Indian Capital Markets @ $4 Trillion : Greed or Fear

Indian Equities Markets have achieved a market capitalization of US$4 tn. This is a significant milestone, and something to be very proud of and happy about. However, this kind of number brings with it a lot of concerns along with jubilation.

This shows tremendous confidence in Indian equities and, in turn, in the Indian economy. As a result, we are seeing huge liquidity chasing quality and also substandard Indian stocks. This is also visible in the way recent IPOs were oversubscribed, with more than Rs. 3.67 lakh crore worth of applications for IPOs totaling less than Rs. 10,000 crores of public offering. This also means that global investors are fully confident about Prime Minister Shri Narendrabhai Modi winning in 2024 with a handsome margin, and his progressive reforms and policies will continue.

However, as a traditional conservative value investor who excessively relies on Excel sheets and rigorous financial models, along with broad macroeconomic and industry research to help me navigate through the minefield of stock selection process, I am feeling very jittery and insecure. Stock market investing is all about greed and fear. Greed for high returns, and fear of losing capital. This is where different investors develop their own proprietary matrices to help them in decision-making. Being an ardent follower of Warren Buffet and implementing the principles laid down by Ben Graham and Phil Fischer, I feel concerned about the broad market in general at these valuations.

At these levels, broad market indices – mainly SENSEX and NIFTY – are trading at a P/E Ratio of around 23.4x while offering an earnings growth of around 15%. With enhanced liquidity, the P/E Ratio is expected to expand. In other words, the broad market is slated to become overvalued, and in all probabilities, the overvaluation story and trend may continue to breach the levels of reasonableness. We have seen that happen in the recent past when the broad market index breached the levels of 30x. However, the market couldn’t continue to sustain itself at such unreasonable levels and corrected.

Hence, amid such an elated environment, I am restrained by my investing philosophy to exercise extreme caution. Instead of rejoicing about touching the US$4 tn mark, I am compelled to feel diffident. The current exuberance in the market and in the country reminds me of what my Guruji Warren Buffet said long ago: “Be fearful when others are greedy and be greedy only when others are fearful.”

This doesn’t mean that everything is lost and there is no hope and potential in Indian markets. India is sitting on an unlimited mine of investing opportunity. We just need to exercise a more rigorous investing process and work harder to identify stocks worth investing in. India is sitting on a long-term secular economic growth trajectory, and we will see a lot of exciting investment opportunities arising every day. We just need to exercise caution and conservatism in identifying those opportunities. For that, we need to build our own investment philosophy and approach and then steadfastly follow it. Investing in stocks is like working in a diamond mine. We have to throw away a lot of stones and pieces of coal to find a piece of diamond. At the same time, we have to be careful and conscious enough to ensure that we don’t throw away any piece of diamond considering it to be a piece of stone or coal.

Good times are right around the corner. I am reminded of Late Shri Vajpayeeji’s election slogan in 2004 – “India Shining” and Narendrabhai’s election slogan in 2014 – “Acche Din Aane Wale Hain.”

Happy Investing. Careful Investing.

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