Hexagon Wealth
July, 2014
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EQUITY INVESTMENTS:
Domestic investors are shying away from equities

In spite of the rally this year, domestic investors are still underinvested in equities. At an interactive session, Mr Raamdeo Agrawal – Chairman of Motilal Oswal said that on average, most wealth advisors have remained under invested in equity through the rally, and rather, over invested in long term debt.

In contrast, at Hexagon, most of our clients are invested to the extent of 70%, the rest remaining in cash as a tactical call. That means client’s portfolios have benefittedfrom the present rally to a large extent. Good advice from good advisors!

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Last 6 months ≠ Next 6 months
During the last six months, the Sensex has generated an absolute return of 18%. This performance is unlikely to be repeated in the next six months as the recent rally has been driven by positive sentiment caused by the BJP’s victory in the general election and by strong FII flows. The market has run ahead of expectations of policy reforms.

Nevertheless, the next six years may result in better returns for investors than the last six years. According to Motilal Oswal, the estimated EPS of the Sensex for FY15 is 1,525. If earnings grow at a compounded annualized rate of 15% over the next six years, and the Sensex trades near its long-term average P/E of 15.4x, the value of the index is likely to exceed 50,000 over the next six years.

This will translate to a CAGR of nearly 14% - which is higher than the return generated by the index in the last six years. During the last six years, the Sensex has generated a CAGR of 10%. Even this estimate is conservative – as it assumes that the P/E of the Sensex will not increase. If the price-earnings ratio rises, then the index is likely to generate even higher returns!