The markets are at peak polarization on valuations. We have an extremely expensive part and a very inexpensive part. There is no middle to this market. This gap will not sustain for too long.

In a de-growing economy, earnings will be unable to guide investors in decision making. Most good companies will see a sharp contraction in earnings. They are likely to return to growth only next year. Even that will largely be aided by a lower base.

To regain pre COVID numbers, we will certainly take two years. Then we have the pre-COVID trouble spots of the economy. The markets aren’t even bothering to look at companies which had problems pre-COVID.

But, we could see very interesting things happening in this space. Valuations are at their lowest price-to-book value in decades. Several industries with excess capacity won’t expand for at least five years. These industries are trading at juicy valuations. Their valuations do not factor any improvement in economic conditions. A lot of the action may shift here.

Markets tend to prefer rotating sectors and themes. This is an effective countermeasure to overvaluation and concentrated ownership. Smart money moves in first and the broader market trend follows. This is the likes of what we see in pharma today. We should see this market trend spread to other sectors too.

This market has been buying falling knives in performing sectors. It may be a time to pick up fallen swords lying idle and unnoticed. The battle ahead may be fought on different terms on newer turfs.

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