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  • Writer's picturePanna Bhandari

Global Equities: Caveat Emptor

Updated: Aug 24, 2020

23 August 2020

Correction 2.0 A significant selloff may be around the corner, and it is worth reconsidering your equity asset allocation at this point

At the time of writing this article, the Nifty is back to February 2020 levels. From our perspective, markets were expensive in February. It was a bubble then, and now with reduced earnings after COVID and Nifty back to February levels, markets are even more expensive.

Nearing the End of the Liquidity Rally?

In our June outlook (read here), we had written that the current liquidity rally could take markets higher. The Nifty has rallied about 10% since then and can even continue higher for the next month or so. In our opinion, we are now in the last leg of this euphoria. Markets will mostly also make new all-time highs because unrestrained liquidity can pump markets to extremes.

But investors must use this last leg of the rally to take some risk off the table, especially if they have significant exposures to equity on their portfolios. If you buy/hold onto, at high valuations now, it will only translate into lower returns in the future. All companies, irrespective of quality, correct, when a bubble bursts.

Every time I talk about expensive valuations and worsening fundamentals whether it was in 2018, 2019, or 2020, the permabulls always negate it with the argument that the trend is your friend and all the possible negatives have been factored into the price. That’s true. Until it isn’t. The reality is that markets are risker and frothier than ever before.

Major Concerns Today:

  • Extremely Stretched Valuations

    • Nifty PE crossed 30 for the first time in the history of the Indian stock markets. Yes, PE can expand during a low-interest-rate environment, but that still does not justify 30-32 PE levels.

  • Bubble like Characteristics

    • Tech stocks in the US: the combined market cap of FANGMAN stocks is higher than the GDP of Japan, Germany, India etc.

    • The Indian markets have witnessed a broad rally since the March bottom but, Reliance alone has contributed for 29% of the Nifty rise.

    • The CNN Fear & Greed Index is inching upwards towards extreme greed. At the time of writing this article, around 70/100. (check here)

  • Selling by Promoters

    • Aditya Puri sold about 840 Cr worth of HDFC in July (his entire stake in the bank).

    • Shibulal’s family sold their family stake of 778 Cr in Infosys.

    • Jeff Bezos sold Amazon worth around $3 billion in August (this was over and above the $1 billion that he usually sells every year)

    • If the medium-term outlook was promising in their minds, why would these people sell?

  • Bears are going Extinct

    • Markets are extremely overvalued, but the put and call ratio shows that more investors are bullish in their positions, shorts are disappearing, and greed is returning to the markets.

    • Until a few weeks ago, people were concerned about the markets. Now they’re neutral, inching towards optimistic. The market wants you to get slack. That’s when most mistakes happen.

  • US Elections

    • With the US elections in November, the government will try its best to get reelected and will direct its best energy to have good things happen to the market. However, eventually, the price of all the money printing needs to be paid and any slight disruption to the existing situation can blow this house of cards away.

The current frenzy is fueled by liquidity and the conviction that quality stocks can never correct and that the worst is behind us. Generally, at the peak of a bubble, investors are willing to buy at any price because they think the stocks can never go down and valuations don’t make a difference. Today we are witnessing a bubble formation in the stock markets, with worsening fundamentals.

Rethink Large Equity Positions

It is tough to tell when this speculative rally ends, but when it happens, it happens fast, almost paralysing investors from making sound decisions for their money. We have seen that in February and March 2020 itself.

We have more than ample reasons to get out of these frothy markets. What we have right now is a powerful bear market rally and a brilliant exit opportunity. All corrections don’t give this second opportunity to exit. In 2007-08 investors never got a chance to get out. It would be a missed opportunity to not sell off some equity as the market inches upwards. One must begin profit booking in parts with every decent rise in the markets and keep strict stop loss triggers.

The unwind - in whatever fashion it takes - is going to be messy. I am incredibly concerned about what the state of the market and the entire world is when the bubble bursts. Because whenever that correction happens, perhaps even in the last quarter of this calendar year, investors aren’t going to have the kind of cash that people had in March 2020 to invest in the markets. COVID has put all of us in a tight spot; investors are running out of money. Times can get so difficult that even if you have the money, perhaps you might not dare to invest in the markets, especially if you have significant losses in your existing positions.

All I am saying is we are close to the top, what you want to focus on now is capital protection, it is time to become extremely conservative right now. All existing equity exposure should be carefully revalued at this point since the risk-reward ratio does not favour having significant equity positions.

And of course, many will say: ‘this time it’s different’. But “markets are a repetitive cycle of fear and greed, and you need to figure out which template is at play (Jim Rogers).”

Be safe out there!

Reach out to us (here) if you would like us to review your portfolio and asset allocation.


Positive asymmetry: high upside/low downside

Linear: similar upside/downside

Negative asymmetry: low upside/high downside

In positive asymmetry games, you win by taking lots of shots.

In linear games, you win by working hard.

In negative asymmetry games, you win by not playing.

Equity markets are in a negative asymmetry zone right now. Sometimes you win by not playing.


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