Indian stock market is clocking record high despite not-so-good economic scenario both domestically and internationally. The fireworks right before Diwali are being looked at very cautiously primarily in the light of precarious economic numbers that simply refuse to fade away. Interestingly, even the US market is treading at an all time high amidst the uncertainty over debt-ceiling deadlock and economic challenges it faces. The general perception holds that an equity market rally is an indication of a favorable economic time. Why, then the current market rally seems to defy the rulesIJ
It is commonly known that when the central bank increases Repo rate (and other key rates), it usually signals tough days ahead for equity markets. Yet, when RBI increased Repo rate marginally by 25 basis points last week, the market responded enthusiastically. Not only did the market breach its all-time high level of 21,206, as many as 82 stocks touched their 52-week high on the exchange. Clearly, the market seems to know more than what the macroeconomic numbers reveal.
Equity market is sure moving dangerously for numerous reasons. This time, the rally is primarily in blue chips and not in mid-cap and small-cap. In absence of high volumes, such rally indicates cherry picking. To make the things volatile, it is noteworthy that most part of the rally is due to foreign investment. So far, in 2013, foreign investors have invested some $15 billion. In October alone, some $2.9 billion poured into stocks. In the absence of domestic participation, more so because retail investment is negligible, the market does not have substantial support. Foreign investors are known to fly back quickly on hint of a better alternative. If Quantitative Easing tapering that the US Federal Reserve so often talks about is activated, we can expect foreign money to return quickly. In such a scenario, market will precipitate faster than we think.
It does not mean the current market rally is for no plausible reason. Taking a cue from US market, it is interesting to note that its market is making new heights not as much because the macro parameters have improved substantially, it is primarily because cheap money is chasing stocks. With Fed printing dollar faster than ever, it is natural that easy money would chase an asset that is performing. That the market run in US is euphoric is evident from valuations of some of the companies (exorbitant valuation of technology companies is a case in point). Money would naturally enter emerging markets. This time, India seems to be a bit favourable.
When the markets have factored in all the bad news, all of a sudden stocks starts looking attractive. There was hardly any good news coming out of India in recent years. The currency fiasco was the final nail in its coffin. With elections round the corner and some righteous move by RBI, the Indian story is looking a tad better than before. With current account deficit (CAD) in control and Rupee having regained some of its strength, currency risk has largely been mitigated. Market also seems to have read a strong Government coming back at the helm. The only villain in the story remains inflation, which should be tackled easily with a strong Government. Apparently in next three months, scenario in India would start looking better and brighter. The market seems to be sensing the change and is in process of factoring in the future valuation in the current stint. This time, I hope, the market will get a chance to unleash its true potential. This time, I hope, the market will wake up after lying dormant for more than four years. This time, I hope, this is for real.
(The writer is Director, InvestCare, leading wealth advisors. You can reach him at samar.vijay@investcare.in)