The second half of 2025 will see sharp swings in company valuations. The reason for this? Supply. Even in the best of companies, long-term shareholders and companies themselves are increasing the float through stake sales. This capital raising exercise is willingly happening at a discount to the current market price. In fact, many such sales are even happening at up to 40% discount to market prices. This is unusual and uncharacteristic.
Yet, we are ignoring such corporate actions simply because the sales are going through smoothly. Liquidity in domestic markets is blindsiding investors. They are failing to take notice of the sharp rise in floating stock across the board. This unusual occurrence is getting normalised very easily.
But, the whole valuation model of this bull run rests on the pillars of scarcity. The scarcity premium in every stock trading above 40PE may be about to collapse. This collapse will be quite spectacular and with serious consequences. The impact of this on the investment performance of equity portfolios will be significant. We will also see a gradual reduction in impact costs. This will reduce the returns in many illiquid stocks, and by extension, portfolios that only own such stocks.
The markets seem to be making light of this possibility and could be in for a rude shock in the coming months. This is a time to be very tight on buying valuations and nimble in selling.