With markets at an all-time high, how do you assess the current market situation?
When one looks at the current valuations based on historical precedence, the markets look over-valued or are close to it on an index basis. However, this is the outcome of polarisation of the market, targeted FPI flows and big-getting-bigger syndrome being seen across the globe. The Nifty is currently trading at a one-year forward PE multiple of 27 times, compared to its 10-year average of 17-18 times. PE levels have been lifted across the world over the past few years driven by rising liquidity and falling interest rates. So even though the current PE seems higher than the 10-year average, it is not very far from the 5 year average.
The current BEER (Bond Equity Earnings Yield Ratio) in India is -1.3 based on 1-year forward earnings yield compared to the historical range of 0.8 to 1.5. There is scope for either the 10-year G-sec rate to move up or earnings yield to fall —and hence PE ratios to rise.
Markets discount the future. However, the gush or absence of liquidity could pull it up or make it less than what it deserves to be. After the US elections, emerging economies should come back in favour once the pandemic is under control. Having said this, large fresh investments at these valuations may be avoided as a technical or fundamentals-led correction may not be far. Asset allocation review and the consequent partial shift from equities to other asset classes may be done to fall in line with the originally thought allocation plan.
"Large fresh investments at these valuations may be avoided as a technical or fundamentals-led correction may not be far."
With economic indicators improving, is recovery entrenched or will post-festive season numbers give fairer picture?
While a lot of high frequency data points have improved over the past few weeks, one is not sure whether this is due to pent up demand or due to a genuine turnaround in economic sentiments. Rainfall has been good; reservoir levels are adequate, rural incomes should grow well. This should ultimately get reflected in corporate earnings. Key sectors and stocks dependent on global markets also could benefit due to indirect spinoffs out of Covid. Financials should recover from the scare of stressed assets once the economic engine is back on track.
Macro statistics should also get back on rail with interest and inflation fears out of the way. If we do not have a second round of Covid-19 and the consequent lockdowns, we think there is a fair chance that the economy would have turned around sustainably. However, one should be aware that valuations have also improved dramatically.
What risks can derail this rally?
In the near term, markets will watch closely the emerging geo-political situation across the globe, the pace of recovery of global and Indian economy, timing of reversal of easy money policy globally, India’s fiscal situation, asset quality stress and availability of credit to businesses and consumers. This apart, the progress or decline of coronavirus cases also needs to be watched closely.
Can the uptick in mid- and small-cap segments last longer?
Mid- and small-cap stocks suffered post 2017 due to the Sebi circular on categorisation and rationalisation of MF schemes. Later a lot of these companies came under pressure due to disruption, liquidity crunch, technology changes etc. However, the underperformance has started to reverse over the past few weeks. This is partly led by encouraging Q2 results. Small and mid-cap stocks will continue to be screened by analysts and investors for building wealth.
However, despite a large universe of listed stocks only a few hundred stocks will be actively tracked from this perspective. In the present world, business models of most companies have come under threat. Commitment of promoters for the long haul and their skill in adapting to changing times is crucial. In a world where regulatory compliance is becoming tougher, large companies are becoming larger and smaller ones are getting eliminated. As the large-caps have seen a decent broad-based rally, we may see the rally spreading to small and mid-cap stocks too. However, it may not be all pervasive as in the past.
"As the large-caps have seen a decent broad-based rally, we may see the rally spreading to small and mid-cap stocks too. However, it may not be all pervasive as in the past."
Which themes or pockets provide the best opportunity now?
Valuations in cyclical sectors such as metals, oil and gas, capital goods, building materials and infrastructure seem attractive and are yet to catch up fully. However, these are not buy and hold. They may be good for a short-term investment. Other sectors that have done well so far including pharma, IT services and chemicals may also keep performing but their returns from hereon may be subdued.
Interest in foreign stocks is on the rise. Are investors rushing into overheated stocks? What is the right way to play this space?
Investors over the last year or two have taken advantage of the LRS by RBI to invest in stocks abroad. These have done well, especially those directed at the developed markets. While easy money policy is fuelling the rally in stock markets abroad, we may be reaching near-bubble valuations especially in the tech sector in the US. Savvy investors who can keep a day to day track of valuation of companies abroad can still continue to invest for the short term in stocks abroad but have to be watchful of early signs of a large reversal. Others can start booking profits from now over the next few weeks.
Investors have the option of investing in FoF and direct investing. FoF investing in MF schemes targeted at global stocks have also done well and don’t require the investors to have the skill to track individual stocks. Direct investing is meant for investors who want to take concentrated bets on individual stocks where they have enough knowledge about the company, its peers, sector and valuation.
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1 Comment on this Story
somnath ghosh53 days ago
HDFC mfs are the worst performers amd he is lecturing! Only Reliance ( now Nippon) is worse than HDFC.