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Price, value, flows and cats (alive or dead)

The sharp correction in the Indian market in CYTD25 has led to a significant correction in the market from peak levels. However, we do not find value in most parts of the market despite the sharp correction across sectors and stocks. Flows have seen endless discussion among market participants but have proven (again) to be pointless to assess the market peak or correction.

Are we there yet? Sigh!

The Indian market has seen a sharp correction in the past 6-9 months, with the market fall being exacerbated by the decline in recent weeks (see Exhibits 1-2). The correction is far more severe in many sectors and individual stocks (see Exhibits 3-5) compared to the headline indices. Most sectors have seen a decent correction, with only the banking sector consistently holding up.

Is there value in the market? Sorry!

We do not find much value in the market (see Exhibits 6-11) despite the severe market correction. Most parts of the market are expensive on an absolute basis or on a historical basis, with (1) consumption stocks trading at full-to-frothy valuations, especially in the context of short-term growth issues and mediumterm disruption risks, (2) investment stocks trading at fair-to-full valuations and (3) outsourcing stocks trading at fair-to-full valuations, especially in the context of short-term demand (IT services) and market (pharmaceuticals) risks. Only the banks and NBFCs seem to be reasonably valued. Headline market (Nifty-50 Index; see Exhibits 12-13) valuations are misleading, given (1) the wide disparity in valuations and (2) a large share of profits of low P/E sectors (see Exhibits 14-17).

Did the daily monitoring of flows really help?

Oops! We see investors focusing excessively on retail inflows into domestic mutual funds, but not enough on business models and valuations of companies. Flows have proven (again) to be absolutely useless in figuring out the peak of the market and the subsequent correction (retail inflows into domestic mutual funds have continued unabated; see Exhibits 18-21), and they will prove useless in predicting the market bottom. A few basic facts about the market remain underappreciated: (1) there is no money in the secondary market; somebody buys, somebody sells at all prices, (2) expectations of returns influence the action of buying (inflows) or selling (outflows) of an investor and (3) the price of a stock is the clearing price based on the expectations of all market participants.

Does a ‘dead’ cat really bounce?

Ouch! We continue to be wary about ‘narrative’ stocks. Many such stocks are trading at unfathomable valuations (see Exhibit 22) despite the 30-50% correction in their stock prices in the past few months (see Exhibit 23). Investors waiting for a revival in ‘narratives’ and a rebound in ‘narrative’ stocks may want to note the following: (1) the cat may be already dead, (2) the cat will likely be dead if it is dropped from a sufficient height (despite a cat’s fabled nine lives) and (3) the image will be too ghastly to imagine.

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