Last October, I was reflecting on the runaway stock prices and trying to figure out why it was so. I noted down the following points in my diary as to what the equity prices for the day reflected:

1. Optimism about the future;
2. High amount of domestic liquidity flowing into equity funds;
3. Pessimism about other asset classes such as debt, gold, real estate;
4. Confidence in the Modi government;
5. Lack of understanding about valuation;
6. Trust in future earnings growth;
7. Too many momentum players in the market;
8. Confidence in managements to ride out the bad times.

Now that the prices of several of the high fliers of those days have crashed and there is a general lull in the market it is time to revisit those points and figure out what has happened to those and what is the  current thought:

1. The future doesn’t look so optimistic;
2. The cash flow into domestic equity funds has slowed down and redemption have started but net cash flows are still positive;
3. Pessimism about other asset classes is disappearing as interest rates are rising, gold prices too have recovered. Real estate continues to languish though;
4. Confidence in Modi government has eroded and future doesn’t look as certain;
5. The lack of understanding about valuation continues to prevail, only it has now gone to the other extreme in few cases;
6. Future earnings growth is not visible in all cases; this knowledge has dawned on market players, though not completely;
7. Momentum players have disappeared;
8. Confidence in managements is shaken by accounting scandals, poor results and shoddy corporate governance. It remains intact in cases of blue chips though.

Based on these thoughts, how do we view todays’ equity pricing:

1. Future is hazy, growth uncertain except in some cases and profitability impacted by input costs.
2. Equity funds underperformance has led to stoppage of SIPs and will pick up only once the NAVs rise. That would also be an indicator of return of inflows.
3. Other asset classes will not attract too much investments. Money will wait in the sidelines to be invested in equity.
4. Political uncertainty, Oil prices, Current Account Deficit, Interest rates concern will continue to cloud the scenario and only performance will win followers.
5. Only after MFs show better performance, we will see return of investors, and momentum players.