Indian stock markets are at record highs. Today the NIFTY crossed 10,000 (though it closed a little lower). According to followers of Narendra Damodardas Modi this is vindication that their superman is delivering phenomenally and the nation is on a stratospheric growth path.
Why do markets go up? Very simple. Because money comes into them. And why do they go down? Because money goes out. As you read on please remember that all the good intentions in the world will not make the market go up. Only money does.
Pause for a minute to consider this: The Indian economy is yet to recover from the effects of demonetization. The government has utterly failed to keep its promise on job creation. The IT sector has received bad news from its primary markets. The real estate sector is expected to deflate until the provisions of the new RERA act are understood. Capex addition is at a 25 year low, bank credit growth has fallen to a six decade low. States are announcing loan waivers for farmers which will deal a severe blow to their finances.
So why this exuberance? Where is this money coming from and why is it going into the stock market?
The answer lies in the global markets. The Western economies are having a “Goldilocks” phase where the credit markets are strong, corporate earnings are rising, inflation is benign and the