Stock markets may remain wobbly as last week’s sell-off comes on the back of concerns that the main street’s earnings growth does not quite reflect the soaring valuations. Stocks are also feeling the squeeze because liquidity is seeping away. Lately in September foreign investors started intensifying selling leading to ₹1,657 crore outflows for the month.
While another stimulus in the US could lift the global markets, the US Congress is divided over the quantum. This could keep the markets on the edge for a few more weeks till the US elections are decided, which is about six weeks away. Volatility could still continue even beyond US election results if there is no decisive vote.
India’s Friday rally on the back of stimulus measures announced by the government came as a relief, but at higher levels selling could increase as investors weigh prospects of a slower economy. Short-covering also alleviated the plight of the bulls late last week.
Although this may seem like the worst is over, one still has to watch the dollar index in the coming weeks. The suddenly-puffed-up greenback caused a flutter in global markets. Gold and silver prices fell as the dollar index jumped 1.7% this past week.
Undeniably, alarm bells have been clanging for some time. Stock markets raced up from the March lows closer to their pre-covid highs. The global stimulus unleashed by central banks “bazooka”ed stocks to levels of valuations not seen in a long time. Nifty 50’s price-earnings multiple shot up to 21 times in August, higher than pre-covid levels.
As valuations are over-stretched, retail investors have to be up and on their guard. While retail investors invest largely in small caps, the recent SEBI circular on multi-cap allocation is not likely to drive small stocks further. Multi-cap funds will find the low liquidity a deterrent to make a switch from large-caps to small-caps.
Meanwhile, the liquidity gush has created an Indian behemoth. Reliance Industries Ltd’s stock scaled $200 billion in valuation. Besides, telecom companies are facing the tariff war again. Last week, Jio upped the competitive ante by bundling free over-the-top streaming services for its post-paid users.
Among other conglomerates, the Tata Group could undergo a massive change after the Shapoorji Pallonji Mistry Group announced it was uncoupling from the former. This sent the stock price of TCS tumbling.
Colgate Palmolive Ltd has been closer to its pre-covid highs as demand for its products has been stable.
GMM Pfaudler’s offer-for-sale, though, was painful for many investors; it came at a 33% discount to its market value. This episode offers important lessons to investors.
Meanwhile, banking stocks continue under pressure. Several banks announced that they would charge additional interest or a processing fee.
The Supreme Court’s judgement on waiver of interest on interest is expected this week, and could clear the air for banks. Besides, the Monetary Policy Committee meet is scheduled this week though a rate cut may not be in the offing as inflation has been rising.
The markets hinge on the banking sector for revival as it has a more than 35% weight in the bellwether index. With bad loan’s and pressure on restructuring covid-19, this sector faces headwinds though.
The September sell-off has yet to bring valuations of many frontline stocks to reasonable levels for many investors to get comfortable owning them again. That’s not tilting the scales in favour of bulls.