When markets are on cloud nine

When markets are on cloud nine

The BSE Sensex and the NSE Nifty 50 closed at record levels Wednesday. In less than seven months, equities are up a staggering 19%. The market capitalisation of Indian stocks hit $2 trillion, marginally behind Canada’s and Germany’s. The NYSE, of course, is the giant in the ring, with a market capitalisation close to $20 trillion. Corporate performance has not been spectacular.
Investment in the economy, particularly private corporate investment, is down. So, the fizz in the market cannot be explained by short-term considerations. India remains long term high growth story. So, investors who are in the market for the long term need not be spooked by the mismatch between the bounce in the market and hard economic data. But short-term turbulence should not cause wild surprise.
The good news bolstering confidence is the ruling party’s overwhelming victory in the Uttar Pradesh polls and the successful roll-out of the goods and services tax. These reinforce the long-term positive outlook: the government has lots of political capital and has the will to carry out significant reform.
However, the short-term scenario could be bumpy. The price-earnings (PE) ratio is a good indicator of whether stocks are priced reasonably or not. The higher the ratio, the greater the chances that markets are overpriced. The PE ratio for the Sensex is now 22.71, a historical peak that overshadows the 20.72 number of 2006-07, before the global financial bubble exploded. It is not enough for fund managers to rely on ‘momentum’, a polite way to say investment sentiment moves in herds.
Though we believe that governments should interfere minimally in market operations, it certainly has a big role to play in reformist policy and action. Two areas are vital and urgent. One, to solve the bad-debt problem in our banks, without spooking bankers into lending paralysis.
This will free up savings that can be invested. Two, create jobs—by supporting labour-intensive activity—for the trying to enter the employment market. Unless the latter is done, the economy will be dogged by social tensions.