The Indian stock markets have recovered from their March lows very quickly. Indian stock market currently one of the best performing in the world.
Will the market recovery last? More importantly, is it the right time for the investors to jump in and pour money into the markets?
The performance of the stock market does not match its fundamentals. Nifty’s Price to Earnings (P/E) ratio is now above 30. This is very high even by historical standards. High P/E ratios are a sure sign of irrational behavior by investors.
The pain for the businesses is still not over as the pandemic’s end is still not in sight. People are preferring to delay their discretionary spending and are still afraid to visit restaurants and shopping malls. It may take a very long time for the earnings to recover.
History Repeats Itself
One of the best things about stock markets is that history repeats itself. The history of stock markets shows that the gap between the fundamentals and the actual stock prices will be eliminated in the long run as investors start understanding the true value of the stocks.
Investors who invested money when the valuations are high had seen the value of their investments fall quickly. Many had to exit the market by incurring heavy losses.
As the current valuations are not justified by the earnings of businesses, the stock prices will come down in the long run. A true rebound in the stock prices is only possible once the pandemic induced economic slowdown recedes and earnings start to grow slowly.
Wise investors should wait until the earnings recover. People who enter the market now might see the stock prices fall drastically in the immediate future before they start growing again.
If you have surplus money to be invested, keep it in a short-term debt fund or a money market fund. This money could be withdrawn quickly and invested in equities when the current crisis ends and the real market recovery happens.
