SENSEX @ 60000: What Should We Be Concerned About ?

'Don’t try to predict the future, Prepare for it. Predicting rains doesn’t count, Building the ark does'

Warren Buffett wrote this in Berkshire’s Year 2001 Annual report, and he admitted that he had expected certain risks but he hadn’t acted to mitigate them

If we remember year 2001, it was one of the most euphoric equity markets globally led by Tech stocks. In India, Infosys and Wipro were traded at 200, 300 PE and Interestingly it took 20 years for Wipro to reach the peak which it did in 2001.

In this context, now SENSEX is hovering around 60000 levels and whether we are in such a euphoric stage right now and everyone is trying to understand and trying to prepare in case of any major correction from here onwards.

Current Concerns Surrounding The Market

1. US FED’s action of “reducing the liquidity” (tapering) has started and is a major cause of concern right now.
2. In India – RBI has also started reducing the liquidity in the last week through reverse repo auction and while small, it has started.
3. Current Valuations of the market are another major cause of concern and let us slightly understand better about this aspect.
   1. On Trailing PE basis, NIFTY is now trading at 26-27 PE as per NSE website data.
   2. This is one of the peaks in the multiple and When NIFTY made its previous top in Jan-2008, Nov-2010, Jan-2015, Jan-2018, PE multiples were around these levels of 27-28 PE.
   3. On trailing PB basis, NIFTY is now trading at 4.5 PB as per the NSE website data.
   4. During NIFTY’s previous peaks in Nov-2010, Jan-2015, Jan-2018, the NIFTY trailing PB was ~3.5X times. In Jan, 2008 the NIFTY PB was 6.6X. Current, PB level of NIFTY is higher than the PB multiple of previous peaks excluding Jan-2008 PB. However, we need to note that during Jan-2015 and Jan-2018, our banks were reporting massive NPAs causing erosion of book values and impacting the aggregate PB of NIFTY. Now, banks have come out of the NPA cycle and there is visibility of NPA recovery. This improves the book values of the banks which can very well impact and show a higher PB compared to the other peaks.
   5. As per the above point, When the NIFTY PE was around current levels of 27-28X, there was one or other reasons / triggers, which caused significant price correction or time correction or both.
   6. Post Jan-2010 as well as Jan-2015 peaks, NIFTY went through healthy corrections of around 25%.
   7. In this context, it is hard to interpret whether such valuations caused the subsequent correction (mean revert) or whether there was some sentimental trigger or BOTH.

4. Based on the above points, our current PE based valuations are almost like the previous peaks. However, as of now, we are not aware about any trigger eg. FED tapering or any other geopolitical events etc which may lead the markets to correct.
5. According to another valuation metric called 'Market cap to GDP', our markets are now 115% of our GDP as per Motilal Oswal’s report. In year Jan 2008, our market cap to GDP was more than 150%, that was the peak, and apart from this, our market cap never crossed 100% of GDP. While doing this relative comparison across the period, we need to be mindful about certain factors such as 'Platform companies' which are now trading at extraordinary valuations according to traditional valuation metrics i.e Zomato, Indiamart, Nazara Tech etc.; this kind of situation was not there in 2001 or Jan 2008.

Platform Companies’ market caps trading at extraordinary valuations are being added into the aggregate market cap, pushing up the market cap to GDP ratio

6. Apart from this, IPOs of New age tech companies are now coming to markets with massive valuations as per traditional metrics eg. Nykaa, Paytm. There is consensus that IPOs with high valuations come during market peaks. Whether the current stage is one such, we don’t know and time will tell.