Moneycontrol Pro Panorama | Time for a reality check in equity markets?

In equity markets across countries, stock prices have crashed leaving investors in financial distress.

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The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

This week saw the backlash of stock prices of two mega companies on the US bourses. One, the chip maker Nvidia, whose shares plunged by about 9.5 percent on Tuesday wiping out about $300 billion in a single day! Two, in a completely different industry segment, US Steel shares too tanked 25 percent, with trading briefly halted after news reports alleging that its $14.1 billion deal with Japan's Nippon Steel may be at risk.

These are two of the most recent and glaring examples where mere whispers in investor circles -- not confirmed at times -- are sufficient to erase a lifetime of gains made in equity markets.

There are numerous such instances in equity markets across countries, developed and emerging, where stock prices have crashed leaving investors in financial distress. And it is not always stock-specific debacles that investors have witnessed. At times, there is a market rout that put investors in a quandary (Japanese Yen carry trade, Middle-East conflict).

In this context, it is perhaps time for a reality check in Indian equities, given the unabated rally. Driven by liquidity and unfettered by rising valuations, the Nifty 50 is holding up beyond 25,000 and the BSE Sensex above 82,000.

Valuations are not reasonable. On the contrary, the price-to-earnings multiples are at a slight premium to the 10-year averages across segments -- large-cap, mid-cap and small-caps. This article highlights that all is not well in mid-caps. “A significant portion of the rally in mid-caps can be attributed to the substantial inflows of mid-cap, small-cap, and sectoral/thematic funds,” it states.

Besides, recent macroeconomic data have not been flattering. Q1 FY2025 gross domestic growth (GDP) faltered, so did the Purchasing Managers’ Index for August, which slowed. At a micro level, the earnings growth for the quarter moderated on the back of a revenue slowdown. Several sectors such as auto, cement and conspicuous goods consumption portray moderation in growth.

Indeed, the silver lining is softening inflation which is raising hopes of an interest rate cut sooner than later. For investors, the dilemma would be whether to opt for a paltry 6-7 percent return from secure fixed income or continue riding the bullish sentiment in equity markets till it lasts.

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Technical Picks: Bank Nifty, PVR Inox, Tata Motors-DVR, Zomato, REC (These are published every trading day before markets open and can be read on the app). 

Vatsala Kamat
Moneycontrol Pro