The month of July went by on expected lines, consolidation and sideway movement in the headline index while the broader market continues to party.
In other parts of the world the inflation scare appears to be overdone going by what the US bond market is telling us. The 10 year yield went to 1.65% and then dropped all the way back to 1.25% in a short span of time. The bond market is essentially telling us that inflation over the long term is unlikely to be too different in trajectory compared to the past decade. Does not mean that this is the right view, just that this is the current narrative.
Back home, the RBI continues to prioritize growth over incentivizing savers with higher interest rates in the short term, this is a subtle but important shift in how the RBI operates. The Govt has finally started releasing cash into the system going by the Q1 commentary of fertilizer companies, by October the system will have a lot of liquidity floating around while the RBI continues to manage the 10 year benchmark yield in the desired range.
In the meanwhile we are witnessing the best hiring environment for IT in almost a decade, each large IT Services company has plans of hiring 40,000+ freshers in this FY. Enhanced visibility of salary growth has historically worked as a booster dose for residential real estate in tech heavy regions like Bangalore.
Equity investors today need to reconcile to the possibility that beyond a price all the possible positives are priced in. This sounds foolish when the market is booming but this is how you get suckered into making bad bets. If you have any doubts in this regard, watch the stock price of Britannia and Page Industries from 2018. Revenue and profits for each are much higher today compared to 2018 but the stock price has been stagnant for three years now. Very few investors have the patience to hold a stock that does not deliver for three years, no matter what the business quality is.
We have more first time equity investors today than we have ever had in the Indian market. Most of them exclusively deal in mid & small caps and follow momentum as long as it works. The new age equity brokers in India have seen their margin funding book go up 30+% since March, a segment of these new investors is dealing in F&O without fully understanding the risks involved.
We have had another piece of the bullish narrative fall into place over the past month with a frothy IPO market that is pricing every new listing as a great business. The signs of market froth are more visible today than they were in March, but you never know for how long such trends can continue. For the time being we should gleefully take what the market gives with both hands but be choosy about investing incremental capital into frothy stocks. 35 P/E is now considered cheap for a specialty chemicals business, till 2019 these were considered overvalued at 25 P/E.
I have reservations about prioritizing alpha generation right now and am more concerned about risk management, Please treat cash with the respect it deserves, eventually a phase will come when that 5.5% FD return looks like a decent deal that also gives you ammunition to benefit from lower stock prices.
Gains don’t matter much if you can’t hold onto the bulk of them once the tide turns.
An average return over the short term can sometimes improve the probability of a good return over the medium term.