Ok, I confess I am late to the party. But it seems like the Indian stock market is enjoying new highs every other day. Is this sustainable? Who know? Does anyone know why the stock market is touching new highs even as the economy has not recovered and many things are still unknown? No one knows. But that does not stop one from making wild guesses. The most common and obvious theory is that the market is buoyant on the news that a vaccine may soon come. I don't know why that should be a good reason to hit new highs.
Just think about it. The Indian economy was already doing poorly even before we went into the COVID situation and the consequent lockdown. Even before COVID, the non performing assets (NPAs) of banks and NBFCs is already looking bad. Sensex was at 42,000 at that time and many said it was already too high. Now, after COVID and reduced economic activity, and higher risk of NPAs due to loss of jobs, how can one expect Sensex to hit a new high of 44,000? I just don't get it. Even Oracle of Omaha, Warren Buffet is in buying mode while the US markets are hitting new highs.
What do the fundamental indicators say?
One should never blindly go by any indicators without taking the whole economic situation into consideration. With that in mind, lets explore what some of the fundamental indicators have to say.
Price to Earnings (PE)
If you look at the PE ratio of Nifty 500, the ratio broke all records including the record held by the 2000 bubble. While the price has gone up a little bit, the primary reason why PE is so high is because of the suppressed earnings in the last couple of quarters. And everyone knows why the earnings were low (hint: COVID).
Price to Book (PB)
Of course if you look at PE during a pandemic it will look exaggerated. A better indicator to look at during such times is the price to book. Indeed PB does look better. But the effect of economy will fall on the books a bit later. So we have to wait and see.
GDP vs Nifty
If you compare Nifty 500 with GDP projections, you will notice that the price is not too far from the projection. So another indicator that is supporting the current high price of market. But again, the GDP number lags the economy by a bit. We will have to wait and see.
Volatility Index (VIX)
The VIX index seems to suggest that no one is really worried about the economy or the virus anymore. Not sure if that is a good sign or a bad one.
What about other indicators?
As I already mentioned, Warren Buffet is in investing mode, which means he is seeing some pockets of undervalued stocks. Gold prices are falling, which is another indicator that people have thrown caution to wind. Bitcoin is making a comeback indicating that people are now bold enough to participate in a volatile asset which is a sign trust in economic recovery. Is it all related to a promise of possible vaccine? Very strange.
Finally, some people are predicting that Sensex will hit 50,000 by 2021. That means a growth of 14% in just 1 year! I think we should all just buy the index and reap the benefits of a double digit returns in 1 year? The same article expects Sensex to hit 59,000 if the same positive trends continue. Just imagine, that is a whopping 34% growth in 1 year from the current high of 44,000. At the same time they project Sensex could go down to 37,000 if there are headwinds. They want to cover all their bases when making predictions it seems, so no one can blame them about a bad prediction.
What am I doing?
As usual, I cannot make any predictions and I don't believe predictions made by others. It is just a fun exercise that I do from time to time to see if I can build some insights. As of now I don't have any insights. So I am just sitting on the sidelines doing nothing. What about you?