Markets grind higher, rich valuations remain a concern!
Who would have thought that the Indian markets could go so high and that too, so fast! Well we did, didn’t we? It was not long ago when the markets fell off from the cliff as Nifty plunged about 12 per cent from the top in just 59 trading sessions (as per the data registered in June 2019). The sudden collapse of the Indian stock was triggered majorly by a decelerating economy, slowdown in consumption, woeful corporate earnings, constricted liquidity and never-ending trade war between the US and China. However, the bull express which began in September after one of the most heroic and prudent step taken by the corporate tax rate cut, there has been no looking back and this bull express has helped Nifty to scale new heights and enter the uncharted territory.
If you recall, we were the one who repeatedly said that Nifty is on course to touch 12,200-12,300 mark. And nevertheless, Nifty did close above 12,200 mark for the first time ever; thereby, reflecting the bullish mood of the markets, about which we have been discussing all this while. The recent enthusiasm in Indian markets can be attributed to a continuous flow from FPIs and the deal struck between the world’s two largest economies. The outflow of funds from the FPIs during July and August was the talk of the town, however, things certainly improved and we saw a gush in inflow from the FPIs. No denying the fact that the inflow this year from FPIs is the highest since 2014. Coupled with fund flows, one of the key catalysts for this Bull Run has been the farsighted measures taken by the government from time to time to tackle slowdown in the economy. No doubt, all the right steps taken today will benefit the economy in the coming years. Many might be wondering as to why equity markets are scaling heights! To understand this, one must know that equity markets are forward-looking and always helps in discounting the future. And, we are quite confident that the future belongs to India.
Meanwhile, the action in the western counterparts is all worth mentioning. The US markets is hitting new highs every single day. However, the latest news coming from the US shores is that the US President Donald Trump has been impeached by the House of Representatives for abusing his power and hindering law makers’ investigation. However, the senate approval for the same is pending. With this, Trump became the third US President in the history to be impeached and none of the earlier two Presidents were removed from office as the Senate did not support the decision. With Republicans in majority in the Senate, Trump is unlikely to be removed from office.
All the benchmark indices are trading at a lifetime highs but the Smallcap-100 index is 41.07 per cent and Midcap-100 index is 22.59 per cent, away from their lifetime highs. This divergence between the benchmark indices and the broader indices is not a character of earlier bull market conditions. The Nifty has able to rally 12.86 per cent for the current year, while, the Smallcap-100 index and the Midcap-100 index both have lost about 11.75 and 5.42 per cent, this year. The Nifty was able to rally 15.25 per cent from its August 2019 lows. The Smallcap-100 index rose by 11.26 and the Midcap-100 index gains by 12.88 per cent from its August 2019 low. Even in the recovery path, these broader indices are lagging in comparison to the benchmark. Nifty is currently trading at 28.48 PE and is one of the most expensive markets when we look in the Asia Pacific region. Earlier in February 2000, January 2008 and August 2018 tops, the Nifty traded in similar PE. It’s historically proven that levels above 28 PE are not suitable to invest aggressively for a long-term. Right now, it is possible that markets may cool-off a little bit. But such cool-off or a breather phase, keep the markets healthy and are must in any bull market. Having said that, there is nothing in the markets right now that suggests an imminent major correction that investor should be worried about. Investors can stay light and less aggressive at current valuations. Try to identify stocks which offer some margin of safety.
