Plenty of basis to sell, but 3 reasons why you need to stay invested in this market

Plenty of basis to sell, but 3 reasons why you need to stay invested in this market

MUMBAI: The valuation being quoted by the Nifty50 index is out of the comfort zone of many investors. At nearly 23 times one-year forward earnings and close to 19 times two-year forward earnings, Indian equities have never been this expensive.

In addition to that, the Nifty50 and the BSE Sensex index have virtually doubled since hitting their multi-year lows in March and several individual stocks have tripled and quadrupled investor wealth over the past 10 months.

With episodes of euphoric market sentiment and several indicators suggesting that the market has shot past its fundamentals driven by easy liquidity and overly optimistic growth projections, there are several reasons to be cautious in this market.

Domestic investors are already a worried lot as reflected in the selling by domestic institutional investors who have not taken their fingers off the ‘sell’ button despite palpable enthusiasm for growth after the Union Budget. At the same time, recent data showed retail investors have been booking profits since as early as October.

For the optimists on the Street, however, 2020-21 is reminiscent of the beginning of the bull market in 2003-04 that saw the Nifty50 sixtuple in value from March 2003 till the eve of the Global Financial Crisis in April 2008.

Money managers believe that three factors will play a very dominant role in the current bull market in India that may continue over the next two-three years, barring a few short-term corrections that are part of secular bull markets.

Earnings, earnings and earnings
Corporate India has come out of the COvid-19 crisis better than expected as they trimmed their fat and deleveraged their balance sheet, while at the same time taking advantage of the acceleration in shift of market share from organised to unorganised sector.

“This could be a comeback year for the markets in terms of earnings. But you can see this follow through and propel itself as more of a self-fulfilling prophecy over the next two-three years. The earnings could sustain over the next two-three years and could see a CAGR of about 25%,” Krishna Kumar, investment director and portfolio manager at Eastspring Investments told ETNow.

Lower for longer bond yields
Valuations are a function of earnings as well as the risk-free rate that anchor future expectations of returns. The risk-free rate in most valuation models tends to be the yield on the 10-year sovereign bond yield. Money managers believe that with central banks globally, and even the RBI at home, pledging to keep interest rates at rock-bottom level for the foreseeable future, equities will continue to remain attractive for investors. “Low bond yields are the key peg for the Indian market’s high valuations,” said Kotak Equities in a recent note.

Stable currency attracts FIIs
India’s bull market has, to a large extent, been driven by record influx of foreign inflows over the past five-six months and money managers believe that India’s stable foreign currency compared to other emerging markets will continue to drive these flows. “…the currency has been very stable and that gets foreign currency and supports the entire cycle,” Kumar said. Amish Shah of BofA Securities expects foreign investors to remain net buyers of Indian equities even as the quantum of inflows may not match the over $20 billion that came in 2020.

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