Top common stock market myths: The truth versus reality; fact-check here

The raging bull market has resulted in increasing faith in narratives and myths and declining focus on numbers and facts, said Kotak Institutional Equities in its July strategy report.

Today, thanks to the new-age media, social platforms and other informative channels, there is a plethora of educational information available on stock markets and related investments. This in a way has also helped in increasing the market participation, in terms of retail investors, across India.

While investors make investment decisions based on available information and assistance from market experts, they are also prone to be sentimentally guided with certain market myths.

Kotak Institutional Equities (KIE) in a recent strategy note has attempted to bust such false narratives and myths. 

The KIE report concurs with bullish arguments (decent macro, strong earnings growth, long-term growth prospects) but note that these arguments are pointless without the overlay of valuations. It is obvious that the same argument cannot hold at all price levels.

Myth 1: Strong GDP growth leads to strong equity returns

Fact check: The KIE report states that data shows otherwise, with Indian markets seeing time-corrections, even during periods of strong GDP growth. 

Concerns

- India's GDP growth has been in a tight band while market P/E has moved in a much wider band.

- Forward returns of the market have an inverse relationship with the economy.

- In the post-pandemic period, a section of the market (largely non-institutional investors), have expectations of high returns from equities at all price points; thus weakening the GDP versus market correlation.

Myth 2: Indian market trading at reasonable valuations

Fact check: The Nifty-50 Index may be reasonably valued in the context of historical valuations and bond yields, but broader market are seen trading at full-to-frothy valuations post rerating in their multiples in the last 2-3 years.

Concerns

- Growing contribution of 'low' P/E stocks to the Nifty-50 Index's overall profits

- Derating in multiples of low P/E stocks (primarily BFSI)

Myth 3: Higher post-tax returns in equities versus debt

Fact check: The argument does not hold true at all price points for equities

Concerns

- Yields (returns) will be lower at higher prices

- Equities have higher risk compared to debt

Myth 4: Indian equities pre-destined to deliver strong earnings growth for a long

Fact check: Although, we agree that Indian equities are pre-destined to deliver strong earnings growth for a long period of time, we would not stretch this point (and assumptions). 

Concerns

- Most domestic-oriented sectors are currently enjoying elevated profitability

- Several high-flying sectors have 'crashed and burnt' in the past including two of the current market favorites (electric utilities and real estate).

Myth 5: Flows determine returns - previously the focus was excessively in decoding the mood of foreign investors, of late the same has turned toward deciphering the sentiment among retail investors.

Fact check: Flows will follow expectations and market prices reflect change in expectations, not change in flows

Concerns

- The net amount of 'money' is always zero in the secondary market (somebody will buy, somebody will sell) at all times and at all price points.

(Source: Extracts from Kotak Institutional Equities report dated July 03, 2024)