First Published by Sandeep Sahni on 150718
The markets are very interestingly poised at this juncture.
Both the Bulls & Bears have their arguments ready, the markets can turn either way, a 10-15% correction or an all time high of Nifty touching 12000 & Sensex scaling a level of 40000 from this juncture.
Lets talk about the Bears theory first:
Market is trading at a PE of 23 +, Adverse macros, Concerns on Fiscal & Current account deficits are looking real, Oil Prices continue to be obstinately high, the bond yields are hardening, interest rates are expected to be anything but benign, inflation has resumed its upward journey and crossed 5% , IIP has touched a low again, Exports are down month on month and Quarter on Quarter, Fund flow into the markets and mutual funds is slackening,
FII’s continue to withdraw from all EM’s and India in particular, Fed Rate tightening is on, Trump continues on his maverick unpredictable, foot in the mouth behavior, Trade war threat is no longer looming but is actually happening, No real correction in the market since demonetisation and
so on & so forth.
And the Bulls are countering the above with:
India continues to be the fastest growing economy in the world with a growth rate of more than 7%, ( It has recently replaced France as the the 6th Largest Economy in the world & will shortly replace Dear Old England as the 5th Largest with the difference between them & us being only a couple of $100 Billion which we should overtake before the year is over)
India is a consumption story which is leading to the Earnings revival as is visible in the first 2 quarters of Calendar 2018,
The sensex level has remained at 36000 in this year but the PE multiple has come down from 26 in Jan 18 to 23 in Jun 18 clearly outlining the earnings revival,
The time correction being witnessed in the last six months may last only the next few months,
We are having a great monsoon so far which should lead to positive rural demand & lower inflation,
Most sectors like Autos, Consumption, FMCG, Infra, IT, Pharma etc continue to do well with a mild concern in PSU Banking.
Banking should also benefit going forward as the government going into Elections will try & resolve as many issues as possible, either through hair cuts in NPA resolution, Bank Recapitalisation or resolution of High Profile cases like Mallya, Nirav Modi, Bhushan Steel & Power, Binani Cement, Essar, Videocon etc which alone should see more than Rs 1 Lac crore of written off / Provisioned assets being realized.
Though the markets are trading at a premium, the valuations have not touched the alarming levels of PE of more than 28, PBV of 6.5 & market Cap to GDP ratio of 1.48 which was seen in 2008.
India deserves a premium valuation due to its growth potential and sound fundamentals which is leading to a structural change and valuation upgrade. Hence, PE Up gradation has resulted in earlier average PE levels of 16-18 to current levels of 21-23.
Liquidity levels remain high with the current trend of financialisation of assets. Even if 5 % of the current FD base of Rs 1.15 lac crore shifts to the market in the near future, it will only equal the total current investment in Equity mutual funds of close to Rs 8 lac crores.
The Foreign reserves are more than $ 400 Billion equal to almost 9 months of Imports, FDI has crossed $61 Billion, India continues to be the recipient of Highest Inward Remittance of close to $ 70 Billion every year.
Our savings rate continues to be in the range of 25-30%, & with a $ 2.5 Trillion Economy, we are saving close to $ 800 Billion every year. Even if 5% is routed to the market, who needs FII’s after this.
The infrastructure push continues with the Indian Economy requiring close to $ 5 Trillion of Infra spend in the coming 5-7 years and the multiplier effect of that itself will generate & sustain the economic growth.
Convincing arguments by both the Bulls & Bears.
However, our take on the current market scenario is as follows:
While evaluating any market, we must keep in mind, two factors,
1) The basic nature of the market is irrational. Markets don’t behave in a very rational manner. They give a premium to
Though the markets are trading at a premium, the valuations have not touched the alarming levels of PE of more than 28, PBV of 6.5 & market Cap to GDP ratio of 1.48 which was seen in 2008.
India deserves a premium valuation due to its growth potential and sound fundamentals which is leading to a structural change and valuation upgrade. Hence, PE Up gradation has resulted in earlier average PE levels of 16-18 to current levels of 21-23.
Liquidity levels remain high with the current trend of financialisation of assets. Even if 5 % of the current FD base of Rs 1.15 lac crore shifts to the market in the near future, it will only equal the total current investment in Equity mutual funds of close to Rs 8 lac crores.
The Foreign reserves are more than $ 400 Billion equal to almost 9 months of Imports, FDI has crossed $61 Billion, India continues to be the recipient of Highest Inward Remittance of close to $ 70 Billion every year.
Our savings rate continues to be in the range of 25-30%, & with a $ 2.5 Trillion Economy, we are saving close to $ 800 Billion every year. Even if 5% is routed to the market, who needs FII’s after this.
The infrastructure push continues with the Indian Economy requiring close to $ 5 Trillion of Infra spend in the coming 5-7 years and the multiplier effect of that itself will generate & sustain the economic growth.
Convincing arguments by both the Bulls & Bears.
However, our take on the current market scenario is as follows:
While evaluating any market, we must keep in mind, two factors,
1) The basic nature of the market is irrational. Markets don’t behave in a very rational manner. They give a premium to
anticipated events & discount expected problems. They always are moving ahead of the events and when the event happens or doesn’t happen, it reacts accordingly.
