Investment Shastra

Nifty@MRP Suggest Markets Are slightly overvalued, What Should Investors Do?

What is Nifty@MRP?

As investors, we constantly track the Nifty movements. To make investing more profitable and not a game of mere chance, we need a solution, a solution which could help us identify whether the market is grossly depressed or irrationally exuberant. This is exactly what Nifty @ MRP is for!

What is the latest value of Nifty@MRP?

For Q3 2019, considering the free float market capitalization and the MRP of individual stocks as of 05th March 2019, the Nifty@MRP is at 10130. On the day of writing 05/03/2019, Nifty closing index value is 10,987.45, which implies 8.5% overvaluation.

Future Outlook

The markets have remained subdued in 2018. Global equities have declined 10.4% (worst performance since 2008), while emerging markets declined by 16.6%, mainly due to concerns on impact of the US trade war with China. Among emerging markets, Brazil and India outperformed on a relative basis. The US was the best performing market amongst developed markets.

The same headwinds also led to weakening FII sentiment. Indian equities witnessed six consecutive years of FII inflow worth US$ 75 billion. With emerging markets witnessed a generalized sell-off pressure in 2018, India too witnessed a marginal outflow of US$ 4.4 billion in 2018. Domestic institutional investors, on the other hand, continued to pump in money for the fourth straight year (US$ 16 billion).

2019 is seeing some weakening in Indian macro catalyzed slowdown in public expenditures and translating into weakening FII sentiments and external account, depreciating rupee, and rising interest rates. Fuel and core inflation ticked up but ultra-low food prices kept the overall inflation under check. At the same time, GST collections didn’t witness the desired buoyancy. The banking system liquidity turned from surplus to deficit. Looking ahead, it appears unlikely that there will be a big revival or turnaround in 2019.

MoneyWorks4me Opinion

Although our Nifty@MRP doesn’t imply large overvaluation, but select 15-20 stocks are quite overvalued while rest of the Nifty stocks are trading at reasonable to undervalued levels. Overvalued stocks are forming higher weight in Nifty and hence even if one invests in Nifty, he will end up allocating more to overvalued stocks and not undervalued ones as they have become smaller. We believe stock picking will work well over next 1-2 years over index fund and hence recommend active investing via stocks or mutual funds over passive investing.

We expect the corporate utilization to normalize and investment cycle to pick up in FY 2020-21. Corporates are in a better shape to undertake capital spending given improved interest and leverage coverage ratios. Banks are also better placed to lend now.

The de-rating of equities in 2018, sluggish macro, erratic earnings recovery, and fall in liquidity should help us get good bargains in 2019. Elections, global geopolitical risks may keep intra-year volatility high in equities.

Based on valuations, we feel asset based business like Infra & infra related companies, Autos and Ancillaries, Oil & Gas provide good investment opportunities in this year. We are participating in these sectors either via stocks or mutual funds.

Also, NPA resolutions should help corporate banks to continue to out-perform. However, NBFC’s may continue to face pressure on margins and growth. Also, the over-valuation in the consumer sector make it unlikely for consumer stocks to perform over next few years.

We advise our investors to take advantage of these investment opportunities in 2019 and invest in our recommendations for good portfolio returns.

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