Editorial     

Published: July 15, 2023
Updated: July 15, 2023

Alarm bells on red-hot market

The Indian stock market is fanning extremely bullish behaviour. The sentiment is so buoyant that the benchmark indices are almost daily in search of new high levels. On July 20, the most popular Sensex based on 30 pivotal stocks quoted on the BSE, Asia’s oldest stock exchange, scaled an all-time high in the past 125 years at 67,619.17, while analysts’ darling Nifty, which tracks the leading 50 stocks quoted on the NSE, India’s national stock exchange, was staring at a 20,000 high. The undertone is still very strong.

The major factor responsible for the sustained upsurge in stock prices is the continued flow of funds from domestic as well as foreign investors. It is also rumoured that a sizeable amount of funds goes out of India and comes back under some FPI’s (foreign portfolio investor) banner. This sustained flow of funds is bound to push up the prices of stocks as per the law of demand and supply.

Foreign institutional investors (FIIs), which had started withdrawing last year, have reentered the Indian stock market as they have realised that India is one of the bright spots in a fragile global economy. India’s stocks are so hot that this country is now home to the world’s fourth most valuable equity market, behind only the US, China and Japan.

The total value of Indian equities has hit the $ 3.6 trillion mark – greater than the value of Europe’s two biggest stock markets in the UK and France.

However, experts are afraid the Indian stock market is overheated and at any moment there may be a sharp fallback in values. Global brokerage house CISA, which had a 40 per cent underweight stance on Indian equities in November 2022, has now once again retained its underweight stance. Says the brokerage, “We remain cautious for now, given the exceedingly rich valuation, margin erosion, depleting EPS’s, India’s relative profitability, consensus growth expectations remaining too optimistic, the RBI lagging EM central banks in the timing and scale of policy easing, and our econometric model signalling that the market is 15 per cent overbought.”

According to CISA, for the 16 years from 2004 through end-2019, Indian equities traded on an average at a 35 per cent premium multiple versus overall emerging markets on 12-month forward consensus sector-adjusted earnings. Since 2020 through July 20, 2023, that premium has averaged 80 per cent, which is where the market is currently trading.

FIIs, which have already infused $ 11 billion in the Indian market since April, may stop buying Indian stocks in the very near future as they have started thinking that the currently high equity valuations of Indian companies don’t provide an attractive entry point for investors. Indian equities are at a premium of around 10 per cent versus their US peers.

This is the time to warn Indian retail investors to adopt a cautious approach in investing in the stock market. It is likely that prices will fall back from the current sky high levels. After all, the problems created by the Ukraine-Russia war are not solved as yet, while the US is living in fear of a recession. The 20 countries that use the euro have already slipped into a recession. Great Britain is facing a detrimental inflationary price spiral. Though India is certainly the fastest-growing economy today, it is also true that the pace of growth in emerging as well as developed countries has slowed down. The IMF expects India to outperform all major emerging and advanced countries this year by logging a 6.9 per cent growth in GDP. Though this rate is higher than in other countries, it is much lower than what we had seen a few years ago. It means economic growth in India has also slowed down.

In these circumstances, retail investors will have to think ten times before investing in stocks at a very high price.