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A host of factors are behind the heady rise in stock markers, and caution is called for

It will be prudent to temper optimism. Large parts of the economy, the informal sector in particular, have still not recovered to pre-Covid levels.

By: Editorial |
Updated: October 30, 2021 9:28:29 am
Large parts of the economy, the informal sector in particular, have still not recovered to pre-Covid levels.

On Friday, the BSE Sensex was down 678 points at the close of markets. Since hitting an intra-day high of 62,245.43 on October 19, the Sensex has fallen by around five per cent. Notwithstanding this recent weakness, India’s stock markets have in recent times been among the best performing across the world. In fact, the country’s premium against emerging markets is at a record high. Since the beginning of this year, the Sensex has risen by almost 24 per cent. It currently trades at well above its long-term average making it one of the most expensive markets in the world. Even the primary markets in India are witnessing frenzied activity. As per a report by CARE Ratings, 87 companies have tapped the primary markets so far this year, raising around Rs 72,000 crore, as compared to Rs 18,500 crore raised in the first 10 months last year.

A combination of factors has propelled this spectacular rise. Favourable liquidity conditions, both globally and domestically, the absence of alternate avenues for financial savings with interest rates at record lows, and the continuing robust growth of corporate earnings are some of the factors driving this surge. The growing formalisation of the economy only adds to the growth prospects of these listed companies. There is also growing optimism over the threat of a third wave receding, and the dramatic surge in the domestic vaccination coverage which is imparting a positive impulse to the economy. There is also a rise in the risk appetite, and a fear of missing out — participation by retail and high net worth individuals has increased both directly and indirectly through investment products. Recent data from the Association of Mutual Funds in India shows that flows into mutual funds through systematic investment plans were at an all time high in September, with inflows crossing the Rs 10,000 crore mark. With analysts already beginning to raise their earnings estimates with the economy faring better than most expected, there has been an expansion in both earnings and the earnings multiple.

However, it will be prudent to temper optimism. Large parts of the economy, the informal sector in particular, have still not recovered to pre-Covid levels. Household consumption remains subdued, and thus, capacity utilisation remains depressed, casting doubts over fresh private sector investments. Moreover, input costs are also rising, squeezing margins. Morgan Stanley has already raised questions over valuations, downgrading them from “overweight” to “equalweight”. A sharp correction could induce a change in investor behaviour.

This editorial first appeared in the print edition on October 30, 2021 under the title ‘Market wisdom’.

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