It’s been an exciting few months for Nifty 50 traders with the frontline index jumping over 35% since its bottom in March. Investors who were jumped into the ring have made pots of money recently. Many stocks jumped more than the bellwether index.
But the recent run-up in the markets faces many a headwind.
VALUATIONS ARE AT PEAK
First, valuations have soared so much so that they are once again in the over-valued zone.
Consider this: At the beginning of 2020, when stocks were soaring, the Nifty 50’s price-earnings multiple had touched almost 28 times, as per data available on the NSE website.
After the flash fall post the covid-19 sell-off, the price-earnings multiple tumbled to a low of 17 times in March. At these levels, stocks were reasonably low-priced.
However, the recent run up has once again driven valuations up to about 28 times earnings. This is significant. Stocks are back to the same valuations they were at the beginning of the year.
In fact, the 28 times PE level has been pretty much the peak levels this year.
BUSINESS CONDITIONS WEAK
While there has been a pick up in mobility and other indicators in recent times, business conditions remain weak. Companies are still struggling with manpower issues. Other companies have seen their manufacturing getting disrupted due to covid-19 breaking out within their manufacturing premises.
Hotels, travel and tourism, construction, real estate, and many other businesses are still not out of the woods. Companies are still not operating at full capacity. Demand is also weak overall.
Of course, some rural demand can be seen, but that is largely restricted to essential items such as some two-wheelers and agri-chemicals. Most other buying is on the back-burner.
In the coming quarters, while some pent-up work could be executed in the construction space, it will not be enough to heavy-lift earnings this year. If you are banking on a big recovery, hold on to your horses.
COVID-19 CASES REMAIN HIGH
Covid-19 cases continue to disrupt the global economy. The US has seen a large number of cases in the last one week. The number of new cases that were hovering around 25-30k a day is now over 50k a day.
India is not showing signs of covid-19 cases easing either. The number of cases are topping over 20k per day for India, which is become the third-largest pandemic infected nation in the world.
Unless there is a big contraction in covid-19 cases, it will not be easy to boot manufacturing and demand for some time.
VACCINE IS SOME TIME AWAY
While rapid progress has been made on the vaccine, still a lot needs to be done. Some vaccine candidates have entered the phase III trial stage, and vaccine-development has progressed rapidly.
But it seems like the developmental standards are being lowered to fast-track development. Some of the efficacy standards are also being reduced. It seems like the idea is to reduce the high R-naught or the transmission rate of the covid-19 virus.
But even if a vaccine is found, mass manufacturing the same and distributing across the globe may not be easy. Capacities will be scaled up only after a vaccine is found, and production standards have to be very high.
Getting it to the masses will be some time away. As such, businesses will be disrupted for longer, and so will the markets.
