Navigating the Euphoria: Assessing Risks in India's Soaring Equity Markets

Beyond the Bulls and Bears: Unraveling the Current Market Euphoria and the Overlooked Shadows of Risk

As India’s equity markets are reaching new highs everyday, a sense of euphoria is slowly creeping in. Political pundits are pricing in the Modi Government’s overwhelming majority in 2024 elections, while some analysts are looking at Nifty and Sensex reaching some astronomical number in the near future.

It’s safe to say, almost everyone has forgotten about risk at the moment.

Recently,

Siddharth Zaveri

published a fine piece on Risk. Where he concluded with a simple idea that “risk is merely another word for uncertainty. When you are not able to control the surroundings around you, you find them risky.

The best way to reduce risk is to keep getting more knowledge on the subject and rule out as many variables as possible so that when the situation does not favour, you do not panic and make decisions in haste that usually do not work in your favour.”

And here I am writing today, that we are in one of the riskiest phase of the equity markets.

Risk - really?

That’s the first response I get when speaking with investors. Then they go through 3 to 4 key achievements of the Modi Government that has nothing to do with equity markets like abrogation of Article 370, India’s strong stance on Russia and Ukraine War, discussions on Uniform Civil Code and a few more.

Traders too are now drawling various lines on their charts suggesting that Sensex and Nifty will surpass even the astronomical levels quoted by market analysts.

To support their hypothesis, media is also doing everything to create an atmosphere of positivity. Suddenly, every bad news are being discounted.

New companies are coming into the stock market through IPOs, Mutual Fund companies are coming out with New Fund Offers and I’m sure we will see some solid numbers in SIPs and retail investment participation this quarter too.

Yet, every investor should invest with some caution.

Markets are cyclical in nature. Every bear market is followed by a bull market and vice-versa. As our minds are too focussed in the present, we tend to forget the recent history.

Think about it.

Back in March 2023, US Banks were failing. There was an atmosphere of 2008 like a recession. Wars in Russia-Ukraine and Israel-Palestine also gave us goosebumps. All this has happened in 2023 only.

And yet, equity markets are in an one way journey - UP!

Have a look at this chart. It contains the price returns of Sensex, Midcap and Smallcap index of the past 20 years.

source: Indigenous Investors, Morningstar

Our intention behind sharing this chart is to merely look at how 3 indexes move over a long period of time. When all 3 indexes merge, there’s usually blood on the streets like 2008 Financial crises, 2013 India’s Fragile Five situation and Covid-19.

It’s impossible to see such an event occurring anytime soon. They are Blackswan Events.

So rather than seeing the extreme, just think about how much the small and midcaps have risen in the past 1 year. Will they give such returns going forward? It’s a question every investor should ask himself and his financial advisor.

RISK NOW!

As prices are moving up, they are deviating largely from their fundamental earnings. Businesses won’t double their sales and net profits in a single night. It will take them 2-3 years along with hiring a lot of talent to reach that place.

A stable government at the centre is a good thing. But that doesn’t mean that businesses will get all the benefits.

Foreign funds will keep investing in India because we are a country of 140 crore Indians where consumption, housing and travel will play a key role. But their holding periods are largely different than retail investors. Foreign Investors will participate in the India growth story and stay in a company for 8 to 10 years, while a retail investor will exit the position in 8 to 10 days.

Few investors will be able to have the holding capacity of decades. At such valuations, they too will be sitting on the sidelines and waiting for a good opportunity to buy.

I would like to end this article with a piece of wisdom shared by Warren Buffet, “In the short term, markets are a voting machine. But in the long term, it is a weighing machine.”

The one who waits the longest will weigh the highest.

And yet, it’s not true for food!

Disclaimer: Indigenous Investors is a subsidiary of Zaveri Savla Consultants LLP. This article has been written to share our thoughts under our regular study. In no way, this is an investment advice of any sort. An investor is supposed to do their own research about the company and base his buy/sell decision on the same.