As posted 10 days back, my plan was to be 80% out of direct equities and leave MF almost as is (with minor cuts and some restructuring). But the selling has been slow, its not easy to sell in these markets Currently I am out of 50% of direct equities PF, and will reach my goal sometime next week.
Will not touch 2 special bets though (Borosil Renewables and Rain Industries) and also will not be completely exiting select few old bluechip stocks.
My selling is not just a reaction to the valuation. It is also because of a change in my investment style (to concentrate on 10-12 stocks only and mostly swing/positional trade) that I have been meaning to do since past few years. This seems to be the right time to make exits and work towards that.
Historically lot of market tops are made in Jan-March and lot of tops are made in Jan. P/E is very high(albeit this is a special situation) and P/B is around 4. Bull market corrections can be swift and harsh.
I am now out of 70% of direct equities. MF pf is more or less as is. I think I am comfortable. Now on the sidelines probably until PE closes in on 30 or so maybe and until I also get some buy signals from my system. I am not a pro-active seller usually - this time I am doing things differently. Been reading a lot. Letâs see how things turn out.
Thereâs a nice report by ICICI direct (Title: DissectingtheNiftyPE, Date: 15th Jan 2021) which comments on the current valuation of the market. According to this report:
Q1FY21 and Q2FY21 wherein earnings of corporate India were completely
washed out. Therefore TTM PE doesnât gives a correct picture of market valuation.
Nifty costituents have changed a lot in last decade with FMCG, Financials (private banks), IT and Pharma having weightage increased from 29% in 2009 to 70% 2020.etc
Further, (regarding forward estimations) according to this report NIFTY FY20 EPS stood at 440 and NIFTY FY23E EPS is 740 ie 18.7% CAGR.
I hope, this gives a clear idea of where we are standing at present and whatâs market looking upto.
I was wondering what are the ways to measure Indian stock market? Traditional valuation metric doesnât seem to apply any more.
1.Nifty PE less than 20 doesnât seem to work anymore because in last few years most often Nifty PE is above 25. Even during March crash it breached 20 PE momentarily.
2. Nifty P/Bv less than 2, Looks like balance sheets many Indian companies are robust off late so this metric is not making much sense. Companies are not able to grow their earnings right from 2014but their book value always seem to be in acceptable range.
3. Dividend yield: Doesnât make sense for Indian companies because not may buy them for dividend.High yield does indicate low share prices or growth in earnings.
4. GDP/Market Cap : Doesnât make sense in Indian context,Because not all companies are listed.
I am honestly surprised by the recent bull market. I was expecting it to be at least 6-8 months of bear market before bull resumes but then it was deep plunge then relentless bull market. It is worrying signs because with such expensive valuations for last several years return potential of the equities are going down and i am not even sure if they beat inflation going forward. Excessive liquidity in developed markets finding its way into indian market due to dollar loosing its value and lax indian tax rules. This is first time QE money got converted into real money so inflation in developed countries might increase which means FED have to stop QE which would increase bond yields then god save equity markets.
So it is a dilemma for any long term investor in such an environment. you just donât know how long these QE program will manipulate asset prices.
so how relevant nifty PE of 20 as valuation metric?
I did read this thread but then off late people are talking about low interest rates, liquidity etc⌠So i get the sense that Nifty PE < 20 is no more valid metric, if not what is the new metric considering most of the market is running due to low dollar price and liquidity with no relationship what so ever with earnings.Earnings have been flat from 2014. Small spike in earnings from 400 to 450 was majorly due to corporate tax cut. so while earnings are flat Nifty keeps posting higher highs.
So to the record this year analysts are forecasting 600 EPS!. Maybe let me rephrase my question little bit then. I see this is not at all right time to do any long term investments because it is driven by FIIâs who are mostly investing due to excessive liquidity in their countries and weak dollar prices. The moment FED stops QE program (If inflation returns ) FIIâs will flee indian market leaving us retail investors strangled.
MOVI (Motilal Oswal Value Index) says anything more than 9000 as overvalued and here we are 14000. Looks like unless something dramatic happens 9000 looks like a distant dream.
I have updated the title :
âIs this right time to invest for long term in Indian equities? If not when?â
I hope this helps in understanding current and future valuations of the market:
Further, regarding liquidity inflow - I agree that the marketâs running-up due to money inflow - but why this money is flowing-in in India? Why not other countries? As per my understanding, FIIs are neither intraday nor BTST traders. They are looking at growth prospects and future valuations. While, we may see a correction when the liquidity flow stops, this wonât be a reason to worry. For me - any such correction would be another buying opportunity.
My personal opinion is - Its okay to remain invested with some cash in hand (depending on individual choice). However, its definitely not the time to remain completely out of the market,
TTM PE includes one washout quarter, I suggest to calculate using normalize earnings
P/B - 2 to 4 range is a thumb rule and it should work (this time its different never work )
Market cap/ GDP (Buffet indicator) is again a thumb rule and should work with historical levels.
Central banks all over the worlds are printing money like crazy, this causing asset prices to go up.
Soon this will effect in labor, raw material & services cost increase, manufacturers will adjust this cost increase with their customers &
companies earnings soon going to go up even if they produce same quantity as in 2019.
Market know this in advance, this is a start of bull market, Nifty PE your seeing will magically go from overvalued territory to undervalued without reduction in stock prices.
