Better Results And Rising Liquidity Keep Markets Buoyant

Go-go stock markets seems to be the new norm as plenty liquidity chase a few quality companies. Stock prices are running up faster than fundamentals discounting profits way into the future. The re-rating of stocks is epitome of frothy markets and is stretching valuations way above-averages.

Future profits will need to be significantly higher to justify current valuations, and if the valuations need to come back to normal. But this market feeds on liquidity. And from the looks of it, the liquidity will continue.

The US Fed has not hiked interest rates in its last policy meet, and that has sent positive signals to the global markets that the liquidity tap will continue. The US Fed has maintained that the near-term risks to the economy have diminished. This would seem like it could raise rates in the next policy meet.

On the other hand, to kick-start its economy, the Japanese central bank, the Bank of Japan, maintained its negative interest rate and bond buying program. But it has gone a step further and increased its purchases of Exchange Traded Funds to six trillion yen per annum, from from 3.3 trillion previously.

All this is likely to keep the money taps flowing, but as the Indian markets are stretching higher on the valuations front, one should only look at only the good counters for investments and where the profits are expected to grow somewhat exponentially in the future. At the same time, investors should keep an eye for corrections.

For those investors who have been in the market for some time now, one can take out some partial profits, at least in stocks that have run up significantly.

Meanwhile, in this rally, the market’s favourite sector seems to be the non-banking finance sector. Bajaj Finance surged 15 per cent last week on the back of excellent profit growth.

M&M Financial Services also surged 9.13 per cent as markets are beginning to factor in the growth in business in rural and semi-rural areas. Penetration of loans and other financial products is driving the NBFC sector.

Another pipe manufacturer, Indian Hume Pipes surged over 35 per cent on the bourses as its net profits surged over 313 per cent on the bourses. This pipe manufacturer’s products are expected to be in demand over the next couple of years. However, again the stock seems to have overshot on the higher side in this market frenzy.

But the good news is stocks are reacting positively to good numbers. The market is rewarding the players that can stand-out in the sideways moving economy.

Hence, this is the time to stay invested. The markets will give opportunities for buying as stocks that do run up too fast do correct somewhat when the speculative froth begins to clear.

Buying stocks at higher prices will result in investors increasing their holding periods. For instance, if you were planning to hold stocks for three years, you may have to hold them for five years. For now, stocks prices are nearing priced-to-perfection levels.