The world-beating rally on Indian bourses of the past year and a half that drove the Sensex above the 60,000-mark recently seems to be still going strong to take the market higher. Market players continue to believe that the undergoing positive momentum could take the Nifty towards 18,500 to 18,700 levels, though the market appears to have fewer legs left for now primarily because of unsustainable valuations. While the valuations have been a major concern during the ongoing bullish wave for quite some time, India’s outperformance to global equities by about 22 per cent in the past one year is largely credited to domestic money. This probably explains why the market has not seen any significant correction of over 10 per cent since the Sensex hit the 50,000-mark in January this year.
Despite clear signs of overheating and notes of caution, the market is, however, expected to ride the ongoing bullish wave. On Monday, indices hit fresh record highs and the Nifty crossed 18,000-mark; so far, the Nifty and the Sensex have gained about 25 per cent this year. The Sensex’s journey from 50,000 to 60,000 came at a record pace in just eight months, with the last 5,000 points in just 28 days. From the Covid-19 lows of March 2020, the Sensex and Nifty have gained over 130 per cent.
In the relentless rally over the past 18 months due to persistent buying by domestic and overseas investors on the back of easy monetary policies of global central banks, the increase in the pace of vaccination, falling Covid infections and optimism over the revival in the economy, stock valuations are trading above the long-term averages.
This brings the question: is the market overvalued? A wide section of the market players think that stocks are overbought, and the frothy valuations are hovering around record levels. While investors are certainly cheering the record-high levels of equity indices, the RBI is indeed worried and has flagged adverse fallouts of inflated financial asset prices. The Central bank is obviously worried about the disconnect between the economy and the market and the possible impact of a deep correction in stock prices on small retail investors.
Although the RBI has not publicly cautioned about stock market levels, uneven progress of the broader economy and the lasting damage inflicted by the pandemic on informal sectors is a matter of concern for the Central bank, as bumpy macroeconomic performance will impact inclusive growth.
While the unbridled stock market rally looks frothy and the market also went through profit booking recently, after hitting record highs on September 24, technical and derivative analysts expect the momentum to continue and don’t see a deep correction anytime soon. This means with intermittent sessions of correction, exuberance on Dalal Street may not ebb significantly from a long-term point of view.
Risk of correction
However, in the short-term, there is risk of a correction because the market is expensive compared to historical levels and on a relative basis. Therefore, an element of skepticism cannot be ruled out at higher levels amid global risks such as the US debt ceiling, rising US bond yields and China’s Evergrande issue.
But then, profit booking in a sizzling market is a normal occurrence. What matters more is the long-term structure of the market from the investment point of view, which remains bullish, with many equity strategists believing that over the next five years, the Sensex could hit dizzying heights. This means the bull run could last longer on the optimism of future growth prospects.
This also explains the tremendous amount of hit IPO activity in India: this year, there were 39 IPOs aggregating over Rs 74,000 crore, many of which were subscribed many times and a number of them witnessed bumper listings. And the pipeline for future public listings, according to Goldman Sachs, is expected to remain robust over the next two years.
Based on the investment bank’s analysis, as many as 150 private firms could potentially list on the stock market over the next three years. “We estimate nearly US $400 billion of market cap could be added from new IPOs over the next two-three years,” Goldman analysts wrote in a recent report, adding, “that could drive India’s aggregate stock market value to increase from $3.5 trillion currently to over $5 trillion by 2024.” That’s likely to make India the fifth largest in the world by market capitalisation, surpassing the UK and the Middle East.
India’s digital economy
What explains such optimism is the potential of India’s digital economy, which will usher the beginning of a new era for the entire ecosystem, as many of India’s largest technology startups have announced plans to go public. “What we are really flagging here is that as exciting as China was over the last decade, when you had this new China story – which is very, very profitable and successful for investors – we could see some sort of an analog of that beginning to take place in India,” says Timothy Moe, co-head of Asia macro research at Goldman Sachs and one of the authors of the investment bank’s recent report.
According to reports, there are more than 800 million internet users in India and over half-a-billion smartphone users – second only to China. The pandemic also pushed many sectors online – from grocery delivery to shopping, and education to digital payments. This has improved the ability of many startups to scale up their businesses and grow.
Thanks to the rapid growth in the internet ecosystem, combined with better availability of private capital and a favourable regulatory environment, Goldman Sachs estimates that there are at least 67 private startups in India that fit the definition of a unicorn – start-ups valued at over $1 billion – and most of them are focused on India’s digital economy. As many of these start-ups list on the capital markets, Goldman Sachs predicts that it could potentially transform Indian capital markets and stock indices over the next few years.
New economy sectors
Currently, stock market indices are dominated by financial stocks and companies belonging to the more traditional sectors like energy and information technology. But going forward, market indices could see bigger representation of the so-called new economy sectors – high-growth industries, underpinned by the latest technology and thought to be the driving force of economic growth – as large floats from internet startups get included in the index.
As a result, while the indices will rise to record levels as the weight of new economy sectors in the indices is expected to rise from the current 5 per cent to over 10 per cent, India’s share in the global stock market value is estimated to rise from the current 2.8 per cent to 3.5 per cent over the next five years, according to Goldman Sachs; this is 40 basis points higher than the investment bank’s prediction of increase in India’s share of global GDP over the next five years.
However, this is a long-term view on the Indian capital market, which is expected to deliver about 15 per cent returns per annum over the next four years. Compounded 15 per cent per annum returns means that the Sensex could possibly go close to 100,000-levels. But this is not going to happen evenly and that is the reason why equity markets do not give consistent returns but give higher returns over time.
The writer is an independent Mumbai-based senior journalist
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