Mount 50K

| Updated on January 21, 2021

Liquidity-driven run could be halted by events over which Indian investors have no control

The Sensex has summitted Mount 50K and there is justifiable jubilation all around. Yet, the celebratory mood needs to be tempered with caution. Yes, there are many positive aspects to the bellwether’s dizzying 90 per cent climb from its Covid-battered low of March 2020. The rebound has ensured that domestic retail investors, who deployed patient money into equities via the SIP (systematic investment plan) route for the last five years, get to enjoy compounded double-digit returns. Healthy market returns also augur well for India’s tentative experiment with channelling into equities the retirement monies parked in the Employees Provident Fund and the New Pension System. Foreign Portfolio Investors have been the driving force behind this rally and their singling out India from diverse global markets for incremental allocations of $23 billion this past year, perhaps demonstrates their belief that the economy will forge a quick recovery from Covid.

But there are discomfiting aspects to this bull run too, particularly its most recent leg. The Sensex’s 45 per cent gain between 2014 and 2019 was driven mainly by a re-rating of valuation multiples for Sensex firms, even as they eked out earnings growth of a piffling 3 per cent a year. Even as analysts were building a growth acceleration into their excel sheets for FY20, Covid struck and Sensex earnings suffered a hit of 13 per cent in FY20. Despite the uncertainty over whether demand and profitability at India Inc can return to an even keel post-pandemic, analysts have been blithely pegging their estimates higher. Market consensus is that Sensex earnings will vault 50 per cent in FY22 and 22 per cent in FY23, which is a tall ask. Yes, this dichotomy between stock prices and fundamentals, which has been created by the easy money policies of central banks and the hunt for even halfway decent returns by global investors, is not unique to India and characterises many asset classes. But the liquidity-fuelled character of this rally does make it highly vulnerable to a meltdown triggered by global events (such as a spike in US rates) over which investors or policymakers would have little control. Warnings about a taper tantrum-like episode puncturing the rally, therefore, need to be taken very seriously.

It is disappointing to see Indian money managers penning notes that justify the sky-high valuations with creative new metrics, rather than caution investors of the need to take money off the table and reduce equity allocations. SEBI can perhaps fill this vacuum with an awareness campaign funded by its copious investor education coffers. Retail investors newly bitten by the equity bug need to note that the latest leg of this rally has all the hallmarks of a classic bubble — with record new demat openings, IPOs at three-digit multiples and fly-by-night punters trouncing seasoned investors. The sharp sell-off that levelled markets by the end of Thursday’s trade is a preview to the bumpy ride that lies ahead.

Published on January 21, 2021

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