Last year marketmen were looking at two possible scenarios during the pandemic. The first possible scenario was that it was a manageable recession and demand would return back with a bang on the back of huge liquidity thus driving stock prices higher in a quick V-shaped recovery. The second scenario was a dangerous recession, larger fiscal stimulus, rising inflation and low stock prices in bear territory. Fortunately, we are seeing the first scenario and everybody is happy looking at their stock portfolios.
But if we look at the fundamentals, markets deserve to be lower than what they are right now. Immense liquidity being pumped by the Fed and low global interest rates is supporting stock prices. Fundamental analysts know that current market multiples, price to earnings and price to book are on the higher side and highly fancied stocks are quoting at high price multiples. Therefore, investors should understand that with stock valuations at new highs the future stock market returns are also expected to be on the lower side. But many market men argue that stock valuations have always been on the higher side during the past five years because of huge liquidity and low interest rates prevailing around the world. Investors should be a little cautious going forward in 2021 as it will be interesting to watch the change in interest rate cycle, cause as and when US Fed starts adjusting its balance sheet and increasing interest rates in the future it will be time to cash out. Covid has also changed the behaviour of making investments by the retail investor in the last one year due to multiple reasons. Investors are shifting from traditional investments like fixed deposits and low yielding debt mutual funds to equities due to benign interest rates, lack of investment avenues , possibility of earning higher income from dabbling in day trading as well as trading in the futures and options market ( F&O). Whatever are the reasons, it has been beneficial for stock brokers as whether the stock goes up or down , the stock broker earn their brokerage on all transactions . There are many brokerage and securities firms which are listed on the Indian stock exchanges like Icici Securities , Motilal Oswal , Angel Broking , Geojit Financial , to name a few . Brokers feel that the trend of investors shifting from physical assets to financial assets will continue to expand further going forward. Investors are switching towards stronger and larger players due to better technology, brand name, excellent research facility and advice and lower commissions. Small stockbrokers cannot compete with the larger players, hence it makes sense to deal with big full service providers like Hdfc and ICICI securities to name a few. While ICICI Securities is a listed entity, Hdfc Securities is not but planning to get listed soon on the bourses. Analysts tracking the financial markets are quite bullish on the ICICI Securities stock on the back of huge new client addition, increased trading volumes, healthy pipeline of investment banking business, etc. The ICICI Securities stock currently quoting at Rs 418 is a good fundamental buy which can deliver a 30% price appreciation by end of this calendar year.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.