In November 2017, Ridham Desai, one of the top equity strategists at global financial major Morgan Stanley, told a business channel that he expected the sensex to touch the 100,000-point mark in 4-5 years. This was at a time when the index was hovering around the 33,500-level and almost every fund manager worth his roar was finding it difficult to make money on Dalal Street. Desai had said the Indian market was on the cusp of a big rally as the drivers for the same were in place.
Market players then were a divided lot on Desai’s comments. For most it was either an audacity of crystal gazing or temerity of stupidity. For a small lot, it was an expression of hope. But none could stick their neck out and support such a bullish call. Since memes were not in vogue then, Desai was spared from being trolled for his predictions.
Almost four years to the date since Desai made that prediction, as the sensex scaled the 60,000 mark in early trades on Friday, investors on Dalal Street now believe that the 1-lakh mark is within their reach. They also believe India’s market capitalisation could soon go above the $5-trillion mark, from about $3.6 trillion now, and front-run the GDP to hit that magic figure. They see a smooth glide path for the Indian market as several tailwinds are visible.
Indian stocks soared to fresh highs with the Sensex crossing 60,000 for the first time as investors continued to ride the bullish wave, brushing off concerns over the crisis at China’s debt-laden Evergrande and the prospect of US monetary policy tightening. With economic and profit growth recovery forecast to be on track, investors, deprived of traditional high-yielding investment options, are betting that the world-beating rally in the country’s stocks could last a while though elevated valuations are making a section of the market uneasy.
The extended upmove has meant that India’s stock benchmarks are among the best performers worldwide since March 23 last year—the start of this bull phase. The Sensex and Nifty have gained over 130% since then.
Investor wealth in domestic listed stocks rose by almost 160% with India’s market capitalisation rising to ₹261.14 lakh crore on Friday from ₹100.82 lakh crore in March last year.
A clearer picture by the US Federal Reserve this week on tapering of asset purchases has been the latest trigger for risk-on trades. The Sensex and Nifty gained 2% after the American central bank’s hawkish remarks.
The ultra-accommodative monetary policy is helping elevate equity prices by lowering the cost of capital.
Unlike the so-called taper tantrum of 2013, when comments by then-Fed chairman Ben Bernanke on cuts in bond purchases sparked panic in the global financial markets, investors this time appear to be confident that they will be able to ride out any withdrawal of liquidity by the Fed.
Analysts are, however, keeping a watch on bond yields in the developed markets with the dialing back of the bond buying round the corner. Risk assets including equities could be most vulnerable in the event of a spike in bond yields.
At home, investors are hoping that the Evergrande crisis and the Chinese government’s crackdown on its technology companies could result in overseas funds turning more of their attention to India. So far in September, foreign portfolio investors have pumped ₹10,100 crore into stocks in India after investing ₹7,454 crore in the previous month.
The rally in the past six months has been driven by domestic investors, especially first-timers buoyed by stellar returns from stocks. Many of these investors have ignored risks associated with higher valuations with fixed-income returns under pressure. The Nifty is trading at an estimated PE ratio — a popular valuation measure — of about 24.5 times as against a five-year average of 21.03.
Some fund managers said valuation risks are not widespread.
The near one-way rally in Indian stocks in the past 18 months has heightened concerns over rich valuations. But a silver lining for the market is that the valuation of the Sensex, the benchmark index comprising India’s 30 most valuable companies, at 60,000 is cheaper than what it was at 50,000.
A study shows the Sensex is trading at an estimated PE ratio — a popular valuation measure — of 25.8 times as against 28.58 when the index first touched 50,000 in January.
Analysts said cheaper valuations have been on account of stronger-than-expected profit growth in the March and June quarters. In January-March, Sensex companies posted their highest-ever net profit numbers driven by higher commodity prices and strong consumer demand.
However, compared to global indices, the Sensex is the second most expensive after the Nasdaq of the US. Key indices of Germany, France, Canada, Indonesia, Japan, Australia, and Dow Jones are trading between 15 and 20 times their one-year estimated earnings.
Eight out of the 30 Sensex stocks, including SBI, ICICI Bank, Axis Bank, ITC, Ultra-Tech Cement, HDFC Bank, Power Grid Corp and NTPC, are currently trading lower than their five-year average trailing PE ratio. Brokers said higher valuations make stocks vulnerable to sharp declines if corporate earnings disappoint.
