‘Wait & watch approach should be the mantra for 2018’

The markets in India have had a stellar 2017; this rally has largely transpired on the back of domestic liquidity and favourable global cues. A proactive government at the helm which had been absent for so long, faintly insinuates a revolution could be underway.

Most market gurus and analysts alike seem to be calling on higher targets for the next year, in some cases forecasting as far as five years ahead with obscene targets. Let me be honest here, not for a second do I believe someone can look ahead to next week and foretell what is going to happen, let alone what will happen in the years to come.

If history has taught me anything, this incumbent feeling of hubris is a precursor to volatility and trepidation which more often than not follows excessive optimism.

Let’s attempt to take a contrarian view here and try to evaluate what is fundamentally transpiring in our economy, and if my cynicism has some footing.

PE ratio in simple words is the stock price versus earnings. Historically, our markets have traded at a PE ratio of 19, the current 26 we are fluctuating around is high and has in the past ushered in periods of sustained underperformance. This level is over two standard deviations above the mean. We, at the current juncture, are also more expensive than most of our Asian peers; this makes a difference when trying to account for sustained foreign fund flows from FIIs.

This one is my personal favourite. I have been a full-time trader for close to 15 years now. If there is one thing I have learnt from the markets, is if 9 out of 10 people say a certain thing is going to happen, more often than not it doesn’t. Presumptuous as this might sound, markets inherently know how to penalise excess. The level of euphoria I see in our industry now leads me to question if we are there yet ...

There are umpteen positives doing the rounds, especially at the policy and reform levels.

A downward-looking interest rate cycle — with bank fixed deposits now offering lower interest rates than ever, every savvy retail investor is looking to other financial instruments to earn yield. Lower gold prices — gold traditionally and culturally has been a safe haven for most Indians. With gold prices now languishing at the same levels for some time, investors are looking to reducing their exposure to this asset class.

Government action against black money, government regulations favouring more inflow into the formal financial sector, diminished red tape, technological enhancement, etc. It has definitely gotten harder to deal in cash, which has forced more money to come into the formal banking sector. Fuelling this huge surplus in domestic liquidity we have seen a gush in this past year.

All these factors are driving stock prices upwards.

While I’m not contesting that all of the above actions are positive, one still has to wonder here if we have forgotten about the inherent fundamentals shrouded by all this noise, and if the price has run up ahead of fundamentals.

The important factor to note with this rally is that globally most markets have done well over the last year, and we are merely maintaining the inherent co-relation with our global peers. While earnings in these global markets are also going up, we are still to catch up on this front. At this moment, we are trading at a multiple which has historically signalled the beginning of a sell-off.

So, for 2018, we would advocate caution, timing the market is impossible, but a wait and watch approach might be prudent at this juncture.

(The writer is Co-founder & Head of Trading, Zerodha. Views are personal)

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