Indian equity markets are flirting with all-time high valuations as key indices continue to set new records almost daily. However, the recent pullback has left many investors questioning whether this is the right time to enter the market or if it’s better to stay on the sidelines. With stock prices soaring, the fear of missing out (FOMO) is palpable, but experts caution that this may not be the best moment to jump in.
While Indian markets have shown remarkable resilience, buoyed by a strong macroeconomic environment, deleveraged corporate balance sheets, and robust earnings growth across sectors, market watchers have a growing sense of caution.
Swarup Anand Mohanty, CEO of Mirae Asset Investment Managers (India), explains that these factors, coupled with strong domestic investor flows, have driven up valuations, particularly in the mid- and small-cap segments. These stocks are now trading at a premium in both absolute and relative terms, which raises questions about their sustainability.
Market veterans advise against letting FOMO dictate investment decisions. Manish Gupta, founder of Solidarity and a protégé of the late Rakesh Jhunjhunwala, urges investors to be patient and avoid rushing into equity allocations at these elevated levels.
“Markets are significantly above fair value. Do not be hurried in incremental equity allocations,” Gupta said in a quarterly update to investors.
He warns against initiating fresh purchases at current valuations, suggesting that a more prudent approach would be to wait for better opportunities or a meaningful market correction.
This sentiment is echoed by other market experts. Christopher Wood, global head of equity strategy at Jefferies, acknowledges the surprising resilience of Indian equities but advises caution in allocating fresh capital to the market.
Wood suggests that if given $100 to invest in India today, he would only deploy one-third of that capital and keep the rest in cash, waiting for more favorable entry points. His cautious stance is supported by concerns that the market could be nearing bubble territory if the current uptrend continues unchecked.
Legendary investor Jim Rogers adds that while India is not currently overvalued, there is a risk that the market could enter bubble territory if the rally persists. Rogers notes that markets often go through phases of inactivity followed by bursts of heightened activity, which can lead to asset prices spiraling out of control.
“Bubbles are only evident in hindsight, and we might be in one for the last 10 years, honestly. It will only be known later, looking through the rearview mirror,” said Deepak Shenoy, founder and CEO of Capitalmind.
Investors are also facing increased risk as the market could crash at any time without warning. Shenoy advises investors to be prepared for potential losses if they decide to invest now, emphasizing that the market’s current strength does not guarantee future performance. “If you can’t stand the heat, the kitchen is not a good place to be,” he remarked, underscoring the importance of being prepared for volatility.
In the short term, there is a possibility of drawdowns, particularly in the mid- and small-cap segments, which have been the first to bear the brunt of any market downturn. Vikas Khemani, founder of Carnelian Asset Advisors, highlights the risk of corrections in these sectors, especially given the stretched valuations. He advises caution, particularly in sectors like railways and defense, which have surged ahead of their fundamentals.
Some fund managers have already taken aggressive cash positions, wary of the lofty valuations in the market. A portfolio manager, who preferred to remain anonymous, revealed that they are holding 50% of their portfolio in cash, citing concerns about valuations in the mid- and small-cap space.
As the market approaches this inflection point, the debate over whether to buy or sell intensifies. Bill Gross, the renowned “Bond King,” recently suggested that investors should consider taking profits during market recoveries instead of buying the dip. He believes that these rebounds could be temporary and followed by deeper declines.
Taher Badshah, chief investment officer at Invesco Mutual Fund, noted that while the recent 4% correction is healthy, there could be a further decline of 5-7% if things take a turn for the worse, such as a delayed rate hike or escalating geopolitical tensions.
For now, the consensus among experts is clear: while the long-term outlook for Indian equities remains positive, caution is warranted in the short term. Investors are advised to be patient, avoid chasing the rally, and prepare for potential volatility as the market navigates these uncertain times.
