Bulls take charge

But India is among the most expensive markets in the world

The legendary investor and Columbia Business School Professor, Benjamin Graham, personified investor sentiment as “Mr Market”, a manic-depressive whose moods swing between gloom and euphoria. One of those euphoric upswings has occurred as a broad majority of Indian stocks have surged. The ongoing bull run is driven by sentiment rather than hard data. Since the Pulwama terror attack on February 14, the Nifty is up by 5.5 per cent and the Nifty Midcap 150 Index is up 7.7 per cent, while the Nifty Smallcap 250 Index is up 12.9 per cent. Foreign portfolio investors (FPIs) have led the charge, buying ~256 billion of equity in the past four weeks. Domestic institutions and retail investors have also been bullish and are putting money into stocks. Many of the bulls are anticipating the return of the Bharatiya Janata Party (BJP) to power, given the rise in nationalist sentiment triggered by the Pulwama attack and its aftermath. This may be premature as there are over two months to go before the shape of the next government is known, but opinion polls do indicate that the BJP has been gaining voter-approval.

Economic data doesn’t support the uptick in sentiment. The Q3 results were poor. A Business Standardstudy of 2,338 companies showed that net profits were down 28 per cent, year-on-year for Q3, 2018-19, versus the same quarter of 2017-18. The high-speed data, like falling vehicle sales, indicates further slowdowns in January and February. This is reinforced by a low Index of Industrial Production for January and falling inflation primarily caused by low food prices, which usually translate into low rural demand. Moreover, the poor macroeconomic data out of the United States, China and the European Union seems to justify a consensus opinion that global growth will slow in 2019. However, FPIs are enthused by recent policy reviews and statements from the European Central Bank and the US Federal Reserve, indicating that monetary policy will continue to be dovish. The Fed is likely to pause its rate hikes; the EU is unlikely to raise its negative policy interest rate; and the Bank of Japan is continuing with negative policy rates and a quantitative easing programme. There are widespread expectations that the RBI’s rate cut at its last monetary policy review in February may be followed by more loosening and another rate cut in April, given a low-inflation, low-growth scenario. The prospect of easy money has driven risk capital into equities and, notably, into emerging market equity in the hope of higher returns. Indeed, every major stock market in the world is up in calendar 2019, and many have logged double-digit gains. India is the laggard in this respect.

Graham also pointed out that “in the short run, the market is a voting machine but in the long run, the market is a weighing machine”. This is apt, considering that prices today reflect the sentiment of investors, who are betting on a hoped-for electoral outcome. But in the long run, prices weigh and discount earnings. And, by any valuation standard, India is among the most expensive markets in the world, with the Nifty running at a price-earnings multiple of 26, and the midcaps and smallcaps valuations going much higher. Investors would be well-advised to exercise some caution, with the market valuations running far ahead of growth prospects.