Address
804, 805, 8th Floor, Tower B4, Spaze I Tech Park Sec-49, Sohna Road, Gurgaon-122018 , Haryana, India.
Download Alpha Portfolio App
Download Consolidated Portfolio App
Social Media
By Alpha Research
Dec 30, 2023
2023 is almost at an end! The last week of the year is an exciting place to be in. Along with last-minute holiday shopping, it is the time to reflect, look back, and plan.
Investors will look at their portfolios to reflect on the current environment and define their expectations for how they see the future evolving. As you check up on your finances heading into the new year, you might find some good news: The recession everyone expected in 2023 never materialized. Instead, headlines read somewhat like this.
1. India is the fastest-growing major economy - beating the growth estimates
2. Crude Oil price set to end year 10% lower
3. Foreign institutional investors going heavy weight on India
4. IPO frenzy in December defying the global downward trend
5. Nifty touching new highs; Sensex reaching a 100 thousand mark, and so on and on
(Do remember the saying goes, "A rising tide lifts all boats")
The lower likelihood of a painful economic downturn should bode well for your investment portfolio and financial decision-making going into the new year. While this presents a tempting prospect for investors, a cloud of caution looms as market valuations reach expensive heights, raising concerns about an impending bubble.
Questions that have been echoing in the minds of investors:
It seems the answer to these million-dollar questions can only be found in the rear-view mirror of time. It is necessary to observe a data-driven image of the landscape. Let's see some intriguing indicators and draw key insights from their analysis. First, let's be clear: we aren't trying to "predict" the future but are assessing the likely performance of assets and the expected returns generated by the investment portfolios. And one of the ways to do it is to constantly incorporate data, news, events, and observations in the analysis.
In 2024, Investors find themselves at a crossroads of opportunity and caution. Reduced risk of a recession is just one element in a shifting financial landscape. Some other developments that can be tracked relate to the
At present, one can observe "The Santa Claus Rally" due to the robust performance usually observed during the holiday season. This phenomenon is part of the broader concept of stock market seasonality, which refers to the patterns in price movements that occur predictably at certain times of the year. One of many existing seasonal effects is the "Sell in May and go away" market maxim or a Halloween effect. This pattern has proven consistent when tested over extended periods under various economic conditions and using different benchmarks. Additionally, this effect is global since this pattern is present in almost every country, despite disagreement on whether the strategy is connected with the optimism cycle, psychology, or even another cause.
Winter depression, or Seasonal Affective Disorder (SAD), is one example. Psychological literature suggests that depression reduces risk-taking. The optimism cycle, in which investors start looking forward to the next year, frequently unduly optimistic about the economic picture (growth forecasts for the economy and earnings), which initially helps equities. Reality hits them many months into the year. The stock market slumps in summer as investors get pessimistic. Thus, psychological variables continuously deceive investors.
Nevertheless, one should note that stocks don't steadily rise forever, although some investors may believe that to be the case. Stocks have a history of performing upward and downward cycles, which investors might see in 2024. Recall the 7-year itch !! It is interesting to observe that the 2-decade long journey has been a volatile one. In the last 25 years, we have had 19 years with positive returns and 6 years with negative returns.
The fact is, markets fall for a wide array of reasons and then tend to recover again. In 2024, it is anticipated that though Inflation is coming down and central banks should be able to start lowering interest rates, growth won't be tremendous. Many risks will simmer, from regional bank balance sheets to elections to geopolitics.
Indicators to help us understand the bubble vs bull run conundrum:
The price-earnings ratio (PE Ratio) is one of the key measures used to understand stock valuations using an estimate of the future earnings per share (EPS). The PE ratio helps you know how much you are paying for each rupee the company earns. While it is not easy, this can help distinguish between a bubble and a bull run. If the PE of a stock is much higher than the average industry PE, there can be a case of a bubble. One should look at the PE ratio and compare it with the company's prospects. There will be cases where the chances are bright, and the PE is high. This is a case for a bull run in the stock. However, if things are out of sync, waiting for a short-term price fall may be best. If the PE ratio continuously balloons more than the company's fundamentals, it could be a bubble.
