Focus on fundamentals, book some profits
Gush of foreign money into equities has pushed valuations well past their earlier highs
Twitter was coloured with pictures of BSE’S employees taking to the stock exchange’s terrace and flying balloons. Indeed, for those at India’s oldest stock exchange, the BSE Sensex touching the 50,000 mark was a momentous occasion.
Apart from being a very short rally from 40,000 to the next milestone of 50,000 points, what makes the situation very peculiar is the resounding bullishness coming from all corners and a near marginalisation of those who prefer to stay on the sidelines or opt to be cautious.
“Even people who were extremely watchful of not being swayed either sides earlier have completely shifted to the bull camp now,” said a fund manager who did not want to be named.
Reserve Bank of India Governor Shaktikanta Das has at least twice spoken about a brewing bubble since December 2019. The fund manager quoted above says under ordinary circumstances, some of these marque investors would have shifted gears and slowed down. “That’s not the case anymore and this is what worries me,” he adds.
Dhananjay Sinha, head of strategy and chief economist, IDFC Securities, terms it as a consequence of uber-liquidity. “At 3738x price-to-earnings for Sensex, we have long crossed the bubble phase. Liquidity component is far more overwhelming than valuations at this juncture,” he explains.
Others, however, share a slightly different view.
Saurabh Mukherjea, founder and chief investment officer, Marcellus Investment Managers, calls this rally a mirror image of a coordinated recovery across sectors. “People panicked on Covid and when the 35 per cent market decline was reclaimed quickly, momentum strengthened. It’s a combination of central banks’ fund infusion backed by fundamental demand momentum,” he explains.
Sinha partly agrees with Mukherjea, but feels liquidity is masking valuations. Earnings growth has become less influential on valuations now, and worse, this mismatch may continue for a while, believes Sinha. He expects the trend to stay for at least 12-18 months and there is no reason to panic just yet.
But, with every high that the market touches hereon, fund managers are likely to book some profit. “The kind of profit booking we saw today is expected to happen every time a new high is touched,” said a CIO of a fund house. This is a good cue for investors, too, to periodically book profit.
Stocks from cyclicals and industrials segments such as metals, engineering companies and oil and gas and prominent names such Tata Motors, Vodafone Idea, Sun Pharmaceutical, and real estate companies that didn’t find mention in the previous rally are expected to be frontline gainers, according to experts. “We saw this theme play out post the dot-com bubble and in 2007-08 and its again playing out now,” says Sinha. His advice is to go with the flow, while keeping an eye on fundamentals.