A moment of silence for all those who predicted doom and collapse if Britain left the United Kingdom. Another one for those who warned of an exodus of FIIs if Rajan left the RBI. And the last one for those who, earlier this year, predicted that markets would collapse under the weight of a slowdown of the Chinese economy. Hindsight, indeed, is 20/20 and with that benefit, it is indeed amazing to see how these predictions – made by well-informed, well-educated, people with a lot to lose if they go wrong – went horribly wrong.
Equity and commodity markets have remained buoyant despite the Rajan and Britain exits. They were spooked by China but, after a very rocky start to 2016, the S&P500 rallied from its February lows till pre-Brexit in July. There was a huge scare during Brexit, but the index recovered quickly and is now back to where it was pre-Brexit. Brent Crude has almost doubled this year, from its February lows of $27/barrel to $53/barrel in June.
You’d expect Indian equities to see a correction considering the inflationary and fiscal impact of doubling of crude prices. Far from it. The Nifty is less than 10% away from making a new all-time high, topping last year’s 9K in March 2015. On any given day, the list of new 52-week highs consists of more than 30-40 stocks. The rally in mid-and-small cap stocks continues. From the lows made on Budget 2016, the Nifty Midcap 50 is up a whopping 32%, making the Nifty’s 19% rise pale in comparison. Even the BSE Realty Index is up 28% in the past three months.
To test the bullishness, look at the huge response that recent IPOs. Mahaganar Gas’ IPO of Rs1,040 crores was oversubscribed 64 times. Quess Corp’s Rs400cr IPO was oversubscribed 147 times. Sure, the issue sizes were relatively small and priced attractively, but the response reflects bullishness. To be fair though, net inflows from domestic and, more importantly, foreign institutional investors (FIIs) hasn’t hit any new highs in this financial year. Thanks to SIPs, domestic inflows into equities is now around Rs3,000cr/month, based on about 1cr folios and an average size of Rs3,000 per SIP, per month. These inflows are still small compared to the power of FIIs, but much higher than what they used to be.
Is this rally justified? The bulls can make a case that a good monsoon, bottoming out of the earnings cycle, a relative calm on inflation, and hopes for a cut in interest rates from the next RBI Governor could justify optimism in the stock market. But when the Nifty is just 10% short of a new all-time high, one has to ask – what exactly is new in this optimism? The short answer is nothing. Stocks that benefit from an uptick in the Indian economy have already run up – for example, the BSE Auto Index is up 12% in the past three months, outpacing the gains in the Sensex.
Indeed, it’s time for a break in this rally. Look at global bond yields which are sinking to new lows. For the first time, U.K. gilts are below 1%, U.S. 30-year bond yields have hit record lows. Clearly, this is in dissonance with the exuberance in equities. The common explanation is the ‘bad news is good news’ trade – which says that bad economic news only means more liquidity from central banks and as more liquidity gets pumped, money will seek higher returns and chase higher growth. And India will benefit since it is the fastest growing country in the world (even if you doubt the data).
But India has already benefited. Its stocks have already rallied and now trade at expensive valuations relative to growth. With no new surprise on the economic front, any further rally will need higher liquidity support from FIIs which has been missing so far. Will they flock in droves in the remainder of this year? With no bargain, no discount, no firehouse sale in sight, it appears unlikely for now.
Anupam Gupta is a Chartered Accountant and has worked in equity research since 2000, first as an analyst and now as a consultant. He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets on markets & the economic horizons.
He tweets as @b50
