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India stock market at an all-time high: Is it a bubble waiting to burst?

Optimistic buying activity in the run up to the Economic Survey today and the Union Budget three days later along with good news on GST revenues front has buoyed up trading sentiments.

Sushmita Chaudhury | January 30, 2018 | Updated 09:03 IST
India stock market at an all-time high: Is it a bubble waiting to burst?

The stock markets scaled new peaks this morning, with the BSE Sensex jumping 300 points and breached 36,400 level and NSE Nifty crossing the 11,150 mark. Optimistic buying activity in the run up to the Economic Survey today and the Union Budget three days later along with good news on GST revenues front has buoyed up trading sentiments.

With the IMF also recently reporting "the broadest synchronised global growth upsurge since 2010" and pegging India's GDP growth at 7.4% in 2018, thus regaining title of world's fastest growing economy, the consensus is that the bulls will continue running amok on Dalal Street for a good while.

But not everyone expects the party to last. According to long-time analyst Hemindra Hazari, who publishes on Smartkarma, the surge in the Indian stock market since early 2016 has occurred in a period of stagnant corporate earnings growth-normally the fundamental driver of markets. The election of the Narendra Modi led government, despite major reforms, has not resulted in significantly higher corporate earnings or a revival in the much awaited private sector capital investment. Since January 1, 2016, the Sensex rose by 38% while EPS from FY2016 to FY2018 (expected) has only gone up 16%.

A similar situation is taking place on the global stage, adds Hazari. The MSCI World Index for the advanced economies increased by 27% between January 1, 2016 and December 31, 2017, but its EPS only increased by 10%.

While the slow pace of wage growth and inflation-apart from the lack of improvement in the labour participation rate-indicate that the US economic recovery is perhaps the most sluggish ever, the reduction in the US corporate tax rate to 20-21% from 35% may result in higher corporate profits in the near future.

This, to some extent, explains the euphoria in the stock markets. "However, the combination of slow wage growth, low labour participation, and a corporate profit surge may not be sustainable. If demand finally fails to show up to the party, the bubble must burst; but when that may be, no one knows, and hence no one cares," Hazari sums up.

"We are not excited by the prospects for the Indian equity market in 2018. Either the market will stagnate to allow valuations to fall in line with historical norms, or it will correct," writes another Smartkarma Insight Provider Neeraj Monga in a recent report.

"India has benefited tremendously from 2015-2017 with moderate commodity prices and much lower yields worldwide. In the newly emerging paradigm of normalisation of global monetary conditions, India will likely be betrayed at the altar. We suspect that at the first sign of a weakening INR, the sell-off in the Indian equity market could become a stampede," he adds.

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