Vijay Kumar Gaba

The benchmark Sensex has recorded its new all-time level today, surpassing its previous high level of 63583 recorded in early December 2022. Nifty50 is also few points from its previous highs. In the past six months, since December 2022, both the indices have taken a huge swing of over 10%.

Optically the markets may appear flat for the past six months, as the benchmark indices are almost unchanged; but a deeper dive would indicate that many material shifts have occurred in the market during this period of six months. For example-

·         Nifty50 is almost unchanged for the past six months, Nifty Midcap100 has gained over 9% and Nifty Smallcap100 has gained over 7% in this period.

·         The sectors that led the markets to new highs in the post Covid period, i.e., IT Services, Pharma, Energy and Metals have actually yielded negative returns in the past six months; while the FMCG sector has been the best performer in this period.

·         Nifty PSU Banks that are the best performing sector for the past one year, have actually yielded a negative return for the past six months.

·         Despite the turning of rate cycle upwards, popular rate sensitive sectors like Auto and Realty have been amongst the top three performing sectors.

Despite sharp outperformance of broader markets, average market breadth for the past six months has been mostly negative. The months of January-March 2023 in fact witnessed the worst market breadth in over two years.

Another pertinent point to note in this context is that Indian markets have sharply underperformed the most emerging market peers and developed markets in the past six months. Note that in 2022 India was one of the top performing global markets. This is in spite of net foreign flows being positive in the past six months to the tune of Rs500bn (vs Rs1256bn outflows for 2022).

Taking a comprehensive look at the market performance during the past six months, I would draw the following conclusions:

1.    From the sharp outperformance of broader markets it is evident that the sentiment of greed is overwhelming the investors’ fears; and signs of irrational exuberance are now conspicuous.

2.    Most of the good news (rate and inflation peaking; earnings upgrades; financial stability; etc.) is already well known & exploited; while the fragility in global economy and markets has increased and hence the present risk-reward ratio for traders may be adverse.

3.    From a historical relative valuation perspective – Nifty is currently trading at ~4% premium to its 10yr average one year forward PE ratio. The same premium for Nifty Midcap100 is 14%; while Nifty Smallcap100 is trading at ~2% discount to its 10yr average one year forward PE ratio. The discount of smallcap PE ratio to Nifty PE ratio is presently close to 22%, larger than the 10yr average of 16.5%. The sharp outperformance of smallcap may be a consequence of value hunting and irrational exuberance, rather than greed; and the traders may soon return to Nifty as the valuation gap is filled.

In my opinion, therefore, it would make sense to take some money off the table, especially from broader markets and high beta stocks.