Mayhem Continues – What markets have in store for investors?

 “Being still and doing nothing are two completely different things.” Jackie Chan

Last Friday markets were in free fall zone, falling 1.9% on a single day or over 15% in last six months. Is this culmination of the market correction going on for over last few months or beginning of a new wave of further corrections?

Usually price to earnings or PE, price to book value or PB and market cap to GDP are tracked to test if markets are overpriced or fairly priced or undervalued. Let’s try to decode and analyze them to see where market stands today.

 

Indicator	Sep-24	Feb-25	Rise / Decline
Nifty	26216	22124	-15.61%
EPS	1063	1125	5.83%
PE	24.66	19.67	-20.26%
PB	4.27	3.29	-22.95%
Market Cap to GDP	139.36	110	-21.07%

Source: www.trendlyne.com & www.gurufocus.com

Nifty a broad market indicator is down by more than 15% from its peaks and earnings of its constituents have increased by 5.83% in the same period thus bringing down market PE from 24.66 to 19.67 or by 20.26%. Most analysts consider market PE in the range of 16-20 to be fairly valued. It is pertinent to note that average PE over last five years is 24.82 and more than 85% of times market PE has remained over 20 in last ten years.

Another indicator price to book value has also come down from 4.27 to 3.29, correcting by 22.95%.  It’s five year average is 3.94 and it has almost always stayed above 3 since last decade.

Another most commonly followed indicator to measure if the markets are fairly priced is market cap to GDP ratio which is also known as Buffet Indicator, is also down by 21% over same period. It is considered good between 82 & 118 and has stayed over 110 since May 2021 with last ten year averaging 100.

So if these data theory is to be believed then markets have dropped in fairly valued zone. But markets never align with numbers. It either lags or leads. In the long run it will grow vis-à-vis its economy and as long as its constituent companies are making good earnings.

In the intermittent times markets behave like an athlete. If it sprints it needs to rest much earlier than when it runs marathon. In simple words when markets rises too fast in little time it corrects much faster than when it has risen at a reasonable pace commensurate with growth in economy and earnings.

Above data analysis is purely an academic activity. And if the theories were to be trusted and acted upon then most of the time over last decade investors would have stayed away from equity markets and would have lost opportunity of making good returns.

So the ultimate test is as long as your economy has potential to grow, markets will also grow and you will get a good return on your investments from stock markets. GDP has grown by 6.2% last quarter. Capacity utilization has also gone up at 80%. India imports a good part of its requirements, much more than it exports. With a population of 150 crores and growing, India’s consumption theory is only getting strong.

India’s infrastructure be it road, rail, water or air network or be it soft infra to deliver services has seen massive developments over last decade. And now is poised to help “Make in India” movement coming true, as it would be much easier and very cost efficient to deliver goods & services from one end to another end. It will not only generate employment but will make it more broad-based than what we see today concentrated to few cities. This will help income distribution to wider section of society and we will see good increase in middle income group. And it is the middle income group who spends.

A point of concern over here is slow growth in industrial credit and lower capital expenditure by all the states in 2024. RBI now finally has started rate reduction, we feel that RBI should decrease policy rates by .5% to 1% this year. This will help corporate willing to borrow more for their capacity enhancement and fulfilling the industry demand and giving fresh wings to GDP.

So barring a few deviation India is poised to grow at much higher rate than developed and competing economies. No political dispensation can stop it now. Rival politics can only delay at most but can’t derail the growth engine.

FIIs are exiting like anything and have withdrawn over 2.8 lakh crores in just five months. US president has engaged into tariff war with multiple countries and other maneuvers to save US money being spent on projects that he feel do not give US any advantage. Sooner or later he will realize that many of his exercises are futile and will only increase inflation and further weaken the US economy. Other countries will also get accustomed to his style of politics in due course of time and retune their economic policies. 

What to do now: a typical question that never fades is what to do now. There is great difference in ‘Being still and Doing nothing’. Being still means you are calmly observing the events carefully without getting disturbed by the events and looking for action points at opportune time. Whereas in doing nothing you just relax and do nothing, not even observing the environment around leave aside taking the actions.

For more than one year till December 2024 we had suggested our investors to be cautious and use more of multi asset and balance advantage funds than hard core equity funds for their investments. Will markets recover from here or fall further, as always we don’t have an answer to it. What we know as long as the economy is growing, markets will ultimately catch up sooner or later.

When markets fell by around 10%, we suggested to start increasing allocation to equity. We always suggest that Cash is King and you should never run out of cash. So on every dip of 5% put some cash NOT all (that you don’t require for at least next five years) into equities. You can also consider moving investments from conservative hybrid equity funds to aggressive equity funds in gradual manner. You should have funds to invest even at the time if markets fall by over 40%, though as of now we don’t see good reasons for that to happen.

Before we conclude, it is noteworthy that most of those who have spent five years or more in equity markets are still sitting on annualized profits of 14% or more despite the 15% correction in large cap indices and over 20% correction in mid and small cap indices. So it is the “Time in the market which is important than timing the market.” 

Consult your InvestmentMitra today, review your portfolio and take corrective action if necessary.

Happy Investing!

Team InvestmentMitra