MARKETS – TIME TO UNLEARN TO RELEARN

It’s a Black Friday celebration for the e-retailers but looks like it has turned into a Red Friday for the markets, with a Black mood dominating the sentiments.

News of a new more virulent and fast mutating virus found in South Africa, Botswana and Hing Kong has spooked the market. All the usual suspects are down – hotels, aviation, theaters, all outdoor companies – all are in the red. And on the other hand, pharma, diagnostic, hospital and wellness companies are back in the green, dominating the gainers list.

The market is worried that the new variant will once again force a lock down if things are not controlled and that will derail the fragile recovery that we are seeing. And underneath this new fear is the US Fed hiking rates and accelerating tapering much earlier than chalked out as the demon of inflation is chomping down everything in sight, making living a very costly affair. Analysts now expect the US Fed to hike rates thrice in 2022 – June, Sept and Dec and two more in 2023.

And a rate hike spooks FIIs as for them then the arbitrage advantage starts disappearing. That’s also the reason why we are seeing FIIs selling more than what they are buying – that has been the trend for over 10-days and is expected to continue for some time more. Over the last three trading sessions FPIs have pulled out a net of Rs 14,700 crore from Indian equities.

The markets are also concerned about the rising inflation in India, not just the cost of living but also in terms of valuation of socks.  Morgan Stanley downgraded Indian equities saying that the stocks have strongly outperformed other emerging markets this year. Nomura also said that Indian equity markets are very, very expensive based on traditional valuation metrics, saying at  22.5 times one-year forward earnings, it is more expensive relative to peers such as China and Japan in Asia. A lot of other FIIs too have put out these reports.

Well, our take on this – we simply cannot stick to valuation metrics of the past. So much has changed over the pat 5-6 years, more so in the last two years that it is quite naïve to use the same historic barometer. We feel that new metrics are now being created and that re-rating needs to happen. A PE of year 2000 or even 2010 has no relevance today.

And while on PE, we need to probably change our focal point to Discounted cash flow or DCF, which is a valuation method used to estimate the value of an investment based on its expected future cash flows. DCF is more forward looking and will give you a better intrinsic value than using the historic valuations.

We are grappling with inflation and rate hikes are just round -the-corner but the underlying fundamentals of the economy remain strong. The spate of unicorns queueing up for IPOs shows the vibrancy of the economy. The long term story of India is good and as we always say, short term blips are good times to buy into stocks in which you have conviction and see a growth potential. Remember – a good and clean company, that’s all the search should be for.

The falling markets always teach us a lesson or two and the most important one we are learning now is to unlearn. We all need to unlearn our historic perceptions of valuations and relearn to have a more forward-looking view.  Ready to unlearn?