Tempted to book profits? Here are three types of stocks you should never sell.
While evaluating Dixon Technologies recently, I realised that even the slightest slowdown in growth could deliver a huge blow to the stock’s valuation. A price-to-earnings ratio of 200 means that if you were to buy 100% of the company's shares, it would take 200 years for you to earn back your initial investment through its profits. Dixon is not the only Indian stock that’s soaked in excess liquidity in recent months.
Inflows from foreign institutional investors (FIIs), and domestic investors by way of systematic investment plans (SIPs), have been consistent. Unlike its global peers, India’s central bank is not to blame for the excesses. In 2006, loose monetary and credit policies of the People’s Bank of China created a bubble in the Chinese stock market.
At the time, Chinese regulators imposed policies that sought to reduce the risk of a stock market crash. For example, the People's Bank of China raised the renminbi deposit reserve rate 10 times from the start of 2007. But this did not remove the excessive liquidity in the stock market.
A large amount of hot money continued to flow into the Shanghai Stock Exchange, driving stock prices up. At the end of 2007, global financial turbulence caused major stock markets to fall sharply. From November 2007 to January 2009, the Shanghai A-share index fell 69.2%.
By comparison, India's stock market today is largely dependent on domestic inflows. But will this liquidity be resilient in the wake of global financial tremors? That remains to be seen. Taking some profits off the table to prepare for a market correction is never a bad idea.
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