JOIN USIt's just a bounce, the larger picture is still grim
The global markets in general, and Indian markets in particular, may have seen huge gains in three of the five days of last week, but let’s wait for some more time before calling it a rally. It’s a mere bounce after an unprecedented bear run.
Decoding of the numbers, over the past few years, the larger picture looks even grimmer, that is why the retail investors, who are most susceptible to the panic accumulations in such situations, need to tread cautiously.
If we look at the global historical numbers, the bull markets last for an average of five and a half years, while the bear markets last an average of 16 months. Since Indian markets have huge exposure to the foreign monies, India is expected to be more in line with the global averages.
However, in the case of India, the bull market over-lasted its tenure: it started in 2013 and continued right up to February 2020 -- about seven years. There were corrections after the note-ban, and after the shadow banking crisis erupted, but benchmarks somehow managed not to slide into bear territory.
So the coronavirus lockdown just provided an ideal opportunity for a massive correction that had been in the offing for a long time.
But how did the bull last for so long in the Indian markets? The foreign institutional investors (FIIs) control one-third of the Indian markets. Since November 2016, the net outflow of foreign funds stands at a whopping Rs 1.85 lakh crore. Since then, the average exchange rate has been 68.28. At that rate, foreign funds have now withdrawn a whopping $27.13 billion from Indian markets in 3 years and 5 months.
A substantial part of this outflow is contributed by reallocations towards Real Estate by global fund houses, as well. Also, a lot of foreign money has been replaced by foreign direct investment (FDI).
However, the impact of policy goof-ups that happened all this while, according to the analysts on Dalal Street, also contributed to this outflow. Over $3 billion was withdrawn in the month of demonetisation (November 2016). Another wrath of the foreign funds was after the levy of super-rich surcharge in July 2019.
On the other hand, the domestic institutional investors (DIIs) lead by Employees’ Provident Fund Organisation (EPFO) and LIC, drove the bull run in the markets post-demonstration, as the domestic savings got channelised towards the equity markets.
As foreign funds dumped Indian shares, DIIs went on a buying spree, purchasing Rs 3.36 lakh crore (almost $50 billion) worth of shares during the same period.
According to estimates, the EPFO has pumped in over Rs 60,000 crore of the pensioners’ money into stocks, which ultimately led to an overvalued stock market by mid of January this year.
So is it the right time to invest in the markets?
Buffet Indicator, which measures the investors’ wealth as a proportion of gross annual national income, shows that owing to the three days of the bounce, India has risen above 75% mark for the fairly valued security market and is still in the bear zone.
As of date, the Indicator, which is prominently used by the global investors to check the valuations of the equity markets, shows that India’s investor wealth to national income ratio stands at 80%, compared with 115.2% two months ago when the market capitalistion of India Inc had peaked owing to a constant rally in the stocks. If Buffet Indicator goes above 115%, the country’s stock market is considered as significantly overvalued.
In fact, in the past three years, Indian markets, which are driven mostly by a select group of blue-chip companies on the benchmark indices, had surged despite corporate earnings being muted. As a result of this, by December 2019, the investors were paying over Rs 28 for every Re 1 earning of the India Inc. However, as a result of about a 30% drop in the Indian markets, the investors are paying only Rs 19.77 per every Re 1 earned by corporate India.
Despite the fact that stocks are becoming cheaper, the analysts on Dalal Street say that one must not rush into accumulating the stocks, as corporate earnings are set to contract by at least 15%, as the global economy has entered into a recessionary phase.
“While these (stimulus packages) are temporary steroids for the economy, nobody can estimate the intensity of the pain, emerging out of this pandemic and lockdown, is going to befall upon our economy and businesses... Earnings contraction in the next two quarters is certainly a given with tourism, airlines, hotels, metals, retail outlets not under essential goods getting impacted the most, but by when will they recover is the million-dollar question,” says Jimeet Modi of Samco Securities.
Hence, with contraction in the earnings, the safer bet for investors would be a select group of companies that have created tremendous wealth over the past twenty years.