A similar analogy can be drawn for the market in general, too. A crucial indicator to know if the stock market is overpriced is the PE Ratio of NIFTY 50. For the 50 companies comprising the NIFTY 50 index, the median PE ratio has been 20.34. As of Dec 2023, this value is at around 23.2. Historically, NIFTY crashed or tanked whenever its PE ratio went between 25 and 28. In early 2021, the PE ratio of NIFTY was insanely large.
However, what is interesting is that even though the stock markets are overvalued, if the companies start posting equally good earnings, the valuation of the markets will be justified. A good profit translates to a good EPS for a company. If the EPS increases, the PE ratio automatically starts going down, indicating normalcy.
The Warren Buffet Indicator or The Market Capitalization to GDP Ratio is another metric that indicates overpriced markets. A higher ratio means the stock market is bigger than the nation's GDP. In layperson's terms, there is too much investing and trading compared to too little economic activity. As of Dec 2023, this value hovers around 103, reconfirming Indian markets to be modestly overvalued.
Foreign institutional investors don't make enough profits in developed countries like the US, Canada, UK, etc. Instead, they invest in developing nations like India for higher returns. Strong corporate profitability, rebound in financials, auto, fast-moving consumer goods, and domestic growth make India a bright spot in an uncertain global economy. Recent economic indications like GDP and manufacturing numbers and external variables like dropping US bond yields support markets. So far, the Indian stock market has been the eye candy of foreign institutional investors throughout 2023, taking the NIFTY 50 and the BSE Sensex to their all-time highs. The vital question is, when will Foreign Investors withdraw from Indian Markets?
The answer could lie in 'Taper Tantrum' https://alphacapital.in/blog/
As we wrap up the final week of 2023, we turn to what might be the crisis in the making. Market bubbles are characterized by price appreciation and new market entrants. Investors should remember that attractive fundamentals drive money into bubbles. However, so much money enters the market that values exceed appealing fundamentals, ending a bull market and starting a bubble. Bubbles are fueled by investor greed. When greed becomes panic, investors rush to sell in a falling market, causing a crisis. The historical record demonstrates that many financial crises began with greed, anxiety, and other elements, including asset/liability mismatch, excessive leverage, excessive risk and currency mismatches. More than one factor is frequently present, and one can heighten the other.
So, What Should Investors Do Right Now?
In volatile markets, it pays off to take a deep breath, focus on the long term, and keep your stock investments stable. History suggests that markets always recover from downturns, and this market should too. You can't time market downturns, so follow your financial plan while investing. Hedging against Inflation and asset allocation are critical to 2024 dynamics.
Headline inflation has dropped from roughly 8% to about 3.5% in the developed countries. That's great progress. However, the process of "nearshoring," global supply chain modifications, and Consumer and Investor inflation expectations may limit Inflation fall. Thus, while Inflation is falling, the landing point may be greater than before.
We enter 2024 with a reconfigured investment landscape. Private markets continue offering premiums over their public counterparts while becoming more accessible to investors. If your priority is to lower your downside risk and limit the range of potential outcomes, it could make sense to shift toward more bond/debt exposure. But if you aim to maximize your upside potential, you might want to keep your portfolio tilted toward stocks.
Geopolitics, elections, growth, and rate dynamics naturally pose new and old dangers. These should be considered when investing. Above all, focus on your long-term financial goals and how markets can help you achieve them.
In conclusion, although historical return patterns can offer some insights, the current heightened economic and market uncertainties make it extremely challenging to predict short-term market movements. Timing the market rarely works. Because markets are the sum of the emotions of millions of investors, they periodically experience large swings of optimism and pessimism.
Investors who ignore the crowd's frenzy and focus on their aims will often succeed. Investment success requires a plan and persistence. This applies to market cycles, bubbles, and financial panics. As year-end approaches, long-term investors should ensure their investment strategy matches their goals and risk tolerance. Investors should be cautious and adapt their methods to evolving market conditions. Ride the wave, invest during the initial spike, and capitalize.
My dear readers, the New Year is an essential checkpoint on a longer journey. Spend time reflecting on what you want to do, what you want your wealth to do for you and if your investments align with that intent.
Wishing you a very Happy 2024!!
Best Regards
Dr. Tarunika Jain Agrawal Ph.D.
Alpha Research
