The Indian stock markets tanked on Monday, with the BSE Sensex ending the day down 2.74 per cent. (File Photo)
The Indian stock markets tanked on Monday, with the BSE Sensex ending the day down 2.74 per cent. The immediate trigger for the drop is external, not internal — there are growing concerns over the US economy, with recent employment numbers coming in significantly below expectations. While markets in India have, in recent times, been driven more by domestic flows, the question is whether this is just a temporary hiccup. Or, does it mark the beginning of a deeper correction?
Predicting the market can be a difficult endeavour — hazardous even, for an individual’s reputation. On October 16, 1929, Irving Fisher, one of the most well-known American economists of that time, famously said that stock prices have reached “what looks like a permanently high plateau”. Fisher was dead wrong. On October 28, the Dow fell by 13 per cent, and by 12 per cent the next day. The downward spiral continued, and by November, the index had lost almost half of its value.
For some time now it has been apparent that stock valuations in India have risen from being expensive to levels that defy logic. You can pick and choose the metric on which to assess, but that’s the conclusion. Unlike the US, where the tech sector has captured the imagination of investors, in India, this irrational exuberance has not been confined to a particular sector, but has been a more widespread phenomenon.
The bulls have, thus far, marshalled a range of explanations to justify the continuous upward movement in prices. But with each passing day, their arguments have been wearing thin. What’s sustaining these stratospheric valuations isn’t equal parts fundamentals, sentiment and liquidity, but more the fear of missing out, greed, sentiment and liquidity. The current cycle is one of flows begetting returns begetting flows.
In recent times, the Sensex has been trading at a price-to-earnings ratio that is similar to levels seen during the last stages of the bull market in 2007. In the case of the small and midcap stocks, and segments like that of public sector companies, the euphoria has been of another order. Signs of the exuberance have also been witnessed in the IPO market, where most investors, or rather traders, have only been participating for the sake of listing gains, and in the futures and options market, where many trade despite losing money. Investors have been discounting concerns not only over lofty valuations, but in many cases also mediocre growth and a sluggish operating environment, as well as the regulator’s concerns and the company management’s commentary which can hardly be described as upbeat. There are numerous examples.
Take Whirlpool. On February 20, Whirlpool Corporation sold part of its stake in Whirlpool of India. Its CEO, Marc Bitzer, told a news channel that “if we have a business which is trading at 50 times multiple and your own company (parent entity) trades at a lot lower, it is basic arbitrage”. On February 19, the share price of Whirlpool of India was Rs 1,331. It has only risen since.
Or look at Asian Paints. While announcing the January-March 2024 results, its CEO said that “the GDP correlation (with the business) has really gone for a toss, in the current year. I also feel that today, I am not very sure as to how the GDP numbers are coming.” More recently, he noted that “the quarter (April-June 2024) has been tough and overall, I think the demand conditions have been fairly challenging because of a host of reasons.” The stock is trading at a PE ratio in excess of 50.
Or take HUL. The company saw sales grow by 2 per cent and earnings per share by 3 per cent in the April-June quarter. The stock is trading at a PE ratio of more than 60. Comparisons with valuations over the past four-odd years make no sense considering that’s the length of the bull market. In the case of small and midcap stocks, even the comments of the stock market regulator have not, it seems, led to investors reassessing their positions.
The story of markets is, however, one of an unending upward march. And this bull run may still continue, punctuated by minor corrections. But the question is: A little over four years into this bull market, how much longer can it last? Will the markets now take a more pragmatic view of valuations and growth prospects?
Considering that each small market correction has been bought into, it’s difficult to say. The Dotcom bubble — when almost every company with a “.com” attached to it soared, including the infamous Pets.com — ran from the mid 1990s to 2000. But, after the crash, it took Nasdaq several years to return to its peak.
There are fears that a sharp correction would scare away millions of new investors. But the rise in the number of SIP accounts suggests that perhaps many have bought into the age-old adage of investing for the long run. In any case, most failed traders often end up becoming long-term investors.
ishan.bakshi@expressindia.com
