Nifty@MRP Suggest Markets Are 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 Dec’16, considering the free float market capitalization at the MRP of individual stocks and the share price data as of 28 February, 2017, the Nifty@MRP is at 8693. On 28h February, NSE Nifty index closed at 8879.6, which is ~2% or 187 points above the Nifty@MRP. It indicates that the index is slightly overvalued. As of 7 March, 2017, closing index value of 8946.9, Nifty is ~3% overvalued.

 

Future Outlook

Nifty has gained almost 2.3% since we last released our last Nifty@MRP on August 31, 2016. However, with the December quarter earnings season being as lacklustre, our valuations for most Nifty companies remain unchanged. Thus, the 0.5% change in Nifty@MRP.

Much of the optimism on D-Street is due to the hopes of Modi-led BJP winning the UP state elections, thereby securing the much awaited majority in Rajya Sabha. It is hoped that post this, the ruling party will be able to push through reforms that are currently stalled by opposition.

Unlike last time, when FII’s had invested ~55000 from March 2016- August 2016, strong DII inflows have been the major reasons driving the markets. DIIs have been net buyers in the markets for seven consecutive months whereas FIIs have turned net buyers only in February 2017.

Of course, there obvious green shoots in the economy:

  • Q3 FY17 GDP growth was 7.1 %, above expectations defying demonetisation slowdown. Factors which boosted GDP include high growth in tax revenue, high growth in agriculture (6%) and government spending on public administration and defence (11.9%), and shift of economic activity from the unorganised to the organised sector.
  • Reduced inflation resulting in lower interest rates
  • Bank NPAs, though not yet over, seem to be mellowing
  • Commodity prices are stabilising which is lending support to the core sectors

Developed market economies seem to have rebounded, resulting in a rise in dollar, bond yields and ultimately equities.

However, risks in the economy are apparent too. These include hidden NPAs cropping up; investment cycle weakening further; lingering slow down effect of demonetisation; rising inflation and interest rates; weak rural demand and monsoon forecast; and s
harp rise in USD and US interest rates resulting in FPI outflows.

MoneyWorks4me Opinion

With the Nifty looking overvalued with respect to Nifty@MRP, we have become extremely cautious. Almost all sectors, barring IT and Pharma that are going through a downturn, seem to be overvalued. The margin of safety at current valuation seems to be non-existent, which makes us extremely wary. Also, the high optimism surrounding the state elections makes Nifty highly vulnerable to any disappointment in the elections.

We thus advise investors to start selling low quality small cap and mid cap stocks, thereby increasing the percentage of cash in their portfolio. This increased cash will give our portfolio the required extra ammunition when markets correct (allows us to buy quality stocks at cheap prices, thus increasing the portfolio returns).

We believe Investors should continue buying quality stocks at a sufficient margin of safety. Markets correct now and then, thereby creating opportunity. High uncertainty across the globe spells good news for value investors like us, as it gives us an opportunity to buy quality stocks at cheap price.

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