Thus timing of the market becomes increasingly difficult.
Today the market is anticipating a growth in earnings, easy liquidity due to financialisation of assets, and the market has now started factoring in the headwinds in macros & uncertainty related to political stability for the next 12 months. Hence the increase in noise as expected in the Election year is also going to be a key determinant of market sentiment, a crucial element of the market.
2) Averages never Lie
The most common argument that is heard in any bull run is “This time it is different” combined with arguments on
re rating & structural change etc etc to justify higher valuations.
But averages & history doesn’t lie. If we don’t learn from it, we end up paying for it.
In the Indian context, as the market goes beyond a 22-23 PE valuation, the risk return ratio definitely turns unfavourable. If the probability of gain is X, then the probability of loss becomes a multiple of X, more in the range of 3X or 4X.
Hence, in the current market situation, we should avoid learning a costly lesson & keep a downside capital protection strategy in place.
The cash holding of most Mutual Funds today are also at an all time high thus indicating an expectation of an impending valuation correction.
However, as mentioned above, no one can time the market. Money is made only by those investors who stay invested in the market and don’t let the market hiccups bother them.
Thus timing of the market becomes increasingly difficult.
Today the market is anticipating a growth in earnings, easy liquidity due to financialisation of assets, and the market has now started factoring in the headwinds in macros & uncertainty related to political stability for the next 12 months. Hence the increase in noise as expected in the Election year is also going to be a key determinant of market sentiment, a crucial element of the market.
2) Averages never Lie
The most common argument that is heard in any bull run is “This time it is different” combined with arguments on
re rating & structural change etc etc to justify higher valuations.
But averages & history doesn’t lie. If we don’t learn from it, we end up paying for it.
In the Indian context, as the market goes beyond a 22-23 PE valuation, the risk return ratio definitely turns unfavourable. If the probability of gain is X, then the probability of loss becomes a multiple of X, more in the range of 3X or 4X.
Hence, in the current market situation, we should avoid learning a costly lesson & keep a downside capital protection strategy in place.
The cash holding of most Mutual Funds today are also at an all time high thus indicating an expectation of an impending valuation correction.
However, as mentioned above, no one can time the market. Money is made only by those investors who stay invested in the market and don’t let the market hiccups bother them.
Warren Buffett's diversified company Berkshire Hathaway,
which deals in multiple businesses, is sitting on a whopping
$116 billion in cash and short-term US treasury bills, at the
last count as he also feels the markets are overvalued.
Growth and value are two fundamental approaches, or
styles, in stock and equity mutual fund investing.
Growth investors seek companies that offer strong
earnings growth while value investors seek stocks that
appear to be undervalued by the marketplace. A combination
of the two strategies is the need at this hour, a balance
between growth & value.
Going forward, there is going to be a lot of volatility in the market. We expect that the market will be range bound in the next 12 months, a range of +/-10-15%
Investment horizon becomes important because in the next 5- 7 years, the economy is expected to double from $ 2.5 Trillion to $ 5 Trillion. The growth of the economy has its positive impact on the market. Just to illustrate, from 1991 to 2018, the Economy has grown around12 times from $ 230 Billion to the current level of $ 2.5 Trillion, but the Sensex has gone up from 1000 to 36000, a whopping 36 times. The markets in the long run always grow at a multiple of the Economic growth.
In this market scenario, any investor needs to evaluate his portfolio or investment on the following basis :
Investment horizon becomes important because in the next 5- 7 years, the economy is expected to double from $ 2.5 Trillion to $ 5 Trillion. The growth of the economy has its positive impact on the market. Just to illustrate, from 1991 to 2018, the Economy has grown around12 times from $ 230 Billion to the current level of $ 2.5 Trillion, but the Sensex has gone up from 1000 to 36000, a whopping 36 times. The markets in the long run always grow at a multiple of the Economic growth.
In this market scenario, any investor needs to evaluate his portfolio or investment on the following basis :
- a) Investment horizon & fund requirement in the next few years based on investment goals.
- b) Overall Asset Allocation Strategy.
- c) Review of current portfolio & rebalancing based on point
(a) & (b)
- a) Avoid a lumpsum investment in Equity or Equity based mutual funds at this juncture. Put your lumpsum in an Arbitrage fund to get a steady return and do an STP over the next 12 months into your desired Asset class.
- b) Follow your Asset allocation Strategy, rebalance your portfolio in consultation with your Financial Advisor based on your needs.
- c) Continue your SIPs, they are the best designed product to help you tide over the expected volatility and build your portfolio.
- d) There are products in mutual funds which follow a Dynamic Asset Allocation strategy based on their valuation models which are designed for riding over volatility and give you downside capital protection. Do look at them as a viable strategy.
I shall like to end with a famous quote,
"The stock market is filled with individuals who know the price of
everything, but the value of nothing." - Phillip Fisher
Make wise & informed choices.
Happy Investing!
Sandeep Sahni
Happy Investing!
Sandeep Sahni
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