Diwali Blockbuster: Only 20% of stocks are cheap, says PMS/AIF veteran — markets headed for lower returns, higher volatility

markets

Markets are entering a phase of moderation after three years of unusually strong returns delivered at remarkably low volatility, said Maran Govindasamy, founder of Unify Capital, in the Diwali Blockbuster series of The Wealth Formula with N Mahalakshmi.

“Markets cannot be over-generalised in India,” he cautioned. “Within the same BSE 500, more than half the companies saw their price-to-earnings multiples double in the last three years (to September 2024).”

While the Sensex crossed an all-time high of 86,000 last September last year, led by record levels in small- and mid-cap stocks, the journey to that peak was uneven. Between September 2021 and September 2024, marquee names like HDFC Bank, Kotak Bank, and Bajaj Finance delivered zero shareholder returns, as did FMCG majors Dabur, Marico, and Hindustan Unilever.

Importantly, earnings for these companies were not flat — they rose in single digits to low teens (around 10–12%), which is meaningful growth over a three-year period. But share prices failed to move as P/E multiples compressed sharply. “In reality, when the index was at an all-time high, there were sections of stocks whose valuations were barely half of what they were in 2021,” Maran noted.

By contrast, the other half of the market — about 50–60% of BSE 500 companies — benefited from a sharp 20–25% annual earnings growth, driven by a surge in government-led capex. “Businesses exposed to government spending — defense, railways, capital goods, infrastructure, power, and real estate — saw spectacular earnings growth alongside P/E expansion. Shareholder returns in those sectors became exponentially high,” he said.

Over this period, monthly movements in benchmark indices remained remarkably subdued. “No single month saw the Sensex or Nifty move more than 5% in either direction,” Maran observed. The standard deviation, a key measure of volatility, fell sharply below the long-term average, he said.

Historically, the Sensex has delivered 15% annualised returns since inception and the Nifty about 14%, but those averages have come with around 25% volatility. “In the last three years, returns were above the long-term average, but volatility was far below it — an unusual combination. Such periods are typically followed by phases of lower-than-average returns, higher-than-average volatility, or both,” he warned.

Maran believes that’s the phase markets are now entering. “The next stretch will likely be characterised by lower returns with higher volatility, unlike the smooth run of the past three years,” he says.

By his estimates, 50–60% of the market today trades in a ‘overvalued zone’, about 20–25% is fairly priced, and 15–20% of companies are cheaper than they were three years ago. “Roughly 80% of the market is either fairly valued or overvalued today,” he said, emphasising the need to be selective as India moves into its next market cycle.