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A recent JP Morgan Asset Management’s assessment of India’s markets paints a mixed valuation picture as the economy struggles to get back on its feet (Photo: Mint)
A recent JP Morgan Asset Management’s assessment of India’s markets paints a mixed valuation picture as the economy struggles to get back on its feet (Photo: Mint)

The wind has caught the sails of broader markets, but beware of choppiness

After the change in rules regarding multi-cap fund allocations, investors have piled up on small caps in the hope that fund managers will give them an exit. But most fund houses are more likely to change the mandate of multi-cap funds rather than invest in small caps

Small-caps shot up much more than the front-line indices last week, and investors may be taking more risks here. After the change in rules regarding multi-cap fund allocations, investors have piled up on small caps in the hope that fund managers will give them an exit. But most fund houses are more likely to change the mandate of multi-cap funds rather than invest in small caps.

Of course, the frontline stocks are not inexpensive anymore, neither are the broader markets. A recent JP Morgan Asset Management’s assessment of India’s markets paints a mixed valuation picture as the economy struggles to get back on its feet.

“India’s equity markets performed relatively well during the second quarter 2020, but price-to-earnings (PE) valuations appear stretched, with the MSCI India forward PE at over 22x, almost at its highest in the last 15 years. The price-to-book ratio appears far more reasonable at 2.7 times, slightly below the long-term average, but an uncertain economic outlook does not bode well for earnings expectations," said a JP Morgan note.

Coming back to small caps, fund managers may not be more comfortable here. The profit pool of small-cap stocks is so shallow that their low market capitalisations may not justify high inflows.

Besides, the pandemic is impacting consumer behaviour. India lost about 2.1 crore salaried jobs, post-pandemic. A survey by JP Morgan India of 500 largely urban residents shows that individuals are concerned about lower income. Twenty percent have already seen declines in income from pre-covid-19 levels.

The survey is not a sample, but the results are interesting. In fact, 60% of the respondents intend to postpone high-ticket discretionary spending. This shows that the economy will go through a tough grind now.

Of course, some companies may find the going even harder. Bhel Ltd’s loss increased in Q1, while its receivables are mounting.

For SAIL Ltd, while covid-19 hit sales, higher costs cut into profitability.

Crompton Greaves Ltd’s stock valuation is narrowing against its peer Havells. With demand increasing due to people spending more time at home, it still difficult to gauge whether spending will persist.

PVR Ltd’s losses were higher on account of greater provisions for common-area maintenance charges to mall developers.

Banking stocks were hit last week, and the pressure could continue to be piled on. The Bank Nifty lost over 4% in the past two weeks. The Kamath Committee prescribed guidelines to restructure about 72% of the loans impacted by the pandemic. Besides, with inflation continuing to play spoilsport, it seems difficult for the RBI to cut interest rates.

Ashok Leyland Ltd got a boost on expectations of demand improving and due to its mid-cap status.

KKR’s acquisition of JB Chemicals and Pharmaceuticals Ltd changed the fortunes of its shareholders.

In some pockets, the liquidity surge and low volumes are driving up some counters, tempting investors to chase returns. They are more likely to get caught on the wrong foot with pumped-up stock values.

But all eyes are on earnings from now, or markets will find it difficult to justify the high valuations. Hope is still alive. Global fund managers are optimistic about earnings revival. 69% of them, the highest level since December 2009, reckon global profits improving over the next 12 months.

Liquidity will also see plentiful. The US Fed’s stance on interest rates is dovish until 2023. Lower interest rates for a prolonged period are normally good for stocks. But then investors are wanting more liquidity - and that is a sign of greed.

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