There are some fundamental factors which are probably affecting future valuations currently:-
Optical Earnings Growth - EPS growth seems high for current earnings. Issue is there is a major effect of higher corporate tax on the base numbers - we should not be anticipating earnings growth continues at the same percentage increase simply because the base will be higher
Inflationary effect : Inflation has seeped into market components like commodity companies, but what about areas like consumer durables and fmcg where it has just started. In my opinion, the positive impact of inflation is coming into earnings, but the negatives are only beginning last quarter
Low base of Q4 2020 - Although only slightly effected by lockdown, but itâs still around 90 operational business days in 2021 vs probably 80 days in 2020 in Q4.
Even through relatively basic factors, but I feel itâs not ideal to extrapolate earnings growth like we currently seem to be doing on valuations. Even a slight moderation will make several companies look overvalued. That said, there are still well valued opportunities in the markets, though itâs really slim pickings.
Would anyone have Nifty PE multiple - trailing and 1 year/2 year forward? I have a couple of different ones - but there is so much variation on the forward ones especially.
Discl - I always stay invested in markets and continue to remain invested even if Iâm not as positive as the indexes reflect currently. Just reduced some positions this week from riskier stocks.
It appears that from now onwards 10 years G-sec yield will harden. Ideally it should put a cap on increasing stock valuation. We will see if that happens or orgy continues.
Here I would like to point out some structural changes even in the case of commodity companies like metals
The huge windfall made by these companies in the current cycle is being used to aggresively retire debt. The single biggest problem with these companies infact the reason many of them went out of business was the debt taken on by them in the previous cycle.
Now once the commodity cycles tapers out you have companies with vastly different balance sheets with significant increase in earnings due to the lack of interest payments which are to the tune of 1000âs of crores.
This will reflect in a difference in the historical valuations accorded to these companies unless there is a capacity glut which seems far from likely.
A look at the hospitalty industry would suggest that transition from unorganised to orgnaised players would happen at a much faster rate. The reduced capacity due to smaller players going out and the demand reverting to normal has yet to be captured in the prices.
Similarly a lot of changes are taking place in terms of the changed behavioral patterns of travel , living , WFH etc which are strucutural in nature. The cost savings and leaner organisations will help them work and operate better.
The economy in my opinion is definitely transitioning due to what has happened in the last 5 years due to reasons varying from Demonitisation, GST , COVID etc. It has to account for something.
High PE is acceptable only when high growth is underway/forcasted.
I donât think our economy is going to catchup in near term like within 1 year(as everyone knows).
Still there is a expectation that it will catchup in medium term like 1-3 years (no one knows)
I believe people are bullish in long term(>3 years)
For now we can say market is overvalued based on short term but I donât think it will fall until there is a change in mid/long term view. Because if market is not going to perform for >3 years, I think people will take the money from market and will move it to other assets.
There are some companies have crazy valuations which would give bubble kind of picture but we have to watch closely whether companies in this crazy valuation zone increases.
Still there is a minor headroom for Nifty then market can go for either price or time correction.
So far one thing which never tested in market is new(covid) retail invertors emotion. How they are going to react to correction. If they handle well then correction can be just correction otherwise it will become crash. Lets wait and watch.
I am a conservative investor. Risk reward is not great at current levels as per my view, so given lesser allocation to equity(~32%) and more to debt bonds and gold. I think asset allocation is key for retail investor to preserve capital as well as profits. i will increase the allocation only when the market is reasonably valued.
Note - This is my personal view based on my understanding. I am always invested in market only allocation would change.
Whatâs wrong with the markets? Serious investors know thereâs nothing wrong with the markets. Corporate earnings are strong and stock prices are a slave of earnings.
One can listen to the two videos given below:
Even PB is currently comfortably above 4, and in my opinion that reflects high future expectations (well placed or incorrect - still to be judged)
I think one component being ignored now is the corporate tax cuts which were implemented in mid 2019. Q3 2020 and Q4 2020 YOY growth looks great due to higher emanating PAT from the tax cuts. Q1 and Q2 2020 were largely COVID affected so treated as washouts. It will be interesting to see how and if the same level of earnings growth continues when the tax rate base is normalised from Q3 and Q4 2021 onwards. It would be interesting to see how earnings growth would look like if calculated on PBT/EBITDA vs PAT.
I do think the title of the thread is not ideal though - we are just discussing possible ways the future could play out - the market is always right though!
Will this applies to March 2020 and January 2008?
Both the times, market were ATH but lost significantly afterwards.
If they were dependent on future prospects then why they fall so much?
I believe market are influenced by many short term factor and they were wrong many times.
A value investor try to take benefit of this situation.
In 2020, markets already started falling in mid Febraury and only ended by end of March. This is clearly due to indecisiveness of how the corona is going to end and its an once in a life time event most of us didnât have any clue of. This is the first reason the markets have fallen so much before we even had any reasonable number of cases in India. They have fallen due to the uncertainity in the system. Once we have new liquidity measures, stimulus coming in, it started going up. Had we not had the uncertainity, markets would have fallen may be ten percent but would have stayed sideways until growth picked up. I canât speak about 2008 as i am not sure of the causes but based on my limited understanding, its a global meltdown triggered by sub prime mortage crisis and top financial institutions going bankrupt which had a cascading effect on us.
Uncertainty is the biggest factor in deciding market direction.
If there is a local/global event which causes chaos & the market/participants feel uncertain about the future - immediate or long term, markets fall accordingly. In the past, all the events which caused the markets to fall hugely, introduced various very high degree of uncertainty which led to the participants moving away from the risky (equities) assets overnight and caused huge corrections.
In 2008 it was failure of one big US bank which could have led to fall of various other global institutions and in 2020 it was a global pandemic due to a novel virus which could have led to a global collapse.
It takes time to regain belief, assurance of safe future and certainty. As soon as clarity returns the markets cheer and recover as fast.
Very interesting read. I wonder this article has predicted the rally of the century and also the ensuing global recession of the centuryâŚIf only prediction & execution was so straightforward and history was such a good teacherâŚ
Going by the article, one can even use symmetry to first understand which sectors boomed during the 6-7 month of frenzy in earlier cycles, map those sectors to todayâs respective sectors considering the type of economy then & now, identify the companies next and time the golden entry & exits!! âŚor Simply focus on the basics now & in ensuing any bears or bullsâŚ
Pardon me, if this is a bit off-topic from this thread. Iâm a novice investor who started stock market investing a year back. To my knowledge, I feel i have bought some quality companies in my Long Term Portfolio as per the research i have done. Iâm happy to hold my LT stocks for 5-10 years. Question is, how to handle 15-20% corrections in market being a Long Term investor? Should i adopt a buy and hold strategy to my LT PF or sell 50% and buy back when market has corrected well? or any other suggestions?
The great investing minds of past suggested to do nothing (sell) even if market falls by 50% provided the stocks in pf was bought by thorough self research and homework based on fundamentals. Otherwise get rid of fear and take shelter in safe harbor until silver line in the cloudy weather is visible. The stock market more often always remains the place of regret than extraordinary success for majority of retail investors.
Uncertainty is what makes market a market. If the market becomes easily predictable, traders and investors would already know what to do and there wonât be any surprises as such. It will lose its value and soon collapse.
Nifty PE was 40 and all theories of overvaluation, average PE and mean reversion etc were pushed aside. Furthermore the Nifty PE calculation mechanism changed and its now near 30 PE. Seems Market is disconnected with economy and thatâs ok.
Are we close to a bubble? Are we inside a bubble? I dont know. Nobody knows. Will bubble be formed?- Of course yes. Will it burst- Of course yes. When?- I dont know, nobody knows. So what should we do?
Investor must have some strategy. Nobody can time it perfectly. One way is to increase cash allocation in the portfolio gradually. Difficult to do when people start yelling- âcash is trashâ. Another strategy is to be stock specific and exiting when valuation is not digestible to your taste- another difficult thing to do when the stock is going up everyday.
Nevertheless, market rewards difficult things. Buy when buying is difficult, sell when selling is difficult.
Key takeaway in my words: nifty composition is changing. More of consumer facing, highly structural earnings companies are entering like life insurers, and cyclicals are exciting. Comparing to historical p/e ratio is not a correct comparison since nifty was different back then.
What works best in all markets is to find companies that grow earnings and buy them at a discount to fair price with margin of safety. This works regardless of where nifty is. Jeevan sir gives examples of how this played out in his pf in March 20 crash.
Valuations are a function of narrative. According to jeevan sir and I agree, the high valuations of some coffee can stocks is due to a scarcity premium. There arenât enough good quality large cap companies. So the ones that are there get a premium valuation. Due to current tailwinds once the chemical, pharma, and other cos become largecaps, the premium for coffee can companies will reduce and so will valuations.
All of this is speculation of course. There are incidental episodes such as maggi nestle episode wherein good quality cos are available are good discount but of course only when sentiment is bad.
