When we look at the Indian stock market today:
- It is the most expensive emerging market on a price-to-earnings ratio. It’s been in the top two for a while now
- It has been significantly underperforming the broader emerging market index in 2019
- Volatility has risen significantly in the last 3 months even as the market has been range-bound
When we look at everything occurring in the world right now, I can only think of how many ways things can go wrong for markets in India and make a mockery of this valuation.
First, we look at the global factors:
- There’s the price war between the US and China, which will cast an ever-increasing shadow the longer it lasts
- There are geopolitical tensions in the middle-east and Venezuela, both of which impact oil supply and prices
- Brexit. The fact that its impact cannot even be clearly assessed and most firms are in a reactive mode
Then we overlay some India-specific ones:
- Election results in a week with the possibility of getting back to a weak coalition government
- Bad loans and their ripple effects - NBFC failures, FMP’s not returning money on time, banks under-reporting their exposure to stressed entities and so on
Taking all this into account, I don’t have the stomach to stay fully invested. It feels like the risk here is asymmetrical.
A clear mandate in the elections would give the markets a boost, but that isn’t a given. Even if it occurs, I fail to see how it can result in a large and lasting jump over today’s valuations in isolation. If Trump and Xi keep increasing the stakes, the slowdown it’ll create can easily overshadow any temporary effects of a good election result. Oil is India’s biggest import, so any increase in prices has significant effects on inflation, balance of trade and the cost of raw materials in several industries.
Taken in isolation, each of these can pull the markets down a good amount from its current levels. If they occur together, we will see ourselves fall to levels that’d take years to claw our way back. They are largely independent, and some of them already seem to be going the way of an old-fashioned train wreck, so the best-case scenario doesn’t look like the most likely one.
I’ll revisit this in 6 months. In the interim, I’d have either lost some opportunity costs, or have seen my holdings fall, but taken advantage of a good buying opportunity.