THE BSE’s market capitalisation (the aggregate value of companies trading on BSE) reached a record high of `108.03 trillion on July 25, 2016 on the back of strong macro fundamentals coupled with good monsoon, possibility of passage of GST Bill at the earliest and stable corporate earnings that are likely to grow in double digit during FY17. Macro indicators show broadening of the recovery driven initially by public capex and FDI and now led by improving consumption expenditure. Growth estimates have, therefore, been revised from 7.5 per cent to 7.7 per cent for FY16 and 7.8 per cent for FY17. With ample liquidity, the market has been receiving strong inflows from FPIs who have by now invested a net of US$ 984 million since the start of the year.
I have been advising investors to use any steep correction as a buying opportunity since I believe that the market is set to give decent returns over a period of 3-5 years. However, investors may have been disappointed since a correction has so far eluded them. The most common mistake investors make is when they feel left out and start chasing stocks in this kind of market with almost euphoric conditions. The phenomena called panic buying should best be avoided at this stage. India’s market cap to GDP ratio, popularly known as Buffett Indicator is at a six-year high of 79 per cent. It is considered as one of the best single measures to understand where the valuation stands at any given moment.
The best part is that the market may continue to rise and defy all norms for some time. But the more suave analysts are worried and prefer to advise investors to stay with cash instead of chasing the market. Those who justify current valuations say that India is a domestic focused economy and local conditions are poised to get better. However, the liquidity driven global rally may fizzle out since clarity on Brexit is still to emerge and the Indian market has invariably followed global trends. Brexit is not a one-off event. Its repercussions are likely to go on for a long period.
However, the Indian market may not witness a steep correction due to fundamental change in the kind of flows the market receives now. There is a distinct shift from direct investing by individuals towards investing through mutual funds, pension funds, etc. Also, investors prefer the SIP route instead of playing in the market; SIP flows are now crossing `3,000 crore a month. Moreover, the pension money that has made a beginning into the equity market will grow in times to come. With these developments, the destabilising effect of hot money will gradually diminish. But the inflation monster has started raising its ugly head and may limit the RBI’s ability to cut interest rates further. The fact that China may resort to currency devaluation to prevent economic slowdown could unsettle markets, including India. The weak external demand and muted trend in private capex may continue to drag growth.
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