Markets shrug off LAC tensions

The Big Picture

• Industrial production in India shrank by 10.4% year-on-year in July of 2020, compared to forecasts of an 11.5% drop.
• The industrial production growth gives us an idea about sectors like manufacturing, mining, and utilities and is a good proxy for judging consumer demand.
• It marks the fifth straight month of falling industrial output due to the coronavirus pandemic.
• Multi-cap mutual funds are those that are supposed to invest in stocks of small, mid and large market capitalization companies, unlike mid-cap, large-cap, or small-cap focussed funds that are supposed to invest only in stocks that match their market cap range.
• On Friday, SEBI released new guidelines wherein multi-cap mutual funds will have invest 25% of their fund’s corpus in small-cap, mid-cap and large-cap firms each. So if a fund has ₹100 as its corpus, it will have to invest ₹25 each in small-cap, mid-cap and large-cap firms. The remaining ₹25 can be used as per the fund managers’ discretion.
• Mutual Fund houses have until February of 2021 to get their holdings in-line with the guideline. When there were no such guidelines, multi-cap funds would invest a large portion of their money in large-cap companies. Now, multi-cap funds will have to sell huge stakes in large-cap firms which might cause a drop in their price. Also, they will lap up shares of mid-cap and small-cap firms which might now see growth in terms of price appreciation.

Investing Insights

Are markets overvalued? Ask the Buffett Indicator!

The stock markets have been said to follow more or less the same trend as that of the economy. Strong economic indicators give investors confidence in the future prospects of the country which leads them to invest in businesses via the stock markets. Over the last few years, however, there seems to have been a disconnect between the economy and the markets. Despite weak economic conditions coupled with geopolitical tensions, markets have done fairly well.

This has fired up a debate about whether markets are overvalued or not. Famous investor Warren Buffett used a peculiar indicator to judge the valuation of an economy’s stock market relative to its historical average. After the govt released GDP data last week, this indicator signalled a massive overvaluation in the stock market. We took a deep dive into the implications of the same and whether the ‘Buffett Indicator’ tells us the full story behind stock market valuations. Read more, here.

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