Why are Stock Markets at an All-Time High? | Best Investment Strategy - when the Markets are High

Описание: The stock markets have had a fantastic run-up in these last 10 months and one won’t be wrong to assume that many investors are spooked by it.

In this video, ETMONEY Expert Shankar Nath puts forward some reasons and hypotheses as to why the stock markets continue to defy the current state of the economy.

Chapters:
00:00 - Introduction
01:01 - Economy coming back to pre-COVID levels
02:53 - Growth in earnings
05:28 - Low-interest rates
08:03 - The Discount rate
11:56 - ETMONEY Opinion

1: ECONOMY COMING BACK TO PRE-COVID LEVELS
The primary premise for this astonishing rise in the stock markets is that the economy is coming back to pre-covid levels.

We looked at the various economic parameters like - GST collection, Unemployment, Railway and Roadways freight, etc, and saw that while there are some improvements in some of them that gives us a sense of belief that the economy is heading towards the pre-covid levels.


2: GROWTH IN EARNINGS
The second premise that is lifting the stock markets is the optimism surrounding potentially superlative earnings.

Reasons:
1. The lowering of the corporate tax rate which was done in Sep 2019 will get a complete & normal year of action in FY22. So that’s something to look forward to.

2. The pandemic has pushed all companies to refocus on their cost structures and the expected cost savings are likely to add to the profits

3. the government stimulus through the budget announcements and also much before the budget, which pans across the spectrum.


3: LOW-INTEREST RATES
The lowering of interest rates helps in lowering the financing costs which encourages corporates to borrow and invest and encourages individuals to borrow and spend.

The expected effects of this corporate and consumer spending are growth in economic activity, higher employment, and greater demand for goods and services.

In our opinion, a lot of this economic growth will be linked to improvement in consumer sentiments.

Secondly, a low-interest rate regime often acts as a catalyst for the movement of money from fixed income products like fixed deposits to riskier assets like equities.

The hunt for higher yields is universal and ends up attracting foreign institutional investors or FIIs to invest in the Indian stock markets.

To put it in numbers, in the last two months of 2020 i.e. November and December .. FIIs poured in 1.13 lakh crores of money which have been one of the major reasons for the recent jump in the Indian stock markets

Another significant impact of a low-interest rate scenario is that lower borrowing costs often fuel asset prices, which increases inflation. This combination of low-interest rates, foreign money, and liquidity seems to have a bearing on the stock market rise

PREMISE 4: THE DISCOUNT RATE

We discussed a unique valuation perspective of why the stock markets are rising. It starts with a valuation tool called the discounted cash flow or the DCF method.

The DCF method estimates the value of an investment based on its expected future cash flows. This is done by estimating cash flows over a number of years and then dividing it by a discount rate to arrive at the present value of these cash flows.

The two key assumptions here are -
The growth rate and
The discount rate

We assumed the growth rate to be zero and discussed discount rates.

Let’s say the equity analysts in asset management companies have been using 12% as the discount rate for calculating the intrinsic value of equity investments. The sum of present values came to 565 rupees.

With interest rates and bond yields falling, an equity analyst might assume a discount of say 9% instead of 12%. This small change increased the sum of present values to 641.

In other words, the analyst is now telling the investors that in place of 565 you can now pay up to 641 rupees for the opportunity to earn 100 rupees per year for the next 10 years.

That’s an upside of almost 14% .. which kind of shows how just a small change in assumptions can have a profound effect on the pricing of assets like equities.


ETMONEY OPINION
What should one do about this rising stock market?
Short term investors - one can look at redeeming some equity investments and booking profits

Medium-term investor - use this opportunity to de-risk your portfolio by rebalancing. This would automatically reduce your exposure in equities. They can relook at their asset allocation too and start adding gold and international equities in their portfolio.

Long-term investor - They should continue to play the disciplined investing game by continuing with your SIPs in equity mutual funds.

#ETMONEY #STOCKMARKETS #Sensex #nifty

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