It took just eight trading sessions for Nifty – which is an assortment of 50 representative stocks in the National Stock Exchange, giving an indication of which way the share market is headed – to add 300 points.
Nifty has gained 21 percent and Sensex, the benchmark index of the Bombay Stock Exchange, has gone up by more than 20 percent this year alone.
Such a gravity defying rally has taken everyone by surprise. The rally has taken place on the back of a seemingly weakening economy with lead indicators not painting a rosy picture – below par industrial production numbers, tepid credit growth and subdued GDP growth.
Is the rally fuelled by the liquidity gush (more money chasing fewer stocks) or have economic fundamentals improved dramatically in the last few months?
Are market participants expecting bumper earnings for corporates in the coming and subsequent quarters, and hence the improvement in price-to-earnings (PE) multiple?
Incidentally, our share market is second most expensive in the world, trailing marginally behind the S&P of the US.
Second Most Expensive Market in the World
The forward PE multiples of the country’s equity indices currently stand at close to 18, which is way ahead of the five-year average of 16.5.
S&P’s PE multiple at 18.5 is marginally higher. PE ratio (price of a share divided by its earning per share) gives an indication of how much one is ready to pay for each rupee worth of the earnings of the company.
Higher PE ratio of a company means over-priced stock. In other words, most stocks in our share market universe are trading at valuations way above the five-year average. Why such exuberance?
The Quint’s analysis shows that other than liquidity gush, the TINA (there is no alternative) factor is behind the record breaking rally in the share market.
Let us assume that I have some investible surplus to invest. What are the options before me – fixed deposits, small saving schemes like Kisan Vikas Patra and postal savings, gold or real estate? Or non-convertible debentures and corporate FDs?
Other Investment Avenues Have Dried Up
What do I get out of fixed deposits? Seven percent taxable return. What is the average taxable return on small savings schemes – 7.65 percent.
And the return on gold is negative. Data shows that in the last five years, one’s investment in gold has given a negative return of 9.5 percent.
In the last year alone, the price of gold in rupee terms has fallen by 10 percent. Should gold then be on my investment radar? Certainly not, if I want my money to grow and not depreciate.
Does the real estate investment make the cut? The broad price trend released by the National Housing Bank’s Residex House Price Index does not paint a rosy picture.
According the Residex index, real estate prices in the last one year have gone up by four percent in Mumbai, six percent in Delhi, three percent in Kolkata and 10 percent in Chennai.
Among the bigger cities tracked, Nagpur has seen the maximum appreciation of 11 percent. However, cities like Noida, Greater Noida, Bhopal and Nashik have witnessed zero appreciation in real estate prices in the last one year, according to NHB data.
Given the way things have moved, does real estate investment hold my attention?
Non-convertible debenture (NCD) and corporate FDs give us another investment option. Considered as slightly riskier assets depending on the health of companies, returns on these asset classes are 1-2 percent higher than bank FDs. Since the supply is slightly irregular, they are yet to become very popular investment options among investors.
Domestic Investors Driving Recent Market Rally
Only other option therefore we are left with is equity. No wonder, domestic investors have been putting in all their investible surpluses into mutual fund companies. And demonetisation of certain currency only accelerated the process. According to an Economic Times report, “the cumulative net inflow in mutual funds in FY17 was Rs 99,775 crore.
According to an Economic Times report, As of November 2016, when the demonetisation transpired, net inflows in mutual funds were Rs 36,021 crore, which in the subsequent three months till February 2017 grew 2.6 times to Rs 95,013 crore.
As a result, most of the recent rally in the share market has been fuelled by domestic funds and not foreign portfolio investors (FPI) as was the case in most previous blockbuster rallies. According to reports, while FPIs have put in close to Rs. 14,000 crore between April and July, the DIIs have invested close to Rs. 33,000 crore.
Now that you know why our markets are going up and up, should you put incremental money now? Your guess will be as good as mine.
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