As the Sensex zoomed past the 30,000 mark on Wednesday, there was as much disbelief on Dalal Street as was euphoria.
“It’s bizarre to see stocks rally, driven solely by liquidity,” said one brokerage.
“You are driving a Ferrari with failed brakes,” quipped a market veteran.
“This rally reminds me of the 2008 bust after the 2007 peaks,” said another.
Alongside bullish views, an equal number of analysts also prophesied that the indices could fall as much as 10 per cent from these levels.
The 30-pack Sensex has risen to the 30,000 mark in just four months. It was quoting at sub-26,000 level this past January.
Even as analysts debated whether one should look at price multiples to check valuations or not, nobody had a rationale to offer as to how are the stocks rallying without supportive earnings.
“Clearly, earnings are not going to change despite our best wishes, which would suggest that the market ascribes a lower cost of equity (expected returns) on higher ‘liquidity’ alone. The latter does not hold in the context of higher domestic yields and unchanged risks. It seems more money reduces vigilance among investors,” Kotak Institutional Equities said in a note.
The brokerage said it was perplexed by the refrain among investors of too much liquidity in the market.
“If investors are making active decisions, they should also be deciding the fair value of stocks based on fundamental factors and not on liquidity,” the brokerage said, adding that it seemed like the sole investment thesis in some cases is liquidity, which is quite bizarre since active investors should be deciding on the fundamental value of stocks rather than leaving it to a nebulous issue such as liquidity.
“We can only hope that fundamentals improve sufficiently to support the valuations of stocks,” it said.
Basant Maheshwari of Basant Maheshwari Wealth Advisers offered a similar view. In an interview with ETNow, he compared the liquidity-driven rally to a Ferrari ride with failed brakes.
“A market driven by liquidity is like a Ferrari with failed brakes, driverless on a straight road. So, when a curve comes, we will know what it is like. I think the curve can come from either Mr Trump, who is blowing his trumpet every day, or from the North Korea or anywhere,” Maheshwari said.
“Fundamentally, this market it is not being driven by earnings. It is driven by earnings for very few pockets, but it is a selective bull market. I do not think an overall integrated bull run is happening anywhere. But people are making money and that is how things are,” Maheshwari said.
Rahul Arora, CEO, institutional equities, Nirmal Bang Securities, told the ET that a 10 per cent correction in the Sensex and Nifty50 from their current levels may not surprise him.
“The stock market today is akin to the 2007-08 period in some sense. Then, there was complacency in the market due to high liquidity, which is the case even now. The media as well as investors out there are taking domestic and foreign inflows for granted and believe the market may not correct,” Arora said.