Philip Fisher once remarked that, “The stock market is filled with individuals who know the price of everything but the value of nothing”. When we buy a stock, what are we really buying, the price of the stock and its future return on the price or the ownership of the company which we understand will deliver value for the price it is bought? The right answer is that we buy the ownership of a company which we perceive would create value for the price. Price is an indicator of value not the actual value. Hence a fall in the price is an opportunity to increase the ownership of the companies in which we see value for invested money. The Nifty-50 index has fallen around 8% from the 52-week high which was literally weeks ago. The Midcap 150 index has corrected by 8.6%. The main questions with this fall are whether one should buy this dip? Are we missing something, and this fall is a regime shift? All the premise about investors knowing the price and not the value, is it a good time to buy value at this price? Do we have enough liquidity to hold the markets from premeditated selling? How to navigate situations like these in future? Let me answer one by one

FII Selling and Do they know something that we don’t!

FII have sold more than 80000 crores in the month of October. This data although somber must be put in context. Based on prime database, as of 30th June 2024, the value of FII holding is around 22.62 lakh crores. Given the total withdrawal of around 80000 crores in October till now, they have basically sold around 3.5% of their holdings. The interesting fact is that between July to September, FIIs had pumped in around 89500 crores in the market in cash. So, what they have withdrawn in this month is less that what they had put in the markets in the last three months! Ignoring the return of around 7.3% which the broader market had given in the span of July to September, the total withdrawal as a percentage is just 3.4%. Please note that if we include the return generated in the span of July to September, the actual withdrawal as a percentage of FII holding is even lower! Had the FII, which is the smart money, known something that we don’t, why would they withdraw only 3.5% of their holding! That would defeat the very definition of smart money.

The China Effect

One of the possible explanations for the withdrawal by the FII could be smart money moving into the Chinese markets post the policy changes and rate cuts in China. There is a lot of debate in Smart Money circles whether the green shoots are visible in China or are we placing our bets on crops before the seeds have been planted! Although there may have been outflow from Indian Markets into Chinese markets yet the quantum and the longevity of these monies remain an evolving problem statement.

Valuation and Debate of Froth

The valuation of Nifty 50 still looks reasonable given the present P/E of 22.6, which is below the median P/E of 23.5. The Nifty Midcap 150 index on the other hand is trading at a P/E of 41, where one sees that the average P/E has been around 29 in the last 5 years. One can observe that the froth is mostly built in the midcap space which is witnessing correction, and which could further see some corrections. Even though the indices look expensive, there are pockets of midcaps which are available at reasonable prices in which certain mutual fund houses have been investing with good risk adjusted return!

Incoming Liquidity!

MFs SIP flow for the month ending September was around 24500 crores per month. With this kind of regular liquidity in the market one would assume that liquidity drying up would not be on top of our list of concerns. The liquidity for DII should be intact if they need support from the domestic investors to keep the market intact

Ideal Course of Action

Times like these are testament to the fact that asset allocation is the important thing. When the market is correcting sharply an optimal mix of Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) are your knight in shining armor. Asset classes like Debt and Precious Metals like Gold and Silver soak up the volatility to lessen the intensity of the fall. The loss although notional in equity has huge implication for the value of the assets. Given one’s optimal mix of SAA and TAA, one can always use times like these to increase their ownership in stocks or ideas where one sees value for the money invested by taking liquidity out of asset classes that have been stabilizing the portfolio if one’s SAA allows. So it would be a great time to get your asset allocation right so that one can use this fall to invest.

Conclusion

Fall is a time of festivities. This season of festivals please gift yourself an optimal mix of Strategic Asset Allocation framework and Tactical Asset Allocation framework and enjoy the festivities.

Mr. Mayank Prakash
Regional Director- Delhi & NCR, Epsilon Money