Life AT 30K
Stock Markets remain close for trading on Monday, May 1 (Maharashtra Day and also Labour Day). Indian stock indices were scaling new peaks last week. The Nasdaq on Tuesday breached 6,000 level from below, first time in its life. The very next day, i.e. Wednesday, Indian bourses too celebrated as their own benchmark indices, Sensex and Nifty, scaled new lifetime highs, mirroring the Nasdaq’s historical feat. The BSE 30-share Sensex skyrocketed to touch 30,184.22 points level in the intra-day trading before closing at 30,133.35, also a record closing above 30k mark. Similarly, the broad-based Nifty 50 kissed the 9,367.15 level, a lifetime high, on heavy buying amid cheerful global cues.
The flooding foreign direct investments into debt and equity instruments, a no-negatives central budget, RS nod to GST legislature, BJP landslide victory in Uttar Pradesh, and other such positive factors led the stocks trek northwards. However, the prices reaching such a height violating all valuations at such a speed in such a brief period is surely a thing that will cause worry.
It is the PE, at which the indices stay, that causes worry. If we take the previous year’s result as a reference, they are currently at 23 times the earnings (Price to earnings ratio- PE ratio). The current year’s prior-estimates are a reference, then it will be 17.76. Prior to the Lehman Brothers crash, when the sub-prime boom is at its peak, these indices were trading at 20 PE multiple. If we assume the Indian interest rates will be at 8%, the ideal PE should not be more than 12.5 (100/8). We can add some premium to it as India is an emerging market. Even after that it must not be higher than the 14-16 range. Since the PE ratio is prevailing at 18 based on future earnings, contrary to the ideal multiple, a short-term correction may occur at any time. Then the Sensex and Nifty will get corrected in short-term. The general observation is whenever the indices experience a correction, the individual stocks too get corrected, but it will be much higher than that happens with the bench marks. Moreover, the mid-cap shares stay in the front line with much lime light and quotes abnormal prices in a booming market. So, they will generally be the top laggards in the corrections. Then there are small cap shares. These stocks are always in the forefront to attract the retail investors when the markets rise. The retail investors enter the market at its peak or near peak and go on buying the penny stocks at prices that do not justify the intrinsic values. Based on the stale news and already discounted other stories or events, they take buy decisions. Then the correction will start. And the greed and weak investor community who went on buying spree in the market at its peak will lose heavily and flushed out from the markets. Only the wise investors who can assess the real values, of the present and the future, and can take decisions based on the price to book value, price to earnings multiple, intrinsic value, enterprise values enter the markets. They are the composed and structured investors.
What share can we buy and at what price, where shall we book profits, which shares can we hold and how long, in which counters can we make a sell off, where from and to where shall we shift. these are the questions that contain the crux of the issue.
With a long-term view, the ‘A group’ shares are the better pics to buy now. Those midcap stocks which are frenzy with the prices that are much higher than their real values shall be first disposed off. Then chose those gems which are under-priced. We need to search for the diamonds in the dust. Get rid of all the scrips that you bought based on free SMS advises. Those who booked profits may think of reinvesting in the auto component, steel, speciality chemical, and banking sectors.
This week may be crucial to the markets. Soon after the USS Carl Vinson (CVN-70), the United States Navy's third Nimitz-class supercarrier, joins the already lingered US atomic submarine on south Korean coast, tensions will erupt suddenly. These heightened tensions may influence the financial markets negatively. In China, the banks are withdrawing the $1.7 trillion funds support they offered previously to the fund mangers. This squeezing will lead to liquidity crisis in the markets. On the other hand, in US the President Donald Trump proposed revolutionary tax reforms. He announced a lower corporate tax rate at 10-15% instead of the current 35%. His intention is to attract the $ 2.5 trillion kept by the American investors in the overseas markets back to home. Moreover, the number of tax rate slabs applicable to individuals will come down from seven to three. Similarly, the estate duty is to be abolished. These measures may lead to the exodus of funds from emerging markets to again into the US. The giant American companies may think about the possibility of taking back funds invested by declaring hefty dividends. For the last week days, FIIs have been investing in the Debt Funds instead of in Equities. What does it indicate? They are suspecting the equity markets may get corrected. In the just concluded F & O settlement, the rollovers of Nifty April series Futures’ in to May series were at 65%, less than the three-month average of 70%. Similarly, market wide rollovers stood at 75%, less than the three-month average of 78%.
Axis Bank, third largest one among the private sector banks, is losing its prominence in terms of profits and administrative efficiencies. One should book profits in this counter. The market makers create a buzz to buy Dhanlaxmi Bank Bank shares. However, the other banks and Karnataka State Financial Enterprise have advised their managers not to honour the letters of credit issued by Dhana Lakshmi Bank. We need not specifically advice to sell Dhanlaxmi Bank Bank stock.
Investing in the markets is like a cake walk to those investors who can overcome the hurdles that come across at 30K levels.