Of late, there have been many voices predicting a big crash, given the unrelenting rise in stock prices, and lofty valuations.
Some quote Harry Dent, a financial author and economist who, in a recent interview to Fox News, said: “we’re in for a financial crash bigger than the Great Recession.” Dent said the “everything” bubble has still not burst. According to Dent, “we’re going to see the S&P go down 86 per cent from the top, and the Nasdaq 92 per cent.”
A tweet from one of the market veterans says, “Market Cap to GDP touched an all-time high of 141 in Dec. 2007. We know what happened then. Now the market cap to GDP is 152. What happens next?,”
While some, like those above, are predicting a hard landing, there are some neutral voices too. A recent note from InCred Capital said macroeconomic tailwind benefits give fiscal headroom to accommodate multiple stakeholders’ demands and yet improve on the fiscal deficit in the July Budget.
Though it expects June 2024 quarter’s results to be tepid, the research firm maintained its Nifty50 target at 25,683, a marginal upside from the current levels, with a preference for large-caps. “We maintain our Overweight rating on the capital goods, cement, electronics manufacturing services (EMS) and financial sectors,” it said in a recent research note.
Die-hard optimists
On the other hand, there are some die-hard bull fans. According to them, everything is rosy — economy, inflation, political stability and hence proactive policy initiatives, monsoon and rising hopes of rate cuts. Given these factors, according to them, money will continue to pour into domestic equity markets.
“Indian companies are leading, helped by a resilient domestic economy, strong pricing power and, of course, leadership positions in the all-important capital goods sector. The hunt for positive growth momentum and attractive valuations is starting to shift investors’ focus away from the US and towards a more regionally-diversified exposure,” said a note from Wodehouse Capital Advisors.
Domestic brokerage Prabhudas Lilladher (PL), in its latest India Strategy Report – The Champion’s Rally Continues, stated that the target for Nifty, in the base case, is 26,398 (previously 25,816). It set a bull case target of 28,575 (previously 27,102) and a bear case target of 24,493 (previously 23,235) for the benchmark.
Wodehouse, a premier mid-market investment advisory bank, said: “Traditionally, higher P/E ratios have been associated with growth stocks, where investors anticipate robust future earnings growth that justifies paying a premium today. However, what is striking today is not just the prevalence of high P/E ratios in growth sectors like technology and biotech, but their pervasiveness across the broader market spectrum.”
Changing attitudes
One compelling explanation for this phenomenon lies in the changing attitudes and preferences of investors across different generations. “As Baby Boomers, Generation X, Millennials, and now Generation Z influence the investment landscape, their distinct outlooks and approaches to investing have reshaped traditional benchmarks for P/E ratios,” it added.
Should one worry about these noises? For goal-based, long-term systematic investors, these news flows help in strategising the investments for better returns, as they would not panic in case of adverse movement and are better equipped to handle such a situation. But short-term investors, should always be on the vigil.
An investment advisor summed up the current situation by saying, ultimately, whether high P/E ratios are the “new normal” depends on a complex interplay of factors, including generational preferences, economic conditions, and technological advancements. “As investors adapt to these changing dynamics, maintaining a disciplined investment strategy that balances growth opportunities with risk management remains paramount.”