Are we entering the bubble zone on Indian equities ?
The Indian stock markets are on a dream run. Up almost 160 % since March 2009 (ie) in little over a year. The trailing twelve months pe multiple is pushing 26 according to the National Stock Exchange web site. Only twice since 1998 when the NSE was founded and the data was first published, have we seen this. In February 2000 at the height of the IT mania, and in December 2007 at the previous bubble peak. On both those occasions we peaked at 27 times and then crashed. We are getting there folks on valuations. Please verify the data from the NSE s web site (Indices and then Statistics) by following the link and punching in the relevant periods. http://www.nseindia.com/
Your basic Fed Funds model is also out of whack. The risk free interest rate on the long bond in India – the 10 year GSEC - is pushing 8 %. The earnings yield on the stock market, - the risky asset - the reciprocal of the pe ratio, – 1/26 – is less than 4 %. The risky asset should yield a lot more than the risk free asset if investors are to be compensated for the risk they are taking. Instead it is yielding 4 % less. Peter Lynch’s immortal advice – “ When the yield on bonds exceeds stocks by 5 % , sell stocks and buy bonds”. We are getting there on this too.
All this would not matter if there was real growth in corporate earnings. But the advance tax payments by the top 100 corporates – a good proxy for the market - was up 13 % only in the September quarter. Not a good augury for profit growth in this quarter, especially with the market at 26 times earnings. Please follow this link for the article. http://www.business-standard.com/india/news/q2-advance-tax-paid-by-top-100-rises-13/408443/
The IPO market is the hottest it has been since 1995. Another sign of the top in place perhaps. September featured a week which was the best since 1995 with 15 issues hitting the market. "This will be the busiest week in the Indian primary market history after 1995. Even during the red-hot bull market of 2007, no single week featured 11 IPOs". So says SMC Global Securities Equity Head Jagannadham Thunuguntla . The IPO pipeline to March is scheduled to raise USD 25 to 30billion, with the largest – Coal India – scheduled in mid October. Please follow the link to read the article. http://www.expressindia.com/latest-news/Busiest-week-for-IPO-mkt-in-15-years/684706/
And how is the real economy doing ? Core sector growth was up a little over 3 % according to the latest figures from the government. 3 % !!! With the market at 26 times earnings. !! Please follow the link to read the article. http://www.business-standard.com/india/news/core-sector-growth-decelerates-to-13-month-low/409705/
And on the price level. The primary articles index is up 18 % according to the latest data, literally close to text book definitions of galloping inflation levels ( which is 20 %) . Please follow the link to read the article. http://www.livemint.com/2010/09/30114119/Food-price-inflation-surges-to.html
And the RBI Executive Director Mr. Mohanty, is calling yet again for rate hikes. Please follow the link to read the article. http://www.business-standard.com/india/news/rbi-says-pulses%5C-shortage-driving-food-prices-up/110830/on
Finally on to insider selling, also a sign that markets are getting dangerously overvalued.. Indian insider selling, Bloomberg tells us, is at the highest it has been since the previous top in December, 2007. Please follow the link to read the article. http://www.bloomberg.com/news/2010-10-01/india-day-ahead-insiders-selling-stocks-at-fastest-pace-since-sensex-peak.html
All this doesn’t matter in the face of a tidal wave of liquidity surging into Indian equity markets. Last month – September 2010- w as the best month ever for foreign inflows into Indian equities. ( almost USD 8 billion). Someone, somewhere is buying Indian paper like water, and like there was no tomorrow. And without regard to any of the facts above. ETFs, hedge funds, sovereigns, it doesn’t matter. And canny local investors, who know no other market than India, and therefore know it well, are all too happy to sell to the foreigners. September 2010 had one of the largest outflows from domestic institutional investors. (DIIs). Basically the foreigners (mainly indexed money) bought, and the local guys sold to them.
Optimism is rampant and the local brokerage community is making the usual soothing noises to keep the party going. One specimen, Raamdeo Agarwal of Motilal Oswal, still insists the market is trading at 17 times forward earnings. Recall from the NSE data that the market trades at 26 times its most recent past twelve months earnings. For it to trade at 17 times forward, it would mean an implied earnings growth of 47 % ! But most recent advance tax growth is at 13%. The numbers simply don't add up. Recall the immense conflict of interest among brokers and investment bankers. They have to sell USD 25 billion worth of paper in the next few weeks and months ( as noted in the article above) . Hence the soothing noises.
At some point the above facts will kick in, and the tidal wave of liquidity will end. Just make sure that when the music stops, you have a chair to sit on. We heading for a crash, folks. And a big one at that.
Disclosure: Exiting Indian markets