In Shakespeare's Romeo and Juliet, a character warns the hero, "These violent delights have violent ends." Go slow, he tells Romeo.
Like Romeo, the stock market may have moved too fast, especially when we compare it to India's real GDP growth. For the first time, India's total stock market capitalization (BSE) is at a record 165% of India's estimated real GDP for FY22. Pre-Covid, it was 108% of real GDP.
This value (total market cap to GDP) is commonly known as the Buffett indicator - Warren Buffett once said that it is “probably the best single measure of where valuations stand at any given moment.” This helps us compare stock market sentiment against actual economic output - telling us when there is a mismatch in investor expectation and reality.
The high level of this indicator right now is a signal to investors to be very cautious about adding more money to equities, especially in the riskier smallcap and midcap stocks, and overvalued stocks. Especially with CEOs across industries talking about rising costs impacting their margins in earnings calls. Achal Bakeri of Symphony puts this well:
"We cannot keep on repeating price increases over and over again. We have not been able to keep passing this. Even in the month of April, there were cost increases - commodity cost increases or basic raw material increases. You cannot just keep on changing your prices frequently in business like ours which is a consumer business. So we have absorbed quite a bit of cost increases."
As the RBI raises interest rates and liquidity shrinks, companies will have to battle both costs as well as the rising price of debt. This is likely to impact valuations further.
Plenty of Nifty500 stocks in the PE Sell Zone
Investors can check which stocks are in the PE Sell Zone (stocks that usually trade below their current PE most of the time). Even after the recent correction, 115 stocks in the Nifty500 are still in the PE Sell Zone, including Infosys, Adani Enterprises, Asian Paints and Bandhan Bank.
Results show some sectors turning wobbly
The Results Dashboard tracks results as they come in, and the Q4 results are illuminating. Some sectors beaten down by the pandemic are finally delivering strong results - Hotels are seeing profit margins jump by double digits, Specialty Retail including PVR and Inox are seeing net profit recovery.
Agrochemicals has so far also delivered a good quarter, although rising costs have put margins under pressure - this sector has limited capability of passing on costs to farmers, especially in India's price-sensitive rural market.
But over 50% of results declared so far have shown negative profit growth.
Sectors that have been weak include auto as well as the tyre industry, which are reeling under both demand and cost pressures.
Interesting reads
HDFC Life, despite the challenges of FY22 has closed the year on a high, showing rising premiums and improving metrics.
UPL delivered a strong set of results. But price hikes played a big part in this, as the company deals with rising costs.
FMCG bellweather HUL managed a difficult quarter well. But like others it has been hit by cost pressures. Does this threaten margins?
