Time for caution

I had earlier thought that the pandemic will flatten the equity market giving it a breather. It did flatten the economy but the equity market is on a song. It will take a while before the economies and jobs come back to the pre-pandemic level. The countries all over the world over have provided an unprecedented level of monetary support and fiscal stimulus. The abundance of cheap money is making Equity even more expensive.

Lately, I am seeing some of the trends which are worrying me:

• FAANG now make up approximately 15% of the S&P 500, a staggering number highlighting the lopsided performance of the select companies in the US. The regulators in the US and China want to control the growth of the biggies.
• The Indian Equity Market continues to run unabated with Sensex and Nifty crossing 50,000 and 15,000 respectively with struggling economy
• Investors are comfortable with $700 billion valuations of Tesla in anticipation and hope that it will capture significant market share in future
• The SPAC (Special Purpose Acquisition Company) without any real business operation is becoming a new way of taking the company public in the US. 250 SPACs raised $83 billion in 2020.
• EV (Electric Vehicle) is becoming a craze. The Chinese EV maker NIO rose 1,110% in 2020.
• The biggies are making a serious investment in the highly volatile Bitcoin hoping that it will become alternate tradeable currency sometime in future
• The IPO of Burger King in India kept hitting upper circuit post listing despite having an expensive valuation
• Members of a Twitter group squeezing the shorts from the seasoned hedge funds in the GameStop saga with no clear exit strategy for themselves
• The valuation of the company is being discussed more and more using Price to Sales ratio and not the Price to Earnings ratio
• Robinhood and Zerodha have increased the motivation of the retail investors to participate in the leveraged trade using derivatives

These trends are reminding me of the events in the run-up to the Dot-com bubble. There was too much excitement about the internet-based companies. Retail participation had increased dramatically. People wanted to own the dot-com companies at any valuation. The premium for risk-taking had decreased and Greed had overpowered fear.

We are seeing build of a similar nature although it may be some time away. The abundant liquidity and cheap money is inflating the Equity asset class pushing the high valuation higher. The retail investors’ interest has increased substantially in the Equity market. EV, Social Media, Pharma and Speciality chemicals companies have generated asymmetric interest. People are seeing their Equity portfolio swell and it is giving them a false sense of belief that they have a unique skill to beat the market performance.

This reminds me of the thumping sound of the footsteps of dinosaur coming from a distance in the movie Jurassic Park. Time for caution.

The writer is a SEBI Registered Investment Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services. To know more about him, click on https://finmyn.com/about/.