Last updated: 10 Jun, 2020 | 08:15 am
One of the primary reasons global and domestic markets have soared in the last few days is an influx of liquidity in the system. The US Fed, RBI and a lot of other central banks around the world are pumping money in the system. RBI has dropped interest rates, created separate credit lines, given moratorium and specialised funding in terms of stimulus to enhance the money supply. It is expected that RBI will continue to do this in the near future. With unattractive interest rates, excess liquidity and savings is often pumped into the stock market.
Influx of money from foreign investors and domestic institutions during May and June in equity. March and April saw a collective outflow of Rs. -68,857 crore by foreign investors from the equity markets. However, May had an inflow of Rs. 14,569 crore and June till date had an inflow of Rs. 8139 crore. Domestic Institutional Investors made a net purchase of Rs. 12,293 crore in May compared to Rs. -117 crore in April. Mutual funds have started increasing their equity allocation and reduce their cash holding.
India is changing a lot of land and labour laws to make it attractive for foreign investments in India. Recent FDI rule changes are aimed to attract foreign investments. The US-China trade war is also expected to benefit India. Some pockets of the Indian economy such as chemicals, metals and Agri products are expected to benefit by filling the gaps in the trade war. Domestic Consumption is also expected to increase in the medium to long term. All these factors are causing a massive influx of foreign money in India.
The government had recently announced its plan of opening the economy. Markets are discounting the fact that businesses will soon start normal operations. Demand, however, is expected to remain subdued.
Is the worst behind us?
Last two months have been one of the worst months for the economy in more than 20 years. The economy was literally at a standstill. The impact of these months on businesses is very high. It will take years for things to normalise and demand to reach pre-Covid levels. India has been reeling with reduced growth much before the Covid crisis. It will take a monumental effort by the government and institutions to boost growth.
Is Nifty attractive enough to deploy large lump-sum investments?
Nifty is currently trading at a trailing P/E of 23 and a forward P/E of 28. This is one of the highest levels of forward P/E seen in the last few years. Growth expectations of all companies have reduced significantly. Our VGQM model had a growth score of 2.9 out of 5 in January 2020 for the Nifty 50. As growth and estimates have decreased, our model is indicating a growth score of 2.2- a significant drop. This means that pressure is expected on company earnings over the next year that ultimately affects how expensively the market is priced. Quality stocks are still trading at expensive valuations, especially when discounted for future growth. Considering the current economic environment, markets are still not attractive enough to deploy large sums of money.
Markets are expected to remain volatile. There are many dangers still hovering over the economy. We would advise you to stay cautious and maintain a high-quality, low-risk portfolio. Our VGQM model has a Neutral rating on Nifty. We recommend you to continue your SIP’s in equity mutual funds.
Have questions about your equity and debt asset allocation?
Click on Ask Advisor button to connect with your family office to help you understand more about the current risk in the country and to help you rebalance your portfolio.