Stay in Cash or Invest?

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As per our P/E analysis chart and negative factors outlined below, market is approaching bottom but its too early to start investing. Investors should stay in cash but be ready to start investing in-parts with mid-long term vision in mind. You can leverage our Free Heatmap to start with opportunities there and do further research to narrow down or opt for our Free Trial to premium products.

What factors are causing markets to go down?

1. Inflation

Where is today's inflation coming from?

  • First trigger for inflation was after Covid in 2021 as demand provoked for goods after countries emerged from lockdowns. Also, many Covid related fiscal stimuli have increased cash in the economy while supplies remained low due supply chain disruptions.
  • Second trigger was the lack of a balanced approach to solve the shortage of natural energy resources by advanced and developed countries. Booming economic recovery and under capacity production are driving prices of fuel across the globe. Shortage of coal in Asia, natural gas in Europe and petrol across the globe are contributing to increased costs.
  • Third trigger is Russia-Ukraine war and sanctions which is causing supply chain disruption of commodities across the globe.

Labor shortage, extreme weather events and breakdown of supply chain are other factors apart from fuel which are driving up prices of food items. These all inflationary events have cascading impacts across sectors which are affecting profitability in the short run.

Current inflation is historical and it means it wont last for a longer time. To control inflation central banks have to take action.

2. Interest rate hikes by central banks globally

  • Start of June experienced corrective measures done by central banks across the globe ( Federal Reserve, Swiss Bank, Bank of England, RBI, etc) by raising interest rates to control inflation which is at an all-time high.
  • Followed by an interest rate hike, the 10-year bond yield for India is also at an all-time high which results in an adjustment to valuations across sectors.

Rate hike is a bitter medicine which countries have to take in the short run to cure for the long run.

3. Weak Demand

  • As a consequence of the cascading effect of inflation at core, companies are passing on the rising raw material cost to end customers which makes products and services costly at the moment.
  • Liquidity in the economy is tightening due to rate hike. On the other side, prices for goods and services are high due to inflation.This is creating a weak demand outlook for the short term.

4. Rupee Depreciation and all-time high crude oil prices

  • As a result of supply chain disruption across the globe and depleted reserves, the Indian rupee has weakened to an all- time high level of Rs 79/ $1.
  • Inflation, rupee depreciation, and war results in a rise in crude oil and other fuel prices. India is the third-largest consumer and biggest importer of crude oil worldwide.

These events are affecting the economic growth of the country and the profitability of the companies in the short run. Though in the long term story, the sky is clear and bright.

Why market is near the bottom?

There are more negatives in the market than positives which are similar to events we have seen in the past during demonetization, Covid when markets were volatile and valuations were adjusted for that specific time.

Market has the characteristic of adjusting to valuation when it reaches an overvalued state. Negative news is the trigger to make that happen. Once valuations get adjusted to markets it starts its growth journey again. We can clearly see this in the graph below.

Porinju Veliyath Portfolio

  • Historically Sensex was overvalued at a PE of 29x in 2000, 25.5x in 2008, and 28x in late 2019, and it was trading at an all-time high range of 35x in 2021- 2022.
  • Whenever Sensex hits an overvalued state it tends to correct to an undervalued state which we can clearly see in the above graph. This phenomenon is caught by the overall markets.
  • An undervalued state is actually an opportunity to grab an investment theme for the next bull run.
    After the 2008 correction, markets have given returns of 107% in two years. Also, after Covid correction, the market has surged up 101%.
  • Now we are moving towards the undervalued state with a current corrected and undervalued PE of 20x, we just need to keep our guns ready to hit the bulls eye of investment and catch the next bull rally.
  • Looking at current market conditions where markets were already overvalued and struggling with inflation; the government came up with different measures as corrective actions to support the economy which we can see in the long-term term picture. As evidence, it was reflected in the market historically when the market bounced back after sharp correction during past events ( For example- Recession, Demonetization, Covid ).
Where and When to Invest?

Where are these opportunities?

  • Most of the economy-driven stocks are corrected to a decent valuation though there are few sectors that are benefitting due to rising exports and rupee depreciation. Also, look for sectors that are least impacted due to interest rate hike and inflation.
  • Please check our Free Heatmap which identifies industries with opportunities and risks. Heatmap accounts for fundamentals, macro economic and company level news, and technical indicators to flag these opportunities and risks.

When is a good time to buy?

  • Market is heading towards the bottom and we suggest investors to wait until market volatility goes down and market becomes resistant to downward movement; don't forget the market wisdom "Don't catch the falling knife".
  • Investors should never wait for a perfect bottom especially considering historically low P/E ratios. We recommend investing in small parts like 10-20% and gradually increase investments as market starts recovering.
We will be regularly updating this article and our guidance as market conditions change so we hope you will check back here soon. You can always subscribe to our newsletter by scrolling below if you want to get updated guidance directly in your inbox each week.

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