Sensex above 50,000! Is the market in a bubble that is about to pop?

As per data available with NSDL, foreign portfolio investors (FPIs) have pumped in about Rs 14,750 crore in the Indian equities in January so far.

January 21, 2021 / 11:51 AM IST

Equity barometer the Sensex jumped more than 300 points on January 21 to surpass 50,000-mark for the first time, another indication that the bulls are not done yet.

The 30-share pack hit a record high of 50,126.73 and the Nifty50 index scaled the fresh peak of 14,738.30 in the early trade.

The Sensex hit 5,000 in 1999, took eight years to climb to 20,000 and 12 years after that to hit the 40,000-mark on May 23, 2019, in intraday trade. This time, it has taken the index less than two years to gallop another 10,000 points to hit the 50,000-mark.

Liquidity boost, low rate regime, healthy corporate earnings and robust foreign fund inflows are pushing the market high.

Also read: Sensex hits 50,000! Six key risks that could play spoilsport for the D-Street bulls

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"The liquidity expansion by the central bank and the ample FII driven liquidity, a V-shaped recovery of growth aided by the discovery of the vaccine, and most recently, the change of guard in the US have been some of the factors propelling markets higher and higher," said Joseph Thomas, Head Of Research, Emkay Wealth Management.

But analysts have been raising concern over the rich valuation of the market, as the economy is yet to recover and the COVID-19 pandemic still a looming threat.

Brokerage firm Motilal Oswal Financial Services, in its Bulls & Bears report for January, said the Nifty was trading at a 12-month forward P/E of 21.4 times, a 14 percent premium to its long-period average. Its P/B of three times is at a 17 percent premium to its historical average.

The Nifty’s 12-month trailing P/E of 27.7 times is at a 39 percent premium to its long-period average of 19.9 times. At 3.3 times, its 12-month trailing P/B is above its historical average of 2.8 times, the brokerage said.

Moreover, India's market-to-GDP ratio is also above the long-term average at this juncture.

"India’s market capitalisation-to-GDP ratio has been volatile as it moved from 79 percent in FY19 to 56 percent (FY20 GDP) in March 2020 and now stands at 98 percent (FY21E GDP)—above its long-term average of 75 percent," Motilal Oswal said.

All these factors point to the fact that the market valuation is stretched.

"As the Sensex crosses 50k, the valuations do look stretched. The valuations are a function of earnings and earnings not coming through remain the key risk at the current juncture," said Thomas of Emkay Wealth Management.

The market's continuous and even perplexing rise raises the question if it is in a bubble.

"No doubt the market is in a bubble zone. A lot of stocks are in the bubble zone, including largecaps, mid and small-caps and penny stocks. However, there are still pockets of opportunities," said G Chokkalingam, Founder and MD, Equinomics Research & Advisory.

Is the market ripe for a strong correction? This is unlikely due to many factors. First of all, the Indian market is mirroring a global trend and as long as key markets such as the US continue to hold up, the Indian shares will rise.

The gush of liquidity along with low-interest rates are also keeping the market higher. Analysts don't think the low-rate regime will end anytime soon.

"Global liquidity is unlikely to do a reversal anytime soon. Till the time the recovery is on a firmer path in key markets like the US, the withdrawal of liquidity is not going to happen. The inflows are going to remain there but the quantum of inflows may fluctuate," said Pankaj Pandey, Head of Research, ICICI Direct.

As per data NSDL available, foreign portfolio investors have pumped in about Rs 14,750 crore in the Indian equities in January so far.

Another factor that may keep the market up is the deluge of retail investors.

"The market may not crash anytime soon because in the last 3-4 days, about 2 lakh new investors have come into the market. Yesterday, the number of registered investors crossed the 6-crore mark for the first time," Chokkalingam said.

"The market may fall 5-10 percent but it will not crash like last year. After June, the market may see a massive rally because a lot of money will flow into the market due to stimulus packages. The Sensex may be in the range of 53,000-54,000 by the year-end," said Chokkalingam.

The December quarter earnings have been decent so far. Decreasing COVID-19 cases and the beginning of vaccine drive are also positive factors.

Investors are now betting on stocks ahead of Union Budget 2021. The Budget is expected to focus on infrastructure, healthcare and manufacturing.

However, the market does have some points to worry about.

Post Q3 results, if the street realises that the stocks (and the market) are overvalued or have run ahead of time, then it may see a correction.

If the budget comes out with a new levy of fresh taxes or surcharges, fiscal indiscipline and possibilities of interest rates rising sharply are also the risks for the market.

There are other factors, too, that can trigger a deep fall in the market such as rising interest rates globally, debt-to-GDP ratio of countries and institutions at dangerous levels, geopolitical concerns, COVID pandemic not coming under control and a sustained rise of US dollar.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Jan 21, 2021 10:40 am

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