In past seven weeks, the Indian equity markets have corrected
sharply. The benchmark Nifty50 index has fallen almost 9% in this period. The
gauge of fear (volatility index) has risen over 60% in this period of seven weeks.
This sharp correction in values, when everything appeared to be
working normally for Indian equities has triggered an intense debate about the
sustainability of present levels of equity prices. Some prominent analysts and
investors have highlighted that the 11 year old bull phase in global equities
that started post Lehman collapse and commencement of easy monetary policies
may just about to be over. The disruptions created by spread of coronavirus
(COVID-19) may have opened many fault lines in the global financial system,
hitherto camouflaged by the persistence monetary stimulus by central bankers.
Many technical analysts and chartists also fear an extended
winter for Indian equities this time.
Since I have recently increased my allocation to equities, by
cutting overweight on gold and bonds, many readers have wanted to know my
reactions to these prominent market voices.
I would not like to comment on the views of various market
experts. I am sure all of them have very strong basis to form their opinions
and views. Moreover, I had explained my rationale for changing my asset
allocation (see
here).
I would not like to entertain a "valuation" argument
at this point in time, because a lot of businesses in India appear standing at
the threshold of a major transition. Therefore, both the numerators and
denominators in the valuation formulae could be subject to dramatic changes in
next 3-5years.
I would however like to highlight a few well know facts about
the Indian equities, which make me believe that the downside in Indian equities
may not be significant from the current levels. Since the rate trajectory
appears firmly down to me, the relative outperformance of equity looks more
likely to me.
1. The Indian equities
have been in a bear market for past five year at least. The advance decline
ratio of the issues traded on NSE has been negative for five years now.
2. Amongst the benchmark
indices, only BankNifty has matched Bank Deposit returns over past 5years.
Nifty Small Cap has returned negative return and Nifty just about managed the
savings bank interest.
Over past two years, only Bank Nifty has returned positive return.
Small and Midcap indices have lost massive ~18% CAGR and ~8% CAGR respectively.
3. Of various sectoral
indices, only financials & services, mostly driven by few private banks and
NBFCs, have consistently beaten the Bank term deposits, over past five years.
Many sectors like Media, PSUs, commodities, Auto, Pharma, and Infra have given
negative return of ~2% CAGR to ~14% CAGR over past five years. The returns have
been significantly poor over past 2years. Only Financials and IT could beat the
bank deposit returns over past 2years.
I am not at all suggesting that the Small Caps, Commodities,
PSUs etc that have severely underperformed in past five year may outperform
henceforth.
The point I am trying to make is that (i) a blanket opinion
about Indian equities, or any market for that matter, may be misleading; and
(ii) there could be plenty of opportunities to be availed in markets.
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