As long as central banks keep interest rates low it will effect in following conditions,
Funds will flow from savings to equity markets
Companies will go for more expansion due to availability of low cost fund
Consumers will consume more due to unattractive interest rates on savings, availability of low interest debt & optimistic environment.
Still there are undervalued pockets in market, where we need to focus.
These are my views and I can be wrong.
92% invested 8% in cash soon to deploy.
DIIâs have been net sellers for several months in a row so they do think it is overvalued?
Buffet Indicator for India well above the average (75) and for US it is just crazy (185) and if correction starts in US markets then it doesnât matter how well we are doing we plunge.
Right from 2014, year after year analysts have been projecting Nifty EPS to grow by some percent but it has been remain stagnant at 400 levels.While developed economies are printing money crazily India hasnât done same. Most of the Europe is still under lockdown while parts of India also still under lockdown.
come the year 2023, India would be getting ready for next election, I am not sure what really would happen around that time.
With things being rather dynamic, it would be hard to predict next 6 months let alone next 3 years. One thing is for sure if we donât see bear market soon then the returns will be severely compromised with very high.
Only question to be answered is why FIIâs are pouring so much money? why are they so optimistic? I guess it is due to favorable dollar prices, lax taxation of India, democracy and stable government more importantly excessive liquidity. From Emerging market prospective china is a black box so we are left with Brazil, SA and Russia which at the moment do have very unstable governments so India is the only sensible place to invest.
I am booking 50% profits only in my small cap fund and keeping rest of the portfolio as is. I have identified some nice themes but all of them have run up 100-200% in last 8 months so i am not comfortable investing at these levels.
I have written this earlier that historical PE donât make any sense for following reasons.
Composition of Nifty has changed towards companies with superior quality of earning. Instead of predominately commodity companies in 1990s today we have dominance of global IT services giants, HDFC twins, RIL (which again has transformed to a tech biz than refining and will command higher PE), addition of more pharma & FMCG businesses.
From high teens interest rate to 6%. Cost of capital is half or one third compared to 20 years back.
Few large loss making companies like Airtel and Tata Motors depressing earning.
Technology and scale is making larger companies better (this is opposite of disruption being faced by few sectors like oil). They are increasing lead over smaller peers.
Last but not insignificant, global liquidity is hunting for decent returns. Now what has happened in China with Jack Ma, more of that liquidity may find its way into India as compared to China.
In my view the two key quantitative variables that account for most of the nifty levels are the 10yr goi yields and GDP growth rate. This is published info do easy to collect. There is also a large body of evidence to suggest that qualitative information like your pan wala giving you stock tips, headline news of the market hitting new highs in a non-financial newspaper, your grandmother/mom asking for stocks to invest in etc also indicate a top.
However, I remember distinctly remember a well known & active vpâer who also runs his own advisory now advising to sell and run (in a private whatsapp group) when the market hit new highs a few years ago. So even seasoned pros have not figured out tops and bottoms.
Let ICICI run their mutual funds properly first. One thing i have learnt early in my investment life is never take these analysts seriously. If you go back in history right before 2007 crash analysts were justifying over heated market saying this is X of FY 10 so current valuations are justified. Have you ever seen any securities company or Mutual fund company saying that markets are overvalued? They wonât because thatâs their business. They need your money to run the show. But their actions are contrary. Mirae asset mutual fund further restricted the flow of SIPâs from 25000 to 2500. SBI small cap fund stopped lump sum investments. What does that say?
There is a better way
On vp forum there is a thread called equity investing as a full time career. When many people comment there and want to take up a career in equity investing or enquire about it, the writing is almost always on the wall
I will never sell a Nestle, Dabur or Marico irrespective of what is Nifty PE and what is stock PE.
If I have cement, steel and construction I will look at where we are in cycle and valuation and will sell if overvalued.
Banks have very strong correlation with Nifty PE so I will trim my positions if Nifty PE is high.
So, unless you are an index investor, it is never the case of âSell and go awayâ. It is always about companies you own and comfort level. Because it is never easy to enter back and you may never get your prices.
I regret selling costly Infosys, Biocon and HDFC Bank. All have doubled from my selling price since I sold them based on some advice of being expensive.
What I anticipate is a bull market correction. Even in the mega bull run of 2003-2007, there were several 15-20% swift corrections. These corrections are profit booking actions and like an inhale-exhale of a bull market.
I fully agree that the current Nifty is a different beast now and 22PE nifty will not be the norm hereon. Infact I believe the slightly enterprising nature of Index balancing is challenging for the MF industry with many moving to index investing.
For folks with a regular income, why do you care about booking profits?
I usually just save a significant chunk of my salary every month and invest whenever a stock corrects more than it should.
Just trying to understand the reasons behind why people usually book profits in bull markets esp. since market timing never works.
@Tar
Trying to time the market is futile for most at most times, but you improve your chances at certain times and some can do it better than others.
Profit booking is done by positional and swing traders. If you learn to profit from both downtrends and uptrends, and learn to carefully hedge at times with F&O - your returns can be superior. But all this is for people who have the interest and the time(not just money) to invest in the markets.
I tried hedging via F&O, made some money as well last year as volatility was high. But the whole experience was very stressful and filled my days with anxiety.
Currently I am out of 50% of direct equities PF, and will reach my goal sometime next week.
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