Nifty-50 at 14347 : is it time to be Bold or Nifty?

Puspendu

No one saw the Corona Virus coming. No one foresaw Nifty above 14K either. Enough to drive the point home that we are living in a very uncertain world, where prediction is almost impossible.

I am happy and worried at the same time. The element of surprise and its spoils make me happy. I feel worried looking at its levity. Before the emotions got the better of me, i felt the need to take stock;

The Macros 

Pluses 

  • The pace of contraction for GDP has reduced sharply and is expected to surprise positively 
  • The indicators of economic activity are also showing consistent improvement
  • Unemployment rate has dropped from 23.5% in April to 6.5% in Dec, 2020
  • GST collections, Deposit Growth have been robust 
  • Monetary policy remains accommodative, interest rates remain benign
  • Forex reserves at all time high with import cover crossing 15 months in November  

Minuses

  • Core inflation remains stubborn
  • Loan growth slower than expected
  • Crude oil surpassing $ 50/barrel. Post-vaccination growth revival may push it higher.   

The Positives outweigh the negatives and hence give comfort.

The Liquidity

  • Liquidity continues to keep the markets raging. Domestic investors continue to provide the necessary supply to the FIIs, coming in hopeful of strong revival in corporate earnings. 
  • Central banks across the world remain accommodative
  • Governments remain open to fiscal stimulus

There are no negatives visible in the horizon at this point in time. But it can’t be trusted much, as liquidity has no loyalty.   

The Valuations

  • The valuations have become very expensive as the earnings growth has not kept up with the market momentum. I would rather say that the market is way ahead at pricing in the expected earnings growth. The mid and small cap have caught up in the race in Q4 and it seems they are about to overtake the heavyweights. 

The Valuations are a cause of concern

To summarise, we should keep a very close watch on the earnings numbers. If they disappoint over the next 2 quarters the valuations will surely become too difficult to sustain. I would not put any of my own money into equities at this point, until the earnings start justifying the current levels. 

– If one has steady cash inflows, holding them back to buy on dips will make more sense. 

– If one is working with a finite corpus with no additional inflows, you have reasons to be cautious. Your “optionality” will be restricted by the amount of “redundancy” you have in your balance sheet.

* The above note is a commentary by the author and should not be misconstrued as investment advice