Do it yourself

The market action in the past three days has been quite exciting. It reminded me of the market action witnessed during March-April 2020, in the wake of the outbreak of Covid-19 pandemic. Drawing from the experience of 2020, like many, at first, I was also tempted to increase my risk exposure to Indian equities. However, on second thought, I have decided to reign my temptation and avoid any deviation from the “plan”. I note that the 2025-2026 market trajectory may not be similar to 2020-2021, for some very simple reasons. ·          Ignoring the panic fall in February-March 2020 and subsequent recovery, Nifty 50 gained 12% in 2020 and another 16% in 2021. These gains occurred because corporate earnings were coming out of a 10yr growth drought. Nifty EPS has grown over 225% in the past five years (FY21-FY25), against just 50% growth witnessed in the preceding decade (FY11-FY20). The growth trajectory is now moderating and is more likely to stabi...

The current market condition reminds me of one of my favorite bedtime stories. I love to narrate this time and again. Once upon a time a sparrow couple made their nest in a wheat farm. In a few days, the lady sparrow laid four eggs. In two weeks, eggs were fully hatched and four chicks were born. In the meantime, the wheat stems had started growing tall. In another two weeks, the chicks started to fledge and the wheat kernels began to turn golden. This was the day when parent sparrows first discussed leaving their nest and moving somewhere else. “The crop will soon be ready for the harvest. Our nest shall be exposed and trampled by the harvesters”, the lady sparrow feared. Her companion however was not worried as yet. “Nothing to worry as yet”, he assured her. In another three weeks, the farm turned completely golden with wheat completely ripe to harvest. The lady sparrow was terribly worried now. “We must fly out now. The chicks have also grown up now and can easily fly to the w...

  I indicated yesterday that I see markets fast moving to a point where it becomes worrisome. The argument for fresh buying or taking a leveraged position is vitiating every day. The sentiments of Greed (making some quick money) and Fear (of missing out on a rally) are already beginning to dominate the conventional wisdom, in my view. To put things in perspective, the latest market rally, particularly in the broader markets, was driven initially by a combination of macro improvements and undervaluation. But now most of the macro improvement seems to be tiring. In fact, it is very much possible that during 2HFY24 we may actually see some of the macros like growth, twin deficit, consumption and investment growth, gradually deteriorating. On a micro level, the earnings upgrade cycle might peak with 2QFY24 results; and we may actually see some downgrades occurring due to poor rains (poor rural demand); further clouding of global demand outlook; margin compression for banks; and the...

My discussions with a variety of market participants in the past couple of weeks indicate that we are at a stage in the market cycle when the investors and analysts begin to change their valuation arguments. Extrapolation of one-quarter performance to the next ten years, “story” pages of corporate presentations, political visions of growth, etc. begin to dominate the assumptions in the valuation matrices. Three to five years of forward earnings are being considered for arriving at twelve-month price targets. My experience of the past three and half decades suggests that this kind of deviation always leads to mispricing of stocks and eventual sharp corrections. It is important to remember that the return on the investment in publicly traded equities is a function of three factors: (a) earnings growth; (b) changes in price earnings (PE) ratio and (c) dividend. The earnings growth is a function of multiple factors, e.g., (a) capacity (production capability); (b) demand environment (market...

  In the first two months of FY24, Indian markets have done well. The market breadth has been strong and; volatility very low. The latest market rally could be described in at least three different ways, viz, 1.    The benchmark Nifty50 has gained ~6.5% from the end of FY23; and the broader market indices like Nifty Midcap100 (~12%) and Nifty Smallcap 100 (~13%) have done significantly well during this period, indicating much improved sentiments. This view would imply that presently the sentiment of greed is dominating the sentiment of fear. 2.    At the current level, Nifty50, Nifty Midcap100 are close to their all time high levels recorded in the 4Q2021 and again in 4Q2022. Whereas Nifty Smallcap100 is still about 20% lower from it’s all time high level seen in early 2022. So effectively the markets have been oscillating in a wider range after the sharp rally post March 2020 Covid panic lows. This view would imply that since the market is now clo...

While discussing the present state of affairs in the markets, especially the valuations, two statistical parameters are used most often – (1) The price to earnings (PE) ratio of the benchmark (e.g., Nifty50) and (2) the market capitalization to GDP ratio (popularly known as Warren Buffet indicator). Both these indicators may soon lose their relevance, particularly in the context of Indian markets. In next couple of years a large number of new economy stocks may get listed. Many of the new economy stocks that listed earlier may get included in the benchmark indices. Obviously, the old economy stocks, especially PSU and cyclical commodity stocks will pave the way for these new economy stocks. The point here is that the new economy stocks are valued at multiple of revenue not profits. For example, it is expected that in the next Nifty reshuffle Avenue Supermart (198x PE) or Info Edge (500x PE) may replace Indian Oil Corporation (5x PE). This will obviously inflate the composite valu...