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Saravanan B

The State of Overvalued Indian Stock Markets (NIFTY & SENSEX)

Keynes once said, "Markets remain irrational longer than you and I remain solvent". This adage relates well to the current state of stock markets in India.

Post lockdown that was imposed on March 23 last year, the markets have inched higher due to myriad of reasons. 

Some of the reasons include: liquidity, higher expectations from the market participants, low interest rates in the US, and the list goes on. One contrasting thing I observed from my friends during the lockdown was the urge to do trading in stock markets. 

Newbies got their DEMAT and trading accounts to experiment their luck in stock market investing.

Days when investors use to analyze fundamental strength of a company are gone and newbie investors want instant gratification. Robinhood investors, a term used for someone who is new to the stock markets have higher return expectations.

This phenomenon has led to a drastic 100% increase in NIFTY and SENSEX indices over the last 9 - 12 months.

How come people make money in the stock markets when the underlying companies are not?

An answer to that has partly to do with "Animal spirits". When more and more people pump in money anticipating higher prices, the party goes on. 

When the party will end, no ones knows. :)

What I do know is that, earnings growth and profitability of companies are not going to come back anytime soon.

Having said that, the PE ratios of NIFTY and SENSEX (a metric used to understand how much the market is priced) has gone to a level that was not seen in the last 20 years. 

Keeping the above point in mind, we should remember that our return expectations should remain muted or expect negative returns in the next couple of years. 

During these times, it is of paramount importance for investors to protect their profits and maintain asset allocation to avoid huge drawdowns in the portfolio. Overvalued stocks that ran ahead of fundamentals should be trimmed. 

What about our Robinhood investor friends who make short term profits?

Let them play musical chairs until the party goes on. But my friends, there will come a time when the herd will look for the door. That's when the actual drawdown will come. 

We have seen this happen in 2008, 2013, 2018, and 2020. This time is never different. 

Until then, let's watch the events on the sidelines and see how it pans out over the next 9 to 12 months. 

Last but not least, "Your money belongs to the market but the profit belongs to you".

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