Every Tom, Dick and Harry has one question in mind when the markets will fall and then I will invest. Truly speaking everyone has have become financial analysts doing analysis that the current PE is not justified and strong well-wisher for markets to fall. You are waiting for Indian markets to crack and fall down as the valuations are low whereas the same flocks of Investors and investment advisors are investing in U.S ETF and other funds. Well S&P 500 is now pricier than in 96% of all quarters over the past 141 years. Those investing in U.S ETF and markets don't know how the complexity of its Equity is ,inked with its debt market, ratings and other Geopolitical risk. Coming to India we know it like another thing. This is key differentiation being missed.
What we fail to understand is that are we doing timing of market gameplay or we are trying to fool ourselves with discussion on asset allocation, financial planning and long term investments. If financial advisors and so-called IFA and MFDs are waiting for a correction in the market based on the P/E ratio then financial advisory is a fallacy to be discussed and written by authors.
A couple of quick points before plunging into more depth.
- Corporates have reduced their Debt
- Fixed cost and Administrative costs have been cut down significantly across the board
- Low-interest cost
- Increasing demand and supply chain
- Sector-specific raw material price impact
- Significant cash and profitability growth for Indian companies
- Digital penetration and cloud-based system enables significant cost savings
- New sector and industry policies by Govt improves the business opportunity
- Pharma, IT, consumption key growth drivers
When corporates profits are going up and cost has come down and more cost will come down and corporates NPA ratio are controlled and well under limits the P/E ratio is bound to be higher side. GDP growth projection of 8% or 9% and even 6% means significant growth for Indian corporates and their profits. So now if the P/E ratio is currently high it means that a new benchmark has been created for the markets and metrics.
We get scared with the P/E ratio since historically we have burnt many fingers but at the same time, the longest wealth creations have also happened in 10 years’ time frame. We are investing for the long term and asset allocation and rebalancing is an art but that art is not linked with the P/E ratio.
If a portfolio has achieved its desired objective of return then a redemption or reinvestment decision can be taken. P/E ratio is not the correct metric when the books are getting clean and Indian banks and financial system is well strong enough.
In another instance, we came across a trend where investors are diversifying too much above 5% to 10% in overseas markets thinking that they will grow more as compared to India. Well, the equity market and interlinked transaction of developed economies are different compared to India and we don’t have a proper understanding of the same and can’t have even by watching CNN and CNBC or Bloomberg TV.
If we look at the P/E part of the markets we find that calculating the current P/E using the past year's earnings per share (EPS) is misleading, because profits are extremely erratic. The funny part is that the price-earnings ratio (P/E) is inverted, putting price as the numerator whereas the Dividend yield which is the perfect measure of the earnings ups and price as the denominator. The P/E valuation model is wrong and giving the wrong picture of the market. Earnings to prices and Dividend yield plays a critical role to judge the valuation.
Further diversification is good up to the mark of 5% to 10% but in many cases, this is going above 20% and even up to 30%. This is a blind game. The irony is that they are investing in Index funds of the overseas market where the P/E is higher to India but in the case of investing in India, they are avoiding under the excuse of a high P/E ratio.
Falling demand and pickup of demand like hotels and Tourism would spook growth which will increase the profits more and hence the forward outlook of revenue growth and P/E ratio will also grow. Waiting on the sidelines and timing the market is fool’s paradise. Investing for the long term and following asset allocation is important for a healthy portfolio.
Now under the current macro factors, Credit Risk funds and Debt funds will be the best places to park and make asset allocation work.
As credit risk funds have low tenure hence the paper maturity is of 2 years to 3 years max. In the next few months, we will find a flood of new papers and quality papers coming to raise funds as banks will be avoided and these credit papers would be best suited for the corporates. The markets are never going to repeat the story of March 2020 provide anything massive negative comes out. In the first half of 2021, investors have pumped in at least $11 billion into the Indian tech startups in over 600 deals, which is growing at an exponential rate.
The $1 billion valuation club now has new unicorns in Digit Insurance, InnovAccer, Cred, Meesho, Gupshup, Pharmeasy, Groww, Urban Company, Mohalla Tech (ShareChat and Moj), Chargebee, Moglix, Infra. Market, Zeta, Five Star Business Finance, BrowserStack and logistics firm BlackBuck, the latest entrant. So these are the new upcoming IPOs that might hit the road in the coming next 1 year to 3 years’ time frame may be 5years. Now if so many IPO’s and big money exits and entries will be happening where do you find massive price correction to happen.
Note that as we mentioned the rationales above its speaks that Indian markets are well positioned for new heights and one should not do the blind mistake of allocating more in U.S markets and avoid and wait on the sidelines for Indian markets. A 10% correction will not be much relief for the buyers. Price and valuation are portraying wrong picture in these erratic times.
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