Stock & awe: Mcap at $5 trillion in ’23?

MUMBAI: Thanks to its 10-month-long rally, investors’ wealth, measured by BSE’s market capitalisation, has been breaking the ceiling regularly and is currently within touching distance of Rs 200 lakh crore or about $2.7 trillion, according to exchange data. Nifty on the NSE, which is actually ahead of BSE in terms of volume and turnover, has been following a similar trajectory.
“If it (the stock market) runs at this speed, in a couple of years we will be a $5 trillion stock market, even if we lag in becoming a $5 trillion economy by quite a distance,” a trader said, in a reference to PM Narendra Modi’s statement in mid-2019 that India would be a $5 trillion economy by 2024. The current mcap also makes India one of a handful of countries to have an mcap to GDP ratio of almost 1:1. Unfortunately, that ratio is also one of the popular indicators of a highly unsustainable stock market, a theory first propagated by billionaire investor Warren Buffet and followed by many others to decide whether to buy or sell a market. On the valuations front too, the sensex is at an all-time high price-to-earnings ratio of 34.4, compared to its 10-year average of 21.8. This ratio in essence indicates the amount in rupees an investor is willing to pay for every rupee of a company’s earnings.
Foreign funds, however, do not seem to be worried either by the Buffet indicator or the all-time high PE ratio. They have been pumping in a record amount of money into the domestic market. Since October, foreign portfolio investors (FPIs) have net pumped in over Rs 1.6 lakh crore, or about $21.2 billion, making India the largest recipient of foreign funds among emerging markets. In comparison, mutual funds have been selling stocks aggressively with the net outflow at nearly Rs 75,400 crore, official data showed.
According to Shiv Sehgal, president—institutional client group, Edelweiss Securities—a combination of global and domestic factors has led to this rush for Indian stocks among foreign fund managers. “Across the world, the news of Covid-19 vaccines and a Democratic victory in the US augur well for global reflation. On the domestic front as well, the absence of a second wave and a strong bounceback in pent up demand have given a fillip to high frequency indicators like GST collections, imports, PMI, etc,” Sehgal said.
In addition, he feels that surprise earnings by India Inc are prompting analysts to up price targets for leading stocks. Corporate earnings have bounced back despite weak demand, which in turn is giving confidence to investors that stock prices will sustain once demand revives. Lastly, “domestic financial conditions have been kept quite benign by the RBI. After all, this is a necessary if not sufficient condition to revive risk sentiments,” Sehgal said. “Given the high foreign ownership (of Indian companies), risk on sentiments aid India disproportionately.”
The nearly 10-month old rally has been mostly led by a handful of stocks that include Infosys, Reliance Industries, TCS, HDFC Bank and HDFC. In the earlier part of the rally while RIL, some banks and financials lifted the sensex, IT soon took over the lead and then pharma joined in.
The rally in RIL was backed by a record foreign fund infusion in its telecom and retail arms. The strong buying in IT, banks and pharma stocks emerged after investors realised that as people remained confined to their homes due to Covid-induced issues, the demand for technology-driven solutions, healthcare and finance was increasing. As sector leaders were able to rise to the new challenges and meet those demands, their stock prices also galloped, market players said.
In Thursday’s market, the sensex started the session at 50,097 points, scaled a new lifehigh at 50,184 points and after a late sell-off that shaved off over 800 points from the day’s high, closed at 49,625, down 167 points on the day. Selling in HDFC Bank, HDFC and Bharti Airtel contributed the most to the day’s selling while buying in RIL, Bajaj Finance and Bajaj Auto cushioned the slide to a large extent. On the NSE, the nifty too rose to a new life high at 14,754 points but closed lower at 14,590 points, down 54 points.
Technically, the indices are at crucial levels. On daily charts, the Nifty and sensex are showing formations which suggest “high chances of quick intraday correction”, Shrikant Chouhan, EVP—equity technical research, Kotak Securities—wrote in a note.

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