Stock market investors' wealth rose by Rs 69.92 lakh crores since the BJP came into power in May 2014. The market capitalization of BSE rose from Rs 85.2 lakh crores in May 2014 to Rs 155.13 lakh crores in Jan 2018. Sensex gained over 11,500 points and zoomed from 24,716 on 26 May 2014 to 36,283 on 29 Jan 2018 thereby providing an annualised returns of 11% each year.
The markets are on a consistent bull run since December 2016 but the intensity of upsurge has increased from December 2017. Sensex jumped from 32500 levels to over 36000 level in just 34 trading days. Out of 909 trading days since BJP came into power, on 489 trading days sensex closed higher than the previous day. It made 86 new highs based on its closing price. In the year 2014 (since 26 May 2014), it made 29 new highs. In 2015, sensex made 6 new highs. In the year 2016, sensex did not make any new high (the last new high was 29687 in Jan 2015, the sensex value remained less than 29687 in the year 2016). In the year 2017, sensex made 38 new highs and in 2018 it made 13 new highs till January 29.
The recent bull run is attributed to the abundant liquidity, Q3 earnings optimism and favourable expectations from the Union Budget. Hopes of increased outlays to infrastructure and rural sector are attracting investors to FMCG and infra stocks. The rally is supported by ample buying by FPIs that invested over Rs 24,700 crores in equities between April 2017 and January 2018. After demonetisation, investors are reallocating money from property and gold into stock markets which is also fuelling the market rally.
However, the surge in stock prices has created valuation concerns as the Indian markets are trading at premium of nearly 35% to other Asian markets. Sensex is trading at PE of 26.4 times its trailing twelve month earnings. The average PE of sensex since May 2014 is 20.8. The numbers clearly shows that Indian markets are overvalued. The experts believe that markets are not in sync with the economic fundamentals as private sector capital expenditure is not yet revived. In addition, stagnant corporate earnings and lack of demand makes the valuations unsustainable.
Chief Economic Advisor, Arvind Subramanian has cautioned investors and recommended increased vigilance as he suspects a bubble like situation in the stock markets. The rising oil prices pose significant risk as it could affect consumption and GDP growth. The rising import bill will fuel inflation that will put upward pressure on interest rates. According to CEA, such risks could stall foreign investment inflows and will lead to significant correction in the stock markets.