Form of words:
sDuring the last year rabbit prices broke free from their normal anchorage. You could even say that the Sensex blew their senses, as the 30-share benchmark index has gained an astonishing 40 per cent or more during the traditional accounting year, which will end with Diwali next week. Investors haven’t enjoyed a year like this in over a decade. And it is a bounce that almost no one anticipated, apart from perennial optimists like Rakesh Jhunjhunwala, whose portfolios have gained over 150 per cent in value since the first Covid action in March 2020.
Still, the connection with the “real” world is too obvious to be overlooked. In a year marked by the second phase of the Covid outbreak, with its attendant tragedies, the full economic toll of the pandemic has become clear – the recovery in economic momentum this year is much less than the decline in economic activity last year. Taken together, if you look at the official figures, the economy will be back to where it was pre-Covid. On top of a double-digit increase in share prices over the past year, it’s not a common reference to a 40 percent increase in the stock market. By comparison, the Sensex rose nearly a third in the six years leading up to Diwali of 2016, and rose by 40 per cent or more in the next three Samvat years – a compound growth of nearly 80 per cent over the previous year. nine years. On Diwali in 2019, no one thought the market valuation was low.
So it is clear that abundant liquidity and low interest rates – positioned to fight the economic impact of Covid – have fueled the rally in stock prices. With those factors one can add to the sense that the corporate and banking sectors are in a better position, and are therefore increasingly poised for (or ready to march). Also, the markets look to the future and not the past – or how would you interpret Nykaa’s offering price and Paytm’s expected offer price?
The real issue for such a fledgling market is the medium-term growth outlook. The government thinks it can expect 8 per cent, but it has always wondered, whatever it is capable of delivering. The International Monetary Fund believes a more likely growth figure for the medium term is 6 per cent. There are certainly enough factors to drive down future performance: low consumption, job losses, and, flowing from these, low levels of capacity utilization (63 percent now, compared to the long-term average of 73 percent). In turn, these translate into a time-lapse before new private investment is required. Government investment can bridge the gap, but only to a point due to high levels of deficit and public debt.
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Think Green, Tech and Platform Business
All things considered, there can be no doubt that the market has been bullish in recent weeks, as is often the case. The spreading recognition that the Indian market is now more expensive than almost all others has already dampened the momentum. Chances are that the new Samvat will be a phase when the market will either correct, or at least digest the excesses of the previous year.
What are the options for investors? With central banks in major markets signaling that they will begin to suck up excess liquidity, interest rates may only go one way: up. This would put downward pressure on bond prices, making them a decidedly unattractive option at the moment. After two years of better brightness, gold has lost its luster a year ago, but remains costly despite rising demand and inflationary risks. As far as real estate is concerned, prices have stabilized, but the overhang of untapped housing stock comes down against easy capital gains. The only remaining option is the stock market’s freighter end, populated by industry disruptors (think green, tech, and platform businesses). To play that corner you’ll need a sharper eye for picking stocks and a greater appetite for risk than most retail investors.
By special arrangement with Business Standard
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