The results season has begun on a mixed note. Contrary to the buoyant market mood, the first flush of corporate results are hardly enthusing. The tepid growth in the Q4 numbers and the muted guidance from Nifty companies for the first quarter seem to hardly bother investors much. Every dip is getting bought and stock rotation is keeping the indices buoyant. Expectations seem to be diverging from reality and domestic flows are actively absorbing selling from all sides. This is more pronounced in the small and midcap categories where the mutual funds are correcting portfolios to improve their stress test rankings progressively.
Funds are able to reduce their positions in stocks with modest impact costs. The war fears over the Middle East too seems to not worry domestic sentiment much. The election results seem to have been taken for granted and the markets are hardly looking anxious about political uncertainty. This is a market actively driven by a combination of deployment anxiety and FOMO. It only remains to be seen how the market discounts results of companies with weaker showing as the results season progresses. But, given the mood, it appears this is a market that is likely to defy gravity and logic till everybody is convinced it will not fall. Such situations are not abnormal and every bull run has displayed these traits in specific parts of the market. But, a secular display of excess confidence is rather unusual.
There is almost complete aversion to investing in debt and gilts. Gold is near its highs, several metals and commodities are rising to their highs, inflation is not looking like subsiding in the West and equities are looking like the only asset to bet upon. What the markets need now is a better sense of balance. Going too far in allocating capital towards only one asset class while avoiding others is not healthy. A gradual redrawing of lines is warranted. Sticking to valuation discipline is crucial and we need to be very selective in our investing.
