When the proverbial panwala & rickshawala start sharing stock tips, one can judge thatthe markets are in full bloom. My first such tip came from an "Uber"wala in June 2023 and I said to myself that the markets may witness some correction in coming months. But as I look back today, it's been 400 days since the Uberwala tip, stock indices are up by ~30%, and we haven't seen even a 10% interim correction in the market. And all of this is despite elevated global inflation, lukewarm election outcome, andconsistent selling by FIIs, PEs, MNCs& domestic promoters.
One can definitely claimthat the current bull market as the smoothest in the history of Indian capital markets, even when compared to the euphoric days of 2006-07. For people like us, who are into managing money, it's as much a time for contemplation as for celebration - What can break the current party? Will our portfolio companies be able to deliver the business performance & earnings that can justify the current valuations? Should our cash levels increase or should we ride the party?
Macro setup - Can there be a bigmarket crash?
Indian stock markets witnessed large corrections in 1992 (Harshad Mehta scam), 2000 (dot-com bubble burst), 2004 (NDA lost elections), 2008 (global sub-prime crisis), 2013 (local scams, currency& fiscal crisis), 2018 (IL&FS and NBFC crisis), 2020 (Covid), 2022 (Ukraine-Russia war). Of the eight major corrections, 4 of them happened due to local issues and 4 due to global issues.
As we stand today, the local set-up in India is extremely benign, and there is little to worry:
- Corporate profits & balance sheets are strong and debt levels are at decadal low
- Our banking system is extremely healthy, with FY24 profits in excess of 400,000cr
- Though not as stable as previous 10 years, we still have a stable government
- Our current account balance & fiscal deficit are at extremely healthy levels and the same is reflected in stable currency and interest rate regime.
- Valuations are higher than long term averages, but the macro set-up and earnings growth are also much better than the long-term averages.
The global situation is a mixed bag, where there are some benign and some ominous signs:
- On the negative side, there is a geopolitical war between US & China, which is spilling over to multiple fronts like Ukraine-Russia, Israel-Palestine, etc. Western economies including US are sitting on unsustainable levels of debt and may take years to come out of this. Tech stocks in the US are in the bubble zone and any correction there could spill over globally.
- On the positive side, India benefits from manufacturing shifting from China to India. Also, as the world loses confidence in the US$, the pressure on Indian currency reduces.
Based on the above analysis, one can conclude that India's macro set-up is solid and big correction, if any,can stem only from global factors. However, India has found a hedge to that as well - the average Indian investor is pumping more & more money into the stock markets, either directly or through the mutual fund route.
This force has been large enough to not only absorb the incessant FII selling, but also ensure that last 400 days have been smoothest bull market that India has seen. The much ridiculed "average retail investor" has clearly become a force to reckon with. So much that Government & SEBI are likely to come out with measures to cool off the markets, especially in SME and option trading segments.
Micro setup - few pockets of value& hope, many pockets of high optimism & euphoria
Given the strong macro setup, strong performance of the economy and the huge gush of domestic money flowing into the Indian stock markets, it would be naive to expect that stock prices willremain cheap or even rational. One can broadly classify the current stock market into 4 pockets:
1. Pockets of value: These are pockets where stock prices haven't gone up much over the last 1 or 2 years. Many stocks in sugar, FMCG & QSR, Banking, NBFC, Insurance sector,metals & mining, PSUs fall under this category. Each of the sectors are going through their own unique issue like ethanol ban for sugar companies, input cost inflation for FMCG & QSR, regulatory action for Banks, NBFCs and Insurance companies. Most of these problems will probably get resolved over time and investors can reap some rewards.
2. Pockets of hope: These are pockets where stock prices have risen but earnings are yet to be accrue. Stocks in chemicals sector, consumer durables & consumer electricals, building materials, fashion & retailing, IT services, etc have rallied by 30-50% in hope of revival in earnings. If the earnings indeed come through, investors can expect more returns, since the valuations are still reasonable
3. Pockets of high optimism: These are pockets where sector outlook is very strong, stocks prices have risen significantly and valuations are sky high. This pocket is represented by sectors like railways, defence, capital goods, industrials, electronic manufacturing, electric vehicles,renewable energy, data centres, AI, electricity, automation, robotics, select PSUs, etc.
The current high prices reflect the confidence amongst investors that future growth will be strong. Should the future growth disappoint, investors can suffer time / value loss. Thus, investors in these sectors have to be reasonably sure about the ability of their companies to grow their future profits.
4. Pockets of euphoria: This is mostly rampant in the SME space and questionable companies are enjoying valuations that are higher than even well-established companies. If one avoids this space, the biggest risk in the market can be avoided.
To conclude the above discussion, the markets are not cheap, but there are no big worry signals either. As investors, we should keep our asset allocation balanced, stay focused on our company's business performance and enjoy the ride. Markets will surely witness 10%+ correction someday, but that would most likely be an opportunity to deploy new money in stocks.
Trivia - Time for celebration!
In India, it is said that when the stock markets go up, lakhs of families become wealthy; when real estate prices go up, millions of families become wealthy; and when gold prices go up, crores of family experience wealth effect. Over the last two years, we have witnessed all these three asset classes going up simultaneously and there are millions of families who are experiencing wealth effect at some or the other level!
And this wealth effect creates an itch to differentiate, celebrate and thus spend. Nowhere is this more visible than in the upgrading lifestyles.What people wear, how they vacation, what car they own, the size of the apartment, the quality of furnishing - We can sense it all around us - a four - member family buying 5,000 sq ft apartment; anotherspendingas muchon furnishing the house asonpurchase; many folks upgrading tobusiness class travel or becoming first-time owners of Merc, Audi, Rolex, LV etc; folks spending as much on their 40th or 50th birthday celebration as during their wedding!
While these are all individual choices, it is clear that luxury segment in India has come of age and is slated for robust growth in the coming decade. The investor in us ismore fascinated by the prospect of owning stocks that can capture these trends, rather than actually owning the products.