Bull markets need fuel, which can come from equity capital or debt, noted ace investor Shankar Sharma in a recent post on X (formerly Twitter).
He pointed out that India’s bull market has been driven by two main factors: a sharp increase in public debt-to-GDP from 65% to around 90%, and an equally sharp rise in household debt (credit to Nikhil Gupta for this analysis). Additionally, he stated that there has been a significant decrease in corporate debt, which the markets tend to focus on exclusively.
So how does it play out?
Sharma observed that the household financial position began deteriorating in the pre-pandemic years and continued to worsen in recent years as well. Furthermore, not only is the growth in household debt in recent years the fastest in several decades, it has also coincided with weak income growth, he noted.
He also added that at the same time physical savings are substituting financial savings and that the collapse of the latter is unprecedented and thus the total household savings have declined.
In response to the post, one user stated, “This decline in HH savings & increase in HH debt is due to revenge spending after COVID, but the other reason is daily expiry in FNO, khelo India khelo, people are loosing their savings & after that debt. No one is bothered. will hamper banks structurally like cancer.”
Another noted, “Market cap to GDP is at 130% so we are definitely in bubble zone but let’s not forget the weekly derivatives that brings tremendous liquidity!!”
The Indian market hit record highs in intra-day deals today with Nifty crossing the 23,000 mark for the first time ever and Sensex above 75,500.
In an earlier post, Sharma has cautioned against the single biggest threat – overcapitalisation driven by the insatiable greed of merchant bankers and operators.
“Single biggest threat to this Bull Market is greedy Merchant Bankers & Operators, exhorting foolish promoters to raise excess capital, permanently destroying balance sheets via over capitalization. I repeat: These are the stocks that will fall 90% in the next Bear market,” he had posted on X on May 7, 2024.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 24 May 2024, 03:12 PM IST