Celebration Time for Stock Market Investors in India

Representational Photo

Bulls have been on rampage during the last few months, as a result of which Sensex achieved a historical milestone on 21st January by breaching 50,000 mark. It took Sexsex almost 14 years to reach 1000 points from 100 points in 1979. But to reach 50,000 mark from 40,000, it took just 14 months. In the last 12 months, it has recorded a historic rise of 22%  and from the lows of March 23, 2020, it recorded a whopping increase of nearly 87%. It is not only the Indian stock market which has rallied against all odds but it is a world over phenomenon. During the same period, NASDAQ, Nikkei 25, Dow Jones, CAC, and FTSE have yielded a return of 96.2%, 83.2%, 68%, 62% and 60% respectively.

But this meteoric rise in the global equity benchmarks is bereft of all the logic and reason. The stock market is a barometer of economic progress, implying that it is strongly positively correlated with the economic progress. The last 12 months have witnessed economic upheaval world-wide due to Coronovirus-19 pandemic. To prevent the virus from spreading, countries all over the world have imposed complete lockdowns in their respective countries, as a result of which economic activities remained completely halted for months together, resulting into the contraction of GDPs. In the second quarter, Indian economy contracted nearly 24% and it is estimated that in the current fiscal year, India’s GDP will contract by around 9%. The lock down of economies to control the spread of virus apart from falling corporate sales/ incomes, has resulted into huge job losses, salary cuts and has wiped out many businesses. Initially, the equity markets did react sharply to the impending economic fallout of the pandemic. Like other global equities, the Indian stock market had fallen around 37% but then in spite of all the gloom and doom, the market not only recovered the losses it had suffered from the highs of January, 2020 but recorded a rise of around 8000 points i.e. 22% increase from January levels. From the lows of March-2020, Sensex yielded a return of 99% which is unprecedented in the history of Indian stock market.

During the financial crisis of 2007, which ultimately led to the worst ever economic recession, the stock markets had fallen sharply and had remained depressed for more than 2 years. Between 2007 to 2009, Sensex had fallen consistently from 20,200 to 8000 i.e. around 60% . It took Sensex around 20 months to recover the losses to reach to the highs of 20,200 points and then remained range bound till BJP came into power in 2014. But this time, the market not only did recover the initial losses within a few months but also recorded a whopping 22% increase from the highs of January, 2020 by breaching 50,000 mark, thus belied the classical stock market theory. What could be the possible reasons for this paradox? Some analysts argue that the present economic upheaval though of huge consequences were due to the virus ‘Made in Wuhan’ and not due to any economic reasons while as the storm in the  stock market in 2007 was due to genuine economic crisis, initially triggered by sub-prime crisis which ultimately led to the worst ever financial crisis.

The probable reasons being talked aboutfor this paradoxical happening in the Indian equities includes; huge fund flows from Foreign Institutional/Portfolio Investors (FIIs or FPIs), low interest rates, expectation of a ‘V’ shaped economic recovery post successful vaccine development, leaner balance sheets of Indian corporates and the rising Indian story. But it is mainly liquidity driven rally resulting from the huge fund flows from Foreign Institutional Investors. More than 23 billion US Dollars have been pumped by FIIs in the Indian stock market last year. This owing to the fact that there has been significant rise in the global liquidity due to the huge economic stimulus given by the western economies to support its people and the economies so as to mitigate their economic sufferings arising from the pandemic. It is estimated that more than 7 trillion US dollars were infused into the global financial system by different countries, most of which has gone into the hands of those who have lost jobs. Most of the FII flows, apart from China went towards Indian equities due to promising Indian story.

Breaching 50,000 mark is really a celebration time for 6 crore investors of Indian stock market and Indian corporate world, as having yielded an unprecedented return of 99% to those who might have invested at March, 2020 lows,  or a 22% return during the last 12 months. But now the most important question remains “Is this rally going to continue or is going to witness a deep correction?” There are varying opinions. The RBI Governor warned about the current rally in the market, citing the reasons of complete disconnect between the markets and the economy as well as expectations of bad- loan ratios of banks to almost going to double this year. The market is currently being traded at Price-Earnings Multiples (P/E Ratio) of 34.4 times which is very high by all standards. It is 10 points higher than the average P/E ratio of 23.7 in 2019. However, some analysts believe that better than expected December quarter earnings will lead to earnings upgrade going forward, which in turn will justify the current valuations. It is also being argued by some analysts that the Government of India has so far rolled out economic stimulus on the supply side. Now in the forth coming budget, stimulus on the demand side is highly expected which if given will boost consumption, thus corporate earnings. Therefore, this rally ahead of the budget in no way should be a cause of concern.

This momentous bull rally calls for a caution from the retail investors. However, some analysts are still bullish about the market who have suggested to ‘Stay Put’ and any correction will be an opportunity to buy on the back of global liquidity. But, given the risks ahead like the possibility of rising interest rates due to a greater probability of increase in inflation, possibility of tightening of fiscal stimulus in the forthcoming budget; possibility of shifting of FII flows towards debt due to rising interest rates, uncertainty about the coronavirus resulting new strains of virus, and the hostile security scenario in our region, there is every possibility that there will be no further movement in Sensex. Besides, the market expects an increase in Govt. spending which according to the former Governor of RBI, Raghuram Rajan, would be most unlikely for the Union Govt. to afford due to its ‘Limited Resource Envelop’. According to consensus estimates compiled by Bloomberg, that despite robust corporate earnings growth going ahead, Sensex is expected to remain flat over the next 12 months.

Wisdom lies in the fact that ‘No Return is Worth Losing Sleep’. Besides, nobody in the stock market knows where the top and the bottom lies. As such, it is advisable for the retail investors One; not enter the market at the current levels till everything settles down. Second; to book profits and shift to safer bets like gold and real estate which are currently available somewhat at fair values. The best advice for the retail investors is to have control over their greed and always have very realistic expectations from equities and other assets. Remember, it is not a place where a small investors can become Millionaire or Billionaire overnight but can only earn more than the fair return provided they strictly follow the ‘Do’s and Don’ts’ of stock market investing which among others includes; Have a realistic profit goal & sell once it is reached? Don’t aim to sell at peak levels because nobody knows what the peak price is until the market starts sliding down. Therefore, prudence lies in realizing your profits & don’t worry about the profits you may have lost by not waiting longer. Besides, it is always appropriate to sell when price is moving up. Remember,  If you don’t follow this advice, it is most likely that you will end up like a monkey climbing a tree, the higher he climbs, the more he shows his bottom which in simple terms implies exposing to more risk.

Author is Professor, Dept. of Commerce , University of Kashmir.