(My recent column in the Deccan Chronicle. The prices worry me. Not because the companies will collapse, but investments at this stage are in the realm of hope… Markets can keep being like this for long. NOT forever… Enjoy the ride..)
COME EASY, GO EASY
This bull run has given joy to everyone who has made a trade. All that seems to be needed is to buy something. By and large, the bull run has spread across the spectrum of the listed universe. Newsletters, research reports, tip sheets and all are vying with each other to find out new names to put on their sheets. And in most cases what I see is that by the time the research reports are out, most of the upside has already happened in the stocks.
To my memory, this run in the market is as wild as the one that happened in 1991-92 before the collapse in April 1992. There the magnitude was amazing. The index went up from 1180 in April 1991 to a peak of 4546 in April 1992. And in April 1993 it hit 1980. Fortunes were made, fortunes were lost and the system had been wounded with the securities scam that had fed this bull run. Stocks were trading at an AVERAGE P/E of 57 times, at peak! Today, they are closer to 25.
This time round, the run up is more widespread. More participants in the market and the big presence of the FIIs. In the 1991-92 run up, there was only domestic money. The total market capitalization today is in excess of Rs.1,50,00,000 crores. In 1990-91, the total market capitalization was under Rs.1,00,000 crores. 1991-92 bull run pushed it by nearly three and a half times.
In 1991, the average daily turnover on the BSE (which probably accounted for 70 percent of business in India) was under Rs.200 crores. Today, the BSE does around Rs.6,000 crores a day and the NSE does around Rs.30,000 crores.
This is not to say that the present market run up has a long way to go. Of course, it would be foolish to bet on the index. Markets today are fueled by money flows (very aggressive in to India), expectations (quite high) and participation (high). Of course, every market is subjected to ‘event’ risks.
The one other big factor that is pushing the markets is the China factor. Indian commodity companies were in intensive care, given the scale and size of China presence in most commodities. Today, China has put a brake on production facilities of many commodities, leaving to a revival in demand and massive price push for products from Indian companies. A strong global economy in 2017 after a long time also helped keep commodity prices on a northward trajectory.
While valuations are extremely aggressive, the expectations is that the next round of earnings growth will be in the high teens, which will temper valuations. This may be true for some companies, but betting on a total rebound is optimistic. And looking at the valuations of financials the markets seem to be re-writing the rules of arithmetic.
There are two worry points that will show up. One is that the interest rates are not coming down. The second is that the three-year gift of low oil prices seems to be behind. This puts stress on the finances as well as on inflation.
I do not know what will the trigger that will hurt the markets. Earnings disappointments or a budget that does not please all or resumption of China supplies ( it would be naïve to assume that they would permanently shut down capacities ) could provide that. In the meanwhile, the prices of stocks across sectors seem to move up in turns. Infrastructure, commodities, consumer, retail are fancied. Pharmaceuticals and IT seem to be the next bets as there is a feeling that the ‘worst is behind’.
For the moment, the market is disconnected from the actuals and are playing on hopes. However, I do not like ‘hope’ as a pillar on which to construct an investment strategy. Trade if you must. It is unlikely that there is anything on sale that will give you a good rate of return if held for next five or ten years.
Two and two is always four. Sometimes we like to pretend that it is twenty two. However, if you start believing it, soon you will come to grief. Valuations are a function of earnings. Yes, they can be far from each other for varying lengths of time. However, the farther away that prices are from a reasonable level of valuation, the lower is your chance of getting a good return on your investment. Yes, given that there are limited choices and too many investors, we may not find stocks with deep value or big ‘margin of safety’. Yes, it is possible that prices may not crash. However, it can always happen that prices may have to wait for a very long time. The world is full of troubles and peace is not a permanent thing.