Markets climb for 7th day, Are markets overvalued?? Amazon-Reliance crossing paths, monthly mutual fund report, & more.
-9th October 2020-
Sensex 40,509.49 ▲ +0.81%
Nifty 11,914. 20 ▲ +0.67%
You must have heard “markets are overvalued”. What does this mean? Would you pay Rs 500 for 1 litre of milk?
That would depend on how much you need it. So maybe you would. Or maybe not. But in the stock markets, most of us buy stocks to sell it later - aiming for a profit - not to consume it. This is why the price at which you buy a stock is important.
And good stocks - everybody wants to buy. So their prices go up more than others. When someone says “the markets are overvalued”, they mean most stocks are overvalued.
And how does one determine if a stock is overvalued?
There is no clear level or number above which you can call a stock overvalued. Similarly, whether the markets are overvalued or not also varies from person to person.
How does a stock go from overvalued to undervalued?
One, if the share price falls; two if the company’s earnings rise (broadly speaking). So, a stock price doesn’t necessarily have to fall for it to become attractive. And really good stocks, many times they just stay overvalued and keep climbing up over the years.
Should you invest only when the markets are undervalued?
Here’s the catch. If you follow many people in the industry, you’ll realize that the markets being “overvalued” isn’t a rare phenomenon. They’re overvalued a good amount of time.
Sensex is up 4.6% compared to last week. The US index Dow Jones is up 3.27% over the last week.
Sensex is at 40,509. Not very far from the all-time high, it touched earlier this year. Same with Dow Jones.
And this, while the economy isn’t as good as it was earlier in the year.
So why are they up? It doesn’t make sense!
Exactly. But they never do. Investors tend to look at the future and invest. Not the present. Investors probably expect things to be fine or better than before in the future. Which is why they’re investing. Which is why the markets are up.
Viewed with regard to the present conditions, the markets don’t often make sense.
How to invest in such times?
Fund managers, portfolio investors, and the likes have a number of ways to invest in different times. But for retail investors - people like us - it seems there is an easier way out: invest through ups and downs.
The markets are so unpredictable, that almost nobody is able to tame it; nobody is able to invest only when the markets are undervalued and take out when the markets are overvalued.
In fact, even the best of fund managers have struggled with timing the markets. In that case, it is just better to not worry too much about valuations.
If you were able to time your investments and withdrawals based on the markets being overvalued or not, would you make higher returns?
Yes, you would. But will you be able to do that? To get in while the markets are low? And exit when they are high?
Almost nobody has been able to do so consistently. This isn't to say that this is a good time to invest. This is to say, that timing strategies don't work for most of us.
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Amazon-Reliance Cross Swords
India has a massive population, and the number of middle-class people is swelling by the day. And middle-class people have one thing in common across the globe: they spend money buying lots of goods.
There are more buyers of goods today than there were 20 years ago. And 20 years into the future, an even larger chunk of buyers is expected to exist in India. This is obviously a huge business opportunity. And everyone wants a piece of this cake.
Future Retail - the company famous for brands like Big Bazaar, Brand Factory, E-zone, etc - was an early mover in this space. Amazon has been dominating the e-commerce space in India. But it has not been able to crack the offline space.
That is something Future Group is good at. Amazon invested in Future last year which effectively gave Amazon a stake in Future.
According to media reports, Future and Amazon also signed an agreement according to which, Future would require Amazon’s consent before selling any portion of the company to any third party.
Enter Reliance Retail Ventures Ltd (RRVL).
Reliance also wants a big chunk of the Indian middle class’ consumer spending. They’ve been getting heavy investments from investors from across the globe. To get an even better stronghold into the retail space, RRVL decided to acquire Future Retail. And that deal was sealed this year for an amount of Rs 27,513 crores. This is the deal that Amazon is objecting to. Their contention is that Future should have asked for consent before selling according to their agreement. Two very big players are crossing paths. This space is sure to heat up as it develops.
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RBI Leaves Repo Rate Unchanged
RBI has kept the repo rate unchanged at 4.00%. The reverse repo rate is also unchanged at 3.35%. The repo rate is the interest rate applicable to banks for borrowing money from RBI. Reverse repo rate is the rate banks earn when they keep money with RBI.
By controlling the repo rate and reverse repo rate, RBI encourages or discourages the amount of money flowing in the system.
RBI also announced that starting December, RTGS will be available 24x7, 365 days a year.
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Mutual Fund Monthly Report Out
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Sensex is made up of 30 of the biggest companies in the country. Nifty is made up of the top 50 companies. Likewise, there’s an index that’s made up of bank stocks - Nifty Bank Index.
Just like Sensex and Nifty are used to get a feel for what the overall markets are up to, Nifty Bank Index tells you about a specific sector - the banking sector. There are similar indices for all major industry groups.
Markets this week
Sensex: 40,509.49 ▲4.68%
Nifty: 11,914.20 ▲4.35%
🥇 Gold: Rs 50,817 ▲0.79%
🥈 Silver: Rs 62,955 ▲4.00%
Down Jones: 28,587 ▲3.27%
Nasdaq: 11,580 ▲4.55%
HAPPY INVESTING!
SEE YOU TOMORROW
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