The SIP Put

We are back to that stage of the market where valuations will not allow it to rise and liquidity will not allow it to fall.??The Indian markets make a new high-climbing wall of worries about Ukraine Russia war, Global inflation and, Fed rates.?The question is whether the rise is sustainable and what is next.?

The last peak was in October 2021 and now we are in November 2022 with Nifty at the same level of around 18500.?So it has been 13 months of sideways movement correcting the valuations from 27 x to 22x PE.?The year’s long-term average itself is 22x.

Any rise from here will take us to the above-average zone.?Valuations will act as resistance to a one-side-up move.?A move from 22x to 27x can occur driven by liquidity but will be more of an opportunity to book profits rather than make an entry.?More so if the market goes to 27x valuation, it will be on the back of the underperforming IT and Pharma sectors.?There is steam left in financials but not enough to take it to more than 23-24x valuations.?

The past year has been more of an alpha market.?Stock picking and sector rotation have worked.?The same trend will continue going forward. Strategies should be aligned for a more sideways market giving debt-like returns than a one-way market.??Should not bet much on PE rating, more on earnings.?It is always the case but now more so.??Strategies like SIP will underperform but accomplish the function of accumulation for the long term without any gains in the short term.?Mean reversion strategies should do better.?

Rakesh Jhunjhunwala famously said, "the requirements for sex and markets are the same: participation and liquidity".?More than 5 crore SIP accounts ensure participation and more than Rs 10,000 crores per month inflow ensures liquidity. This ensures that any fall will be limited.?The US has its Fed put which apart from the US equities benefits global equities also.?India has what can be termed as SIP put. The lessons of investing by AMFI and MFs have made SIP an instrument of choice for starting equity investments.? Due to this even a marginal fall in valuations results in MFs buying the FIIs selling. See the month of August 2022 in the table below.

The unknown is the mid-caps and small-cap space. They have underperformed the NIFTY and correction, especially in some sectors, like Specialty Chemicals, Mid Cap IT & pharma has been severe.?As said before the market will be that of sector rotation and stock picking.