Here’s how to interpret five sentences commonly used by stock market experts
Last week, the Bombay Stock Exchange Sensitive Index, or Sensex, moved from 19,000 to 20,000 mark in merely six trading sessions. No wonder investors are watching the developments in the stock markets keenly.
As television channels and newspapers report the daily rise and fall in the stock market indices, there are a few sentences commonly used that one gets to hear and see.
We look at some of these, and help you with the interpretation:
FII money is driving the Sensex
It means global inflows from foreign institutional investors (FIIs) are pushing up the stocks and the market. Such inflows are often termed as ‘hot money’, as they can come and go swiftly, leading to sharp rises and corrections.
Of course, there are different types of FII money. There are pension funds that invest for the long term. Short-term money comes into the market through hedge funds, and also through exchange-traded funds.
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As Anil Rego, CEO, Right Horizons, explains, “The nature of foreign funds will determine if the investment made is short term. For instance, if foreign pension funds invest, they will have a long-term investment horizon vis-a-vis a hedge fund.”
Investors should be cautious when the market is being driven by ‘hot money’. Don’t invest a lump sum at a high in such markets. Instead, invest through systematic withdrawal plans by moving your money from a liquid to an equity scheme. And if you have a systematic investment plan, continue with it.
Liquidity-driven surge
It means the swift upward movement of the market can be attributed to an increased inflow of money. “Such rallies take place when institutional investors are sitting on huge cash, and stocks are the most lucrative way to make quick money. High demand is driving up the stock prices, and not the companies’ performance,” says a financial planner.
Money can move quickly again if there are better avenues. So, once investors start booking profits, the market may not be able to sustain the current levels, thus leading to a correction.
Again, in such rallies, the best thing is to sit tight. Don’t take unnecessary risks to be a part of the herd. Keep investing steadily and the returns will follow.
Price-to-earning (PE) multiple at an all-time high
The price-to-earning multiple is a reflection of how much the market values a stock. It is derived by dividing the market value of the stock by the earnings per share.
A rising PE multiple in a short span signifies that while the earnings remain constant, the stock prices are rising. Such a rise is abnormal.
At present, some stocks are trading at a PE higher than what it was at the peak of January 2008. Mukesh Dedhia, director, Ghalla and Bhansali, explains, “Stocks should move up gradually, backed by strong fundamentals. A sudden spike in prices is due to speculation, which is unsustainable in the long run.”
If you are holding such stocks, it could be time to book profits. But before you do so, take advice from a professional who can interpret whether the stock is rising on speculation, or the earnings growth will soon ensure that the stock price is justified.
Falling returns on equities (RoE)
The RoE is expressed as a percentage, indicating the profit that a shareholder receives on his/her equity in the company. Consequently, a higher RoE means higher profits and vice versa. However, there are exceptions. A fall in RoE could be temporary due to out-of-course events like a heavy expense on marketing initiatives or the settlement of a lawsuit.
“A falling RoE shows lower profitability, and from a long-term perspective, it may make a stock unattractive despite its high price,” says Suresh Sadagopan, a certified financial planner.
In a market rally, despite a falling RoE, many stocks keep rising, as they are a part of a sunrise sector and there are expectations of future earnings. Be careful about investing in such stocks. Recently, many investors suffered in the information-technology boom of the late nineties, or the realty boom.
Indices in the green, market breadth is positive
This is good news, as it implies the broader market is doing well. Besides the Sensex and the Nifty, all the key indices are also in the green. A positive market breadth indicates more stocks are rising and fewer are slipping downwards.
Such markets reflect a stable rise, and should provide comfort to investors. If you are starting to invest, choose your stocks or mutual funds depending on your risk profile. An existing investor can re-jig his/her portfolio by getting rid of underperforming stocks and mutual funds.