Markets are difficult to understand
US Equity valuations and market expectations of recession seem to be misplaced and overly simplistic
Taking stock of where equity valuations are as compared to history for India and the US. Considering the widely held belief that the US will have a recession in the second half of this calendar year, the equity valuation metrics are near their peak. This signifies that most people are expecting a soft-landing outcome. I recall a saying about starting a war that ‘starting a war is your choice but ending a war is not’. Taking this saying further, I think ‘getting into a recession is Fed’s choice but getting out of it and how it pans out is not’. I strongly feel that the recession expectations of the market are overly simplistic and low.
India as shown in the above picture, is expected to do decent in terms of GDP growth (can’t foresee how India will fare if there is a harder US recession). However, equity valuations of Indian markets are near their median. To me, this is a difficult thing to understand.
While I will not try to guesswork about the reason for this valuation vs GDP growth/recession mismatch. The only thing I will infer from these pictures is that the risk-reward is not at all favourable for the US equity markets while for India, it seems to be decent. In dislocated markets, everything falls but having a context of where we stand helps a lot in holding as well as buying during the steep market falls.