Intransigence

Exploring the Possible Nature of the Eventual Moderation in Equity Valuation Following Interest Rate Normalisation.

The Nifty50 index trades at a three-and-a-half-month high today. The last month was a volatile period, marked by a sharp decline followed by a swift recovery. Nifty50 suffered a 3.20% decline over the eight days between September 18, 2025, and September 30, 2025, which appears as a precipitous fall on the stock chart. During the fall, the index reached a low of 24,611.10, which was higher than a preceding low of 24,426.85, set on August 29, 2025, which in turn was higher than another preceding low of 24,363.30, recorded on August 8, 2025. The Nifty50’s recovery from both preceding lows (August 8 and August 29) failed to break the high of 25,637.80 reached on June 27, 2025. The index has sharply rebounded from the September 30 lows from October 1 onwards. Today, it trades at 25,585, up 3.95% in eleven trading days, and is inching closer to the June 27 high.

Nifty50 has been trading between 24,500 and 25,500, a narrow range of 4% (1,000 points), for the past four-and-a-half months, after recovering 13.50% from its March 2025 trough. It currently trades 2.40% below its all-time high of 26,216.05, achieved more than a year ago on September 26, 2024. Anyone accustomed to the long bull market in Indian equities that began more than twenty years ago, in 2003, would surely construe last year’s range-bound trading as a period of consolidation. Most investors anticipate the market to resume its uptrend sooner or later. The possibility that the bull market that began in 2003 has run its course is unlikely to be on anyone’s mind.

The Past is in the Past (Probably)

But what if the more than twenty-year-old bull market has ended, and September 26, 2024, marks the peak? How possible is it that this peak would remain unbroken at least for the next five years? Nifty50 currently trades at a price-earnings (PE) ratio of 22.20. When I asked Gemini AI about the history of Nifty50’s price-earnings ratio, it answered that – Historically, when the Nifty Price/Earnings ratio exceeded 22, the average return from Indian equities over the subsequent three years became negative.

Between 2001 and 2007, Nifty50 traded only 20% of the time at a price-earnings ratio greater than 20. However, between 2009 and 2025, this ratio was 90%; that is, Nifty50 traded at a price-earnings ratio greater than 20 90% of the time. Why did stocks trade at a lower valuation in the former period (2001 to 2007) and at a higher valuation in the latter period (2009 to 2025)?

Interest rates differentiate the two periods. Global interest rates were relatively normal during the period from 2001 to 2007, while most of the latter period, 2009 to 2021, was characterised by extremely low interest rates. However, between 2022 and 2023, global interest rates swiftly normalised after remaining extremely low for more than a decade. As interest rates normalised, stock prices also should have normalised by moderating to a lower valuation. However, although three years have passed since global interest rates normalised, equity valuation globally, particularly in India and the US, remains elevated. In the US, stock prices remain exuberant despite US interest rates being the highest among major advanced economies.

It is quite confounding that equity markets have remained intransigent to the normalisation of global interest rates that happened two to three years ago. However, it cannot remain so indefinitely. Market forces, policy interventions, or changes in investor psychology — any or all of these — would eventually neutralise the intransigence and cause equity prices to reflect the changed reality; this means lower equity valuations.

If the Nifty50 earnings are to increase at an annual rate of 5% for the next five years and its valuation moderates to 18 times its earnings, compared to 22 times today, then the Nifty50 would be trading at 25,982 five years from now, which is lower than its peak of September 26, 2024. Perhaps the moderation is already in effect; we are unaware of it due to its gradual nature. The Nifty50 trades at a PE of 22 today, whereas a year ago, the PE was 23. An annual decline of one unit will take PE to 18 in five years.

Consolidation of Indian equity prices over the past year was gradual and mostly uneventful, apart from the extreme volatility during the first two weeks of April 2025 following Donald Trump’s April 2 liberation day tariff announcements. However, the question is whether Indian equity valuation will continue to moderate gradually and uneventfully. Or would panics, market crashes, bankruptcies, and bailouts make the rest of the moderation eventful?

Understanding Market Cycles

Investor buying and selling causes stock prices to fluctuate, resulting in higher or lower prices. Investors are humans. Being fallible, they tend to overdo things in line with their prevailing mood. Investor mood typically swings between two extremes: optimism and pessimism. When these mood swings occur, they are felt in the market through extreme asset price volatility.

Everything has a beginning. In markets, it appears somewhat like this: optimism surrounding a new development causes investors to buy stocks of companies that are most likely to benefit from the development, driving their prices higher. However, the optimism slowly permeates the general market, driving prices of other stocks higher as well. Exciting narratives about the potential of the new development eventually cause the associated optimism to escalate into a mania. Widespread speculation soon follows, causing a rapid rise in stock prices. Investors are now buying stocks motivated by the rapid increase in stock prices, rather than the potential of the new development. They assume the rapid rise in prices will continue for a long time. Unrealistic and ludicrous expectations are built into the stock prices. The mania eventually ends when some exogenous shock brings investors back to their senses. Panics and market crashes are the aftereffects; they are how the mania ends and excesses are corrected.

The possibility of excesses is higher today, as we have been in a long bull market, and manias usually develop toward the end of a long bull market. Every rapid rise in asset prices should be closely monitored with concern and evaluated for potential excesses. Additionally, we must also be extra vigilant of a rapid surge in activities (not just prices) in any corner of the financial market.

But there is a predicament. The lifetime of a bull market can vary widely, from as small as six months to as long as twenty-five years. How do we know whether we are near the end of a bull market or not? It is easy to understand when they have ended. However, for effective decision-making, we must be aware of them beforehand. Knowing where we are in a bull market in advance is onerous. One rough heuristic for estimating the impending end of a bull market is the level of retail investor participation. High retail interest in markets is often evident at the end of a bull market.

Retail investors, being the least sophisticated among market participants, are the last ones to enter the party or mania. They are also the ones who suffer the most losses when the party comes to an end. A rapid rise in asset prices and activity, coupled with heavy participation from retail investors, could be warning signs of an expiring bull market. The bull market typically ends in a panic or crash if, during its lifetime, too many excesses have been built into the financial system.

Precious Metals Price Rally

So far this year, prices of precious metals, including gold, silver, platinum, and palladium, have risen rapidly by between 40% and 50%. While the gold price rally began last year and is in its second year, the rally in other precious metals, including silver, started this year. Precious metals typically have three applications: jewellery, industrial use, and investment. Their rarity, durability, and limited supply make them an attractive investment asset. A rapid rise in precious metal prices is often attributed to increased demand for them as investment assets. The present rally too seems to be one like that.

Gold or silver don’t generate any income, unlike other asset classes such as stocks, bonds, and real estate, which generate income in the form of profits, dividends, interest, and rent. Despite that, investors flock to them due to their reputation as a haven, a store of value. Investors seek a haven for their money when they start to believe that leading currencies can’t preserve the value of their money.

The US dollar, the Euro, the British pound, and the Japanese Yen are the world’s major currencies. All the countries that issue these currencies – the United States, the European Union, Britain, and Japan – share a common problem: concerningly high debt, which has become an imperative to address now. The government debt-to-GDP ratio in these countries is at its highest since World War II: in the United States, at 123% of GDP; France, at 113%; the United Kingdom, at 96%; Japan, at 237%; Italy, at 135%; and Spain, at 102%.

High debts won’t feel like a burden when interest rates are low, which they were until 2022. However, interest rates are no longer low, thanks to the steep interest rate hikes between 2022 and 2023. Since 2022, long-term (30-year) yields have increased in the UK, rising from 1% to 5.5% today; in the US, they have risen from 2% to 5%; in France, they have increased from 1% to 4.25%; and in Japan, they have risen from 0.75% to 3.15%.

The debt burden is particularly intense when the economy grows at a rate lower than the prevailing interest rates. So far, we don’t have such a situation. In the United States, the nominal GDP growth of 5% exceeds the 10-year Treasury yield of 4.12% by 88 basis points. The spread is positive but has narrowed significantly in recent years.

To lighten the debt burden, either economic growth should accelerate or interest rates should come down. The latter appears to be an easier choice for governments, but it comes with adverse consequences, particularly high inflation. Historically, most governments have resolved their high debt dilemma by inflating it away.

Unfortunately, inflation erodes the purchasing power of money. The current investor rush towards gold and silver appears to be an attempt to preserve the purchasing power of their money by holding assets that retain value during periods of inflation. However, the problem is that we often overdo things. The above rationale may have driven precious metal prices higher, but its rapid rise could give rise to a speculative frenzy.

Perhaps the frenzy is already in place. Gold, which has returned 13% annually over the past decade, rose 12% in September 2025 alone and is already up 6% for October 2025, halfway through the month. The purchase of gold by central bankers to diversify their foreign exchange holdings was cited as a significant factor contributing to the increase in gold prices over the past decade. However, retail investors too seem to have joined the party this year. Global gold ETFs (Exchange Traded Funds), the preferred investment option for retail investors in gold, experienced their strongest quarter on record in September 2025. Gold ETFs have added 638 tonnes of gold to their holdings so far in 2025, representing a 20% increase from the end of 2024. It appears that we have a rapid rise in prices, combined with high retail participation, which creates a very precarious situation.

Over the two decades before 2025, there were three years when holdings of gold ETFs rose by more than 500 tonnes: 2009, 2016, and 2020, when they increased by 639 tonnes, 543 tonnes, and 892 tonnes, respectively. On these three occasions, gold prices rose by 24%, 9%, and 25%, respectively. Gold prices are up 57% so far this year. The years 2009 and 2020 were momentous: the former by the global financial crisis, and the latter by the Covid-19 crisis. Though not on the scale of 2009 and 2020, 2016 was also eventful, marked by the Brexit vote, turbulence in the Chinese stock market, and demonetization in India.

An Excited IPO market

The Indian IPO market experienced significant, record-breaking activity in 2024 and 2025, in terms of total funds raised and the number of IPOs and mega IPOs (those exceeding $1 billion in size). In 2020, 15 Indian companies collectively raised ₹26,600 crores through IPO; in 2021, 57 companies raised ₹1,19,000 crores; in 2022, 40 companies raised ₹59,300 crores; in 2023, 57 companies raised ₹49,500 crores. There was one mega IPO in 2020, 2021, and 2022 – SBI Cards, one97 Communication, and LIC, respectively. There was no mega IPO in 2023.

However, in 2024, 91 companies collectively raised a record-setting ₹1,60,000 crores through IPOs; there were three mega IPOs: Hyundai Motor India’s ₹27,858 crores IPO, Swiggy’s ₹11,327 crores IPO, and NTPC Green’s ₹10,000 crores IPO. Additionally, there was the ₹18,000 crores FPO (follow-on public offer) by Vodafone Idea. The strong momentum from 2024 has continued to 2025 as well. So far in 2025, 77 companies have cumulatively raised ₹1,15,000 crores through IPOs. Notably, four mega IPOs have taken place: Tata Capital’s ₹15,500 crores IPO, HDB Financial Services’ ₹12,500 crores IPO, LG Electronics India’s ₹11,607 crores IPO, and Hexaware Technologies’ ₹8,750 crores IPO.

However, these issues are devoid of excessive retail interest. The LG Electronics IPO was oversubscribed by 54 times, while its retail portion was oversubscribed by only 3.55 times; Tata Capital was oversubscribed by 1.96 times, while its retail portion was by 1.10 times; HDB Financial Services was oversubscribed by 17.65 times, while the retail portion was oversubscribed by just 1.51 times. Hyundai India’s 2024 IPO was oversubscribed by 2.37 times, while its retail remained undersubscribed at 0.50 times. Of course, there has been a rapid increase in IPO activity over the last two years. However, retail investor participation remained subdued.

A notable pattern of significant IPO activity often occurs at the end of major bull markets. Typically, most of these new issues would be from poor-quality companies. But their issue price and listing gains usually reflect prevailing euphoria rather than the fundamentals of the companies involved. Under normal conditions, some of these companies wouldn’t even entertain the thought of fundraising through an IPO. But that doesn’t seem to be the case with Indian IPOs in 2025: most are profitable and in good financial health. Most minor issues are reasonably priced as well.

Takeaway

The Gold market is characterised by rapid price rises and increased retail participation. The Indian IPO market has seen significant activity over the last two years, but retail participation appears subdued. Despite our extensive contemplation, it remains unclear whether the moderation in equity valuation in the coming years will be gradual or eventful. Gold and IPO markets contain cues suggesting that things might turn eventful. There is considerable uncertainty, including currency depreciation, a possible economic growth slowdown, inflation threats, the direction of interest rates, and escalating trade conflicts. There also seems to be a lot of urgency to get things done before the music stops.

However, the moderation of equity valuation is more certain, and I think we need to prepare ourselves for it, because what worked in the past is unlikely to work in the future. Popular stocks, overvalued stocks, and stocks heavily favoured by institutions will endure the greatest brunt of the anticipated moderation in equity valuation over the coming years. Navigating the moderation requires an investment approach tailored to it.

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