Moneycontrol Pro Panorama | The peak of reckoning

There is no single factor behind this breath-taking rally of Indian equities or the quiet resilience of the bond market.

Dear Reader,

When Ed Hillary and Tenzing Norgay reached Mount Everest’s peak in 1953, only one or two expeditions per year were allowed. Today, a multi-billion-dollar industry thrives on the adrenaline of mountaineers who want to conquer the highest peak. Many people have reached the top and countless have failed and suffered a worse fate. But we are here to talk about a different peak.

India’s benchmark stock indices have broken multiple records in the past months, unfazed by geopolitical tensions, notoriously fickle data that swung the pendulum for rate cut hopes wildly and a growing regulatory impatience onshore. The Sensex just scaled 80,000 yesterday.

Granted, the election outcome did throw the market off the rails, but that was so brief the pain has long been forgotten.

Obviously, there is no single factor behind this breath-taking rally of Indian equities or the quiet resilience of the bond market. Multiple trigger points have led to this summit and investors are spoilt for excuses to drive up the market in July as well. The quarterly earnings season that will kickstart next week and the full Budget of the newly elected government have given enough fodder to the rally.

Capex hopes are sending public sector entities and bank stocks soaring, passive investment is chasing momentum stocks and even mutual fund managers don’t seem to exhibit the maturity that they are believed to have gained. The retail investor is just happy to toss money where the bigwigs play.

Such is the ferocity of the current rally that it has even worried the chief justice of India. CJI D Y Chandrachud gave his two pennies to regulators at an event recently and said, “The more you see the surge in the stock market, the greater the role, I believe, for SEBI and SAT, as institutions which will exercise caution, celebrate the successes but at the same time, ensure that the backbone is stable.”

Of course, regulators haven’t been quiet. The Securities and Exchange Board of India (SEBI) has taken a slew of steps to curb reckless options trading and has even asked brokers to have a mechanism to prevent fraud and abuse. The SEBI chief wants investors to be wary of “mischiefs” by portfolio managers who handle fat wallets of the rich.

Meanwhile, we have a timely piece by Larissa Fernand for retail investors on how to invest sensibly in these bullish times. Analysts at Kotak Institutional Equities also have a handy reckoner to remind us of some “market myths”. They elaborate in their July 3 note that strong economic growth does not translate into big equity returns at all price points. “The Nifty-50 Index may be reasonably valued in the context of historical valuations and bond yields, but most other parts of the market are trading at full-to-frothy valuations after a massive rerating in their multiples in the past 2-3 years,” they added.

Further, the analysts point out that comparing post-tax returns of equities and debt is like comparing apples and oranges. Notably, the belief that earnings will compound annually always is a myth. “Investors may want to remember (or forget) that several high-flying sectors have ‘crashed and burnt’ in the past including two of the current market favourites (electric utilities and real estate).”

What does all this mean? Simply, investors must keep their wits when surrounded by too good to be true narratives. Kotak analysts warned about narrative stocks in an earlier report. “In our view, irrational expectations (high market return at all price points) among non-institutional investors have been the key driver of the market,” they wrote. The power of narratives has been explained by Manas Chakravarty in his piece here citing a study by NBER.

When will the market break? Or will it at all?

A dose of reality could lower the adrenaline of investors. The early updates of some banks on first quarter business performance have already given investors enough to retreat a bit. My colleague Madhuchanda Dey explains here why banks are not pleasing investors. Deposit growth hasn’t lived up to expectations which could mean credit growth would slow too. The upshot is that expectations backing valuations will need to stand up to the reality of corporate earnings.

For investors eager to scale the next record high atop benchmark indices, a sobering line from a different context: Every corpse on Mount Everest was once a highly motivated person.

Investing insights from our research team

Weekly Tactical Pick: Multiple triggers in place for this OEM

Indian textile industry: Recovery and growth patterns visible

Should investors bet on DCB Bank?

What else are we reading?

Budget Snapshot: Interest burden is not changing for the better

Budget 2024: It’s time for the government to walk the talk on bank privatisation

Beyond box-ticking, it's time to reassess the role of independent directors

HDFC Bank’s shares to display pendulum effect, thanks to MSCI’s index methodology

The three reasons why India is unable to build quality public infrastructure

How the investment world is trying to navigate geopolitics (republished from the FT)

Budget 2024 finds India in a sweet spot, thanks to unanticipated revenue boost

Why disconnecting global trade from China is so hard

India’s banks know climate is their biggest threat

Koo Closure: A wake-up call for new-age entrepreneurs to up their innovation game

Budget 2024: How capital gains tax can be used to optimise capital allocation

Donald Trump wasn’t going to prison anyway, neither was Hunter Biden

Personal Finance

Considering cholesterol-reducing jabs? Inform your insurer so

Tech and Startups

SEBI's uniform charge structure: Top discount brokers might see up to 20% decline in FY25 topline

Technical Picks: TVS Motor, L&T, Inox Wind and Bajaj Finance (These are published every trading day before markets open and can be read on the app).

Aparna Iyer Moneycontrol Pro