A note of caution in a market still sizzling

Mumbai: The world-beating rally on Dalal Street of the past 18 months that propelled the Sensex above the 60,000-mark last week may have fewer legs left for now. While the Nifty too, riding the ongoing bullish wave, is expected to cross the milestone of 18,000 soon, top fund managers and strategists warn about looming risks such as earnings disappointments, rich valuations and the Evergrande crisis in an overbought market.

So far this year, the Sensex and the Nifty have gained about 25%. The Sensex went from 50,000 to 60,000 at a record pace in eight months, with the last 5,000 points in just 28 sessions.

“Anything more than this is froth,” said Sanjiv Bhasin, director, IIFL Securities. “The market has priced in all the good news but this pace cannot sustain.”

The Nifty is less than a percent away from 18,000. The index touched a record high of 17,947.65 on Friday before closing at 17,853.20, up 30.25 points or 0.17%. While a wider section of the market thinks the stocks are overbought, what is giving investors confidence is that stocks advanced last week despite US Federal Reserve’s hawkish stance and the debt crisis at Chinese realty giant Evergrande.

“The risks could come from the Fed, inflationary pressures and the outside chance of geopolitical issues. Of course it might be something totally minor that sparks a wobble,” said Hugh Young, Chairman of Aberdeen Standard Investments Asia. “We’ve seen a tremendous amount of hot IPO activity in India and there might be simply some indigestion provoking a pull back. People may focuson some of the traditional issues in India like the strength of the banking system,” said Young.

Indian markets have seen a relentless rally over the last 18 months due to unprecedented buying by domestic and overseas investors on the back of easy monetary policies of global central banks, increase in the pace of vaccination, fall in Covid-19 cases and optimism about the revival in the economy. From the Covid-19 pandemic lows of March 2020, the Sensex and Nifty have gained over 130%. The rally has resulted in stock valuations trading above long-term averages.

The Nifty is trading at an estimated price to earnings (PE) ratio-a popular valuation measure – of about 24.5 times against a five-year average of 21.03.

“Peaking growth, peaking liquidity and worsening earnings surprises should impact equity returns,” said Sanjay Mookim, strategist and head of India research at JP Morgan.

“The support for equity returns has diminished. There is a generalized argument that India has a demographic advantage, capex and economic recovery, but this can’t be said at every price for the market,” said Mookim. Foreign Portfolio Investors have pumped in ₹65,000 crore, or over $9 billion, into Indian equities this year while its Asia region peers like Taiwan and S Korea have seen outflows.

Lack of high returns from traditional investment options have driven a record number of retail investors to the stock market. This is particularly evident in the midcap rally and the run for subscribing to initial public offerings (IPOs). The latest example of this trend was Paras Defence and Space Technologies’ IPO which was subscribed 328 times, with the high-net-worth individuals’ category being subscribed 974 times.