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Irrational Exuberance – Opinion News
It’s a furious bull market. The record rally in equity markets, with the Sensex crossing 80,000, has taken the market capitalisation to nearly Rs 450 trillion. Fuelled largely by local liquidity and, of late, buying by foreign funds, the spectacular rise in stock prices has taken the market capitalisation to GDP ratio to around 1.3X, which some experts say is not in the overvalued zone. India’s economy is undoubtedly doing well relative to the rest of the world, even if there are pockets of weakness, namely consumption. Nominal GDP growth of 11-12% should result in corporate profits growing at least at the same pace; some may do better. No other economy is likely to see corporate profits grow as fast. At the same time, there is little to suggest, yet, that the economy will gain significant momentum in the coming years. In fact, there are signs of a slowdown in key sectors such as real estate and automobiles. Given the weak tractor sales and continued negative growth in real rural wages, it is hard to believe that a rural recovery is on the horizon. Furthermore, given how quickly technology is advancing, it doesn’t take long for an industry to be disrupted.
Given these concerns, it is difficult to justify the current assessments. It could be argued that Nice is reasonably valued when compared to historical valuations and bond yields — it now trades at 22 times FY25 estimated earnings and close to 20 times FY26 estimated earnings. But a very large number of stocks now trade at multiples of 50x and 60x forward earnings that are building unrealistic expectations; the multiples price in sustained earnings growth of 15-16% annually for the next 15 years. This does not seem to be worrying retail investors. Given the continued strong inflows into systematic investment schemes, now at around Rs 20,000 crore per month, retail investors are clearly convinced that equity Marketplace is the best place to park their savings. They would be well advised to be prepared for a correction and wait for the returns.
The attraction to equities has pushed the proportion of equities as a share of households’ net financial assets to 14.7% in FY23 from just 4.5% in FY21; it could rise further in the coming years, possibly at the cost of bank deposits. This is good news for companies that are absorbing funds from the market. 2024 could be a record year for stock fund rising. In an environment of scarce capital economy as India‘s, the availability of equity capital can help companies and reduce their reliance on debt. At the same time, investors should also note that promoters and private equity players are reducing stakes.
First published on: 05-07-2024 at 05:30 IST