The era of narrative-driven investing is coming to an end, marking a shift toward greater dispersion in stock performance across sectors and individual companies, according to veteran investor Prashant Jain.
Jain said this in an exclusive interview with N Mahalakshmi on the Wealth Formula. You can listen to the full interview HERE.
“We are coming to the end of the narrative-driven phase in the market,” Jain said, emphasising that stock selection will now be far more critical. “You will see wider dispersion in stock price movements across sectors and even in companies within the same sector. That is what I feel.”
Jain cautioned that once a sector experiences significant valuation expansion over several years, a reversal in momentum is unlikely to correct quickly. “When a sector goes up from 20x P/E to 80x P/E over five years, and when that momentum turns, it is unlikely to reverse in six months or one year,” he said. “Ultimately, the fair P/E multiples (in narrative-driven themes), in my opinion, are a lot lower. And once the momentum breaks, investors become a lot more cautious, a lot more analytical—both buyers and sellers. So, I think it is difficult for a momentum to reverse once it has reversed after a five- to seven-year trend.”
Jain identified several recurring signs of market excesses, which have played out in past cycles, including the early 1990s, 2000, 2007, and the present. “The signs of excesses are always the same. The place of excess keeps on changing,” he said. The first indicator of excess is stretched valuations. “When valuations start becoming stretched, it is a sign of worry,” Jain noted. Rapidly rising stock prices serve as another red flag, followed by a surge in new investors entering the market. A fourth key indicator is a spike in capital raising, particularly by business owners, institutions, and private equity investors who have a sharp sense of valuation and often sell at high prices.
“Huge capital raising is a fourth sign because business owners or institutions, the PE investors, they really know how to value a company. So they are willing to sell,” Jain said. The final hallmark of excess is the rise of strong market narratives that overshadow traditional valuation metrics. “Along with the large group of new investors, there are strong narratives. Narratives start dictating stock prices, and when you are in a narrative-driven investing phase, valuations take a backseat. You can justify almost any valuation with a narrative,” Jain explained.
He suggested that the recent themes that have driven markets, including Make in India, China Plus One, renewable energy, EVs, e-commerce will be in correction mode. In a narrative-driven market, all stocks rose similarly, now as this phase is waning, stock price performances will diverge, Jain noted. “You will find bigger divergence even within a sector—for example, even within defence companies,” he said. It will be difficult to generalise whether a bounce-back in stocks signals a true reversal or merely a relief rally, but vast swath of stocks in these themes belong to the small and mid-cap category which are still overvalued, Jain noted.
As the market shifts away from narrative-driven investing, Jain noted it will be imperative to focus on fundamentals and stock selection.
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