The Signal: Are Markets Really Overvalued?

We welcome this note with India’s bellwether index crossing the 50,000 mark earlier this week only to tumble by ~1200 points in its weekly close.

The euphoria in the midst of a global pandemic has pushed markets to recover faster than its fall. Ironically, the upward move brings more questions about uncertainty than participants voiced in times of downfall. This noise is courtesy of markets “apparent” disconnect with economic fundamentals and its figure value in incorporating future facts.

Across analyst forums, fund manager speaks, and fisdom investor interactions, the most asked question is – “Are Markets Really Overvalued?”

In scratching this itch, we pen this article to help you know health & wealth of markets with suitable investor actionable to help you maximize return while minimizing risk.

2020 Seeds Grow Into 2021 Plant

To understand where we go from here, we need to acknowledge where and how we got here. The hart below highlights the market trajectory in the year while accrediting key-note events to birth today’s momentum:

The unprecedented support from the govt. and its banker via their policies and packages helped India welcome staggered unlockings vis-à-vis developed counterparts who even today struggle with new covid strains.

The broad bodies opted to put growth on the pedestal with inflation worries taking a backfoot. Here is the latest development on both country-defining statistics:

• Growth

 Global research house KnightFrank’s recent survey highlighted that 73% of participants feel India will be the 2^nd fastest growing nation in FY21, and the fastest growing nation over the next 5 years.

Various other agencies promote the same feeling, as is reflected in their projections for upcoming fiscals:

• Inflation

 Retail inflation eased for 2nd straight month, falling to its lowest levels in 15 months after touching its highest figures in last 6 years in Oct’20. Coming in at 4.59% in December vs 6.93% in November, it fell in-line with RBI’s tolerance level (4% +/- 2%) after staying above it for 8 consecutive months.

Core CPI eased to 5.34% after rising to highest in ~2 years at 5.51% in the month prior.

As is observed, much of 2021’s market fervor can be credited to 2020’s macro actions in ridding covid fever. The latest hearings from the country’s broad bodies continue to emphasize on the need for growth, thus instilling confidence in todays markets betting on tomorrow’s future.

India Inc’s Bumper Corporate Earnings

Market values may be influenced form many factors but are truly representative of 1 key line-item, which is corporate health. So, to gauge true value of markets today it is only fair to how India Inc has delivered on the revenue front in the latest reported quarter. The graph below highlights the same:

As is observed:

1. India Inc. Net Profit Recorded Multi-fold Increase In Sept’20 Quarter At 263% After Declining By 74.7% In Previous Quarter
2. Profit Growth Q2FY21 Were Higher Than Top Quartile Profit Growth Records Over The Past 60 Quarters

Corporate run-up is signaling similar momentum in December quarter too, as 157/4630 companies which have declared results have witnessed Sales & PAT growth of 6.3% and 1.6% respectively. More importantly, the growth has been broad-based, with all market segments recording figures in green. The same is shown below:

India Inc is expected to continue picking up steam as is reflected optimistic business confidence levels and rejuvenated manufacturing, and production activities.

Hence, for as long as combo of macros + micros garner strength, then so will the markets. And if it didn’t, then would we even call them “Markets”?

Investor Takeaway

India is today being touted as the next “manufacturer of the world” and is recognized as the biggest vaccine maker globally.

In times like these, the demography, supportive policies, and expedited adoption to new normal has shaped India become the hotpot for investments.

Hence, all factors considered, it is fair to say that markets have enough gas in the tank to drive over the next bump and continue moving forward.

Markets are a tool for investors to learn-&-earn. It has and always will be the case. The 1 commonality it has enjoyed across the many crisis it has faced in years past is its long-term outcome, which is an upward sloping curve.

In hindsight the market hysteria looks cushioned.

In foresight, global and domestic cues continue to spring a long-awaited wave of optimism in Indian equities. While structural challenges are being resolved gradually, Indian equities seem to be on a strong upwards trajectory.

You as an investor should utilize this opportunity to step-up systematic investment/transfer plans (SIP/STPs) by a moderate degree.

Those feeling adventurous can look to cue up their risk profile by a hierarchical step. The same can be done by gentle and gradual allocation into mid-cap and small-cap equities.

With this we conclude our 2 cents on the market’s happenings.

As always, feel free to write to us to share your thoughts/observations on market’s makings-&-takings.

Till next time, wish you a Happy Weekend