Are value investing,benchmark indices losing relevance?

The market capitalisation of all BSE-listed stocks stood at a record level of over Rs.155.50 lakh crore on Monday. Since early 2015, while the Sensex has moved up by just about 16%, the overall market cap of all BSE-listed stocks jumped by over 55% from around Rs 101 lakh crore in January 2015 to Rs 155.50 lakh crore now. This is mainly because of mid cap space continuously outperforming the benchmark indices for more than three years in a row.

Consequently, the share of Sensex stocks in the overall BSE market cap has fallen from 46% in January 2015 to just 39% now. On Monday the Sensex accounted for the total market cap of Rs 61.12 lakh crore as against the overall BSE market cap of Rs 155.50 lakh crore.

Many market participants compare the PE multiples of the broad indices like Sensex and Nifty to their own historical values and conclude that the Indian equity market is still not overvalued. When the broad index like Sensex accounts for only 39% for overall market cap and leaves out 61% of the balance market cap, it is imperative to look at the valuation of individual stocks rather than taking comfort only on the basis of valuation of the broad indices in such a bull market.

The overall market cap accounts for 98% of India’s fiscal 2018 estimated GDP in current prices. If fear comes to the market and investors and traders dump even 0.5% of the total value of the stocks, it would be very difficult to find the adequate liquidity in the system as 0.5% of overall BSE market cap would translate into a value of around $12 billion.

Moreover, rewards for many mid cap stocks are not commensurate with their valuation or quality of the stocks. An airline company reports over 90% year-on-year fall in profits, oil price shoots up over 55% from 52-week low and the industry once again starts selling air tickets as low as less than Rs 2,000. But the stock zooms over 30% in a couple of weeks post its poor quarterly results. A small company engaged in metal business reports a lot of loss and very bad balance-sheet in terms of debt and working capital management in relation to its business size. Still, this stock hits upper circuit continuously for several days! New home launches in Mumbai fall 83% and annual sales volume down 43% in 2017 from the 2010 peak, but several real estate stocks have hit record highs. Is value-investing also losing its relevance?

During the peak of bull markets, many new small investors, especially in the small and mid-cap space, ignore the values and give focus only on price movements. This is what happens invariably at the peak of the bull markets. However, the history shows that this huge gap between the value of stocks of benchmark indices, and small and mid-cap stocks does not last long. It is very difficult to forecast when exactly this gap would be bridged. However, stocks of benchmark indices and value research come to the fore after every possible shock to the overall markets.

The writer is founder and managing director, Equinomics Research & Advisory Pvt Ltd