MARKETS – CRASH OR NEW HIGH?

Is the market going to crash? Or is it going to hit 53,000?

These are two extremes of the same spectrum but that’s the biggest question is everyone’s mind.

Unemployment is high, Covid rages, deaths are mounting, lockdowns have once again started affecting supply chains, vaccine saga continues, they say the third wave is inevitable, manufacturing is down- overall, as we see on the news channels, day in and day out, the bad news simply does not stop. Blame it on political ineptitude or the wrath of the God’s, or maybe both together, India is simply not the best place to be in right now.

Yet, FIIs are investing in the Indian stock markets. The Sensex and Nifty scale new highs and no one is yet saying that the markets have become too pricey.

The RBI too voiced its concern saying that the rising stock market amid GDP contraction poses a risk of a bubble. Are we in a bubble currently and is it growing so big that when it bursts, it will drown us all?

Well, to pop your bubble, the market does seem to be in a bubble zone. Undoubtedly, market valuations are overstretched. Valuations are based on earnings and Q4 numbers have been fantastic mainly on the low base effect – last year Q4 marked the beginning of the lockdown and that means Q1 of current year too, on a YoY, will show fantabulous numbers. But the underlying stress on costs, the inability to pass it on to the consumers and pressure on margins is very clearly evident. With inflation heading northwards, fuel prices hitting the 100-mark, yes there is cause for concern.

Definitely many stocks, be it large or mid or small cap or even penny stocks are in the bubble zone. But is the market going to crash? Nope; not any time soon. That’s what the global markets also indicate. There is a lot of liquidity, what with the huge dollops of stimuli and low interest rates; so till interest rate, globally and in India, are held low, the crash is not going to happen.

Along with huge global liquidity, as we have said time and again, the increasing cult of retail investors, also with liquidity, will keep the markets buoyant. So, inflows will continue but they might fluctuate time to time.

The bubble will remain as long as interest rates remain low. In the immediate short term, the US is not expected to touch the near-zero rates and even here, immediately at least, no policy reversal is expected. But some time later, the US Fed will start tapering and hike interest rates but based on past experience, the Fed will give ample notice and not just pull the rug from under the feet.

The bubble we are in today will not burst; rather it might slowly start deflating and at that time, whether or not reversal of fund flows will happen will depend on where our economy is and how well the leadership is managing the pandemic.

The rising stock market does create an illusion of prosperity but its just an illusion – everything needs fixing and that too urgently. Our boat has many leaks but we are sailing high…..