One group who don’t sound complacent are retail investors investing via mutual funds. Although there have been redemptions recently, there is still net inflow.
Returns are so bad - land, gold, FD - that relatives who used to perennially think I was gambling - by investing money in shares - are asking me for advice on share investing.
Completely agree… SIP/Stocks/MF’s have become common conversations these days. Many people are asking about where to invest (and also get offended if you tell them that this might not be the best time to invest and its better to wait for some correction)
Although I have been and am still bearish on the market, one of the reasons I think a higher multiple might make sense, is because of the very low (historically speaking) interest rates, which show no sign of going up (atleast in India, especially given the low inflation numbers).
To add to the P/E confusion, we’ve had 3 years+ of anemic growth, so earnings growth has been quite depressed compared to the past. Ideally, corporate earnings should grow at a clip of Real GDP Growth + Inflation, so many are betting on this to return. If we use P/BV as a measure of the overall market, I wouldn’t say we’re in bubble territory, although I am still very cautious.
While you are free to make your own observations, here are some of my observations:
Please note that earnings growth does not mean that NIFTY will keep increasing. Case in point being 2011, when NIFTY fell despite steady increase in earnings! This made the NIFTY PE fall drastically and that in fact was a great time to build a long term portfolio!
Very good observation !! Just want to know where can we find this chart showing Nifty, Nifty PE and Nifty Earnings at the same place. Also, is it possible to have a look at this for individual stocks ?
Very nicely put Chirag. I also agree to your observation. Earnings uptick is the most likely probability from here on. What will upset this is definitely an unknown, external factor.
I have made chart from the data given by NSE India.
Couple of personal observations in last few months.
Recently my PMS advisor said that he is not surprised that the nifty has gone up, but the fact that it has gone up so quickly surprised him. Valuations are definitely high according to him. However, even around current levels new clients are ready to put in money simply because they don’t see any other asset class giving that kind of returns as equity. He doesn’t see a major correction (10% or more) because he (and many other experts/advisor etc) believe there is huge money waiting on the sidelines. However, I believe when a correction comes it is very difficult to predict the extent of it. Overall he was cautiously optimistic mentioning that the long term growth story of India is intact and a medium fall is also a buying opportunity.
I am in the diamond industry and out of 10 people that I meet in a day, at least 5 talk about the share market. This worries me a little bit as something like this I had seen around 2007-2008 when people were advising each other in diamond industry to focus more on equities and we all know what happened after that. However, in 2007-2008 our industry had seen really good growth during previous years as well. However, this time things are different has growth has been really abysmal since last few years. Hence connecting the dot to which my PMS advisor said; people are putting in money cause they aren’t seeing enough return/growth around them.
In any case, I am being cautious and selling part of my portfolio of stocks which i don’t think are worth investing for longterm(which I personally built and not the PMS) and which have given me returns above 20% in less than a year
The trend is surely testing everyones patience. Since many weeks now my fingers are itching to click on the buy button 
But I am prepared to wait and wait and wait for the right time with 25% of cash in hand.
I was initially cautious about the sharp run up as most of the under performing stocks in my portfolio had also started inching up. However that seems to the general sentiment around and so now I am thinking that if at all, we may see around 10% correction. Even the money flowing from retail via mutual funds is mostly from people ‘who know that they don’t know’. There is still not a lot of risk taking visible from the retail guys. When people ‘who think they have mastered the game’ start using leverage and taking big bets directly that would indicate a top.
Disc - Holding around 10% cash and regretting a little for cashing out of some stocks early.
Market cap to GDP not applicable for India? nice read http://www.thehindubusinessline.com/opinion/the-buffett-indicator-is-not-for-india/article9781610.ece
Something I had written in April 2017. Maybe relevant to discussions here.
Valuations in Indian Markets
Many believe Indian markets are expensive. Nifty P/E is 24.
My take on this.
I believe we must consider the following :
Let’s analyze each of this.
Real Estate:
This asset is in a cyclical downturn. Prices have been coming down and I don’t see that changing in the near term. Real Estate as an investment is not at all a paying asset class right now. And I see lower and lower domestic investment inflows in that.
Gold :
Fascination of gold is decreasing by the day among Indians. I definitely see lot less attraction for gold among the young Indians. Gold imports are coming down. And returns are very low, right now.
Debt :
FD rates, return on debt instruments are coming down by the day. 6-7% return barely matches inflation. So in real term you are really not making anything.
This leaves Equity as the only asset class which can give superior returns.
More than 5000 Cr per month coming into equities via MF SIPS apart from lumpsum investments.
LIC and other life insurance also invest a sizable amount in equity.
EPFO and NPS equity inflows have also started. These domestic inflows have really helped in stabilizing and supporting the market even in case of FII outflows.
Our dependence on FIIs has definitely come down. I don’t see domestic inflows slowing down, which will keep fueling the equity markets.
Merging of formal and informal economy has been fueled by Demonetization and will further gather pace with impending GST (a game changer reform).
FIIs are looking at India with renewed vigor (Mar 2017 showed record inflows).
With political stability, reform path is clear.
And a sovereign rating upgrade sooner or later is imminent. This can lead to more FII inflows.
So, in conclusion, I think that Indian markets may remain expensive or in fact become more expensive.
Corrections may come intermittently (and since many have big cash, will be bought into, thus protecting big downfall).
Runway seems clear at least for the next few years as far as equity is concerned.
And the supposedly expensive 24 P/E may be the new normal for sometime to come.
-Jiten Parmar
It makes me scary when liquidity becomes the prime fuel of the bull market. Liquidity can dry really fast and if market is expected to drop as a result, people will sit on cash no matter how much cash they have. Earnings growth is not coming in. Despite strong macro indicators, short term factors such as demonetization and GST de-stocking will have an impact on GDP and earnings growth.
Fair value of Indian stocks largely depends on performance of corporate India while market value of Indian stocks depends on global and especially emerging market indices. We are benefiting from a global rally that is not supported by earnings growth at home.
Thanks @jitenp for for giving a bird’s eye view of Indian economic scenario impacting investors. I totally agree with you. It is better to ride with the market than in the sidelines!!
Although we may think that fixed income is giving very low return, one should always look at real returns. Currently fixed income is giving one of the best real returns compared to the past when inflation was 7%+ and FD returns were ~9%. Compare now, the inflation is almost at 1-2%.
Plus in the falling interest rate scenario bonds can give capital appreciation also.
Given the kind of valuation, based on historical trend, equity can under perform and can give minimal returns unlike average 15-20% returns in the past.
Only risk I see is due to low financial literacy in India, people will keep pouring money in equity + given tailwind of money entering in banking system, one can see even higher infusion of money in equity at even stretched valuation for longer than expected.
Let’s see how future pans out!!
These days, one of the common justifications i see is that, people will start investing in equity considering the other asset classes dont give good returns (which i agree). But i dont agree with this theory. The number of people investing in mf/direct stock is still very small. Those who entered recently will get out on small crash/correction. (As always , they buy at these valuations because the market is going up). Recently I was reading an interview of the ceo of zerodha. ( the interview was not about market conditions. but a general one). He said he felt zerodha became a big fish in a small pond. He said, although the addressable market is huge, new people are not entering the market.
Market is overvalued as a whole. But there are pockets, where you can get good returns based on earning potential in good stocks. Now for FD post tax return is 5%
Very informative and thought provoking thread.
I think it ultimately boils down to your time horizon. Its is true that markets may continue to run up and those who move to cash/short tern debt may miss out on the rally. But those with a shorter time horizon need to realize that when the correction comes, it will come when no one is expecting it. While debt will continue to give low yet positive returns, those with shorter time horizons (anything less than 3 years ?) need to be prepared for negative returns on the equity portion of the portfolio.
Prudent strategy would be to move some part to cash and redeploy it whenever there is a correction in terms on P/E. Decide on asset allocation and stick to it.
I think we can’t take a 1-2% inflation for a short time and annualize it. I think we must take an inflation of min 4%, which is what is guided by RBI.
Inflation of 1-2% is just a paper figure. Real inflation is high @ 10%. Every time I go out to buy any commodity the price has increased. I do not have any intention of complaining about the price rise here. I am skeptical about 1-2 % inflation which government is showing.
