That is despite central banks around the world pushing up key borrowing rates. The Reserve Bank of India’s monetary policy committee hiked repo rates by 50 bps today. As money gets expensive, share prices usually seem to discount the implication of tighter liquidity conditions.

Foreign portfolio investors are back to buying Indian equities. They put in more money than pulled out over the past week. Strong domestic monthly flows through systematic investment plans in mutual funds and positive buying from foreigners could keep Indian equities firm. That is despite the liquidity challenge posed by central banks hiking interest rates. Clearly capital usually finds its way to profits.

There is a word of caution, though. The global current equity risk premium or the excess potential return investors can expect over a risk-free return of a 10-year government bond is around 3%, according to one analysis by Morgan Stanley, a global bank. It is below the average of about 3.5% witnessed over the past 13 years. The global bank argues in its latest post that during the times of Fed tightening, historical data points to an equity risk premium of above 4.5% as an attractive entry point. That means current share prices are not low. As such the bank advises caution to clients not to be fooled by the recent surge in share prices and to tread cautiously in building any large fresh exposure in risk assets.

The ETF Juggernaut continues to roll despite the volatility seen in global markets all through 2022.

The value of assets of ETFs worldwide grew markedly during the period from 2003 to 2021, reaching over 10 trillion U.S. dollars in 2021. The number of ETFs worldwide grew as well during the period, from 276 in 2003, up to almost 8,600 in 2021.

Assets under Management in global exchange-traded funds (ETFs) from 2003 to 2021(in billion U.S. dollars)

Globally, we have observed a trend of investing more in passive investments which have also intrigued Indian investors as they can be seen taking up the trend as it involves better returns.

A similar story is seen in India, there has been a steady rise in passive investments by Indian investors, shows a recent study by the National Stock Exchange (NSE). Among the different modes of passive investments, investing through exchange-traded funds (ETFs) is the preferred choice for a large section of investors in India. As of March 2022, the total assets under management (AUM) of ETFs stand at 4.99 lakh crores which is more than 8x growth from March 2017, similarly the No. of ETFs has also doubled in the last 5 years.

Investors seeking exposure in both equity and debt without taking on the fund manager risk that comes with actively managed funds can take the ETF route.

Wondering how to go about it? Here’s where we come in with our platform at www.alphaniti.com to help you take charge of your investments with our newly launched ETF Corner to make investing easy for you!

References:

Food Security Update | The World Bank

Fed Rate Hike 2022 | Are Investors Too Bullish? | Morgan Stanley

International ETFs: Is it time to consider investing in international ETFs? | The Economic Times