India’s Stock Market Headed for Crash?

The key Indian indices — Sensex and Nifty — have been on a continuously expanding since the beginning of 2017. So far in 2017, domestic investors have bought stocks worth more than $7.2 billion, compared with foreign portfolio investors (FPIs) who have run up a tab of $6.67 billion. Back in 2016, FPIs bought stocks worth $2.9 billion while home-grown wholesale investors spent $5.6 billion. The benchmark index of National Stock Exchange – Nifty 50 and Bombay Stock Exchange – Sensex have returned 21-24% so far in this year. The broader Nifty 50 index touched an all-new lifetime digit of 10,178.95 points in the early morning trade today.

Warning sign

These stellar returns are probably a sign of depression or a stock market. It happened in the year 2008 as the 30-share barometer Sensex tumbled 27% over the month of September to 9,748.08 points from 13,417.91 points. The net profits for the Nifty set of companies fell around 11% year-on-year in the first quarter of FY 2018 which disappointed the Street.

Indian equities have been rallying since January 2017 even as economic growth had slumped to its weakest since the year 2014. Michael Patra from Reserve Bank of India’s rate-setting panel described these conditions as “frothy and bubbly” in the minutes of last month’s meeting. “The combination of high valuations in equity and fixed-income markets, an appreciating currency and the persistence of a liquidity overhang in the money market is a perfect recipe for a financial imbalance,” Michael Patra added.

Despite the earnings’ decay, the estimated price-earnings ratio of Nifty is almost two standard deviations above the 10-year mean, Bloomberg reported. This means the valuation of Nifty measured in terms of price-earnings ratio is exceptionally higher than its 10-year long-term average. The last time the ratio was that high, at the start of the global financial crisis in 2008, the gauge had its worst annual decline on record.

Cautious brokerages

Brokerages have been expressing caution the Indian market is overvalued, trading at close to 20 times one-year forward earnings, well above its long-term historical valuations of around 15 times. Moreover, they have also flagged the downwards revisions to earnings estimates. “There is a clear and present risk to the earnings turnaround in FY19 as consumption, which has been the sole driver of growth, will not likely be strong enough due to weak fiscal push and job growth. The capex cycle remains promising and limited to pockets of infrastructure,” Macquarie wrote in a report.

GDP slowdown

India’s GDP growth disappointed for the second straight quarter. It decelerated down to a mere 5.7% in April-June pitting the country behind China on the list of world’s fastest-growing major economies. The 5.7% fiscal first-quarter GDP growth was much lower than the 7.9% seen in the same quarter a year ago. It even slowed down from 6.1% in the preceding quarter.

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