On a risky run

For the past six days or so, stock markets are on dream run, setting new records with every passing day. Benchmark BSE Sensex hit an all-time high of 37,606.58 points yet again on Tuesday. Not to be left behind, NSE Nifty scaled to new peak of 11,356 points. Markets witnessed similar records in the past one week or so. 

Reliance Industries, India’s biggest business conglomerate, has been driving markets for the last couple of days. RIL led by Mukesh Ambani, India’s richest man, posted a stellar first quarter results with its net profit zooming to a record Rs 9,459 crore during April-June period. 

It released the results on Friday. And within two days, it replaced TCS, the profit-spinning machine of Tata Group, as the country’s most valued company by market capitalisation. With its share price rising by 3.14 per cent to Rs 1,185 a piece on BSE on Tuesday, its market capitalisation rose to Rs 7.51 lakh crore, nearly Rs 8,000 crore more than that of TCS (Rs 7.43 lakh crore).

But these stock market fireworks are baffling many. It’s true that decent financial results being reported by companies is a good cause for celebration on D-Street. Going by that measure, stock market indices are likely to be on fire for some more days unless Reserve Bank of India pushes any unpalatable news down their throats when it announces third bi-monthly monetary policy for this fiscal on Wednesday. However, that downward tendency may be one-day affair and markets are likely to be back on green track and may continue bull run for a few more days.  

Nevertheless, it’s time for stock market investors to turn cautious and take the record setting run with pinch of salt as long-term macroeconomic indicators are not so exciting. Inflation is on a rising trajectory owing to higher oil prices and other factors. Though crude oil prices are cooling now, they are still at higher levels for a country like India which heavily depends on oil imports. In addition, Indian rupee on a weak wicket. In fact, weak rupee is the primary reason for robust profits reported by companies like Hyderabad-based Dr Reddy’s Laboratories whose performance is linked to its sales in the US market. 

Against this backdrop, it’s not surprising that volatility levels in Indian stock markets are in double digits. Volatility index (VIX) increased to 12.59 per cent in the last one month. Moreover, Profit to Earning (P/E) ratio for Nifty 50 crossed alarming level of 28 on July 27 and reached 28.22 on Tuesday. A P/E ratio of above 28 means the markets have entered a bubble zone. 

As a technical expert pointed out, Nifty P/E ratio crossed 28 levels in January 2018. It could sustain that level only for three days before falling to 10. It’s to be seen how long markets will sustain such a high level of P/E ratios this time. The other aspect is whether markets will crash land, sending stock prices into a tailspin. If that happens, investors will lose heavily. Therefore, it’s high time to exercise caution before it’s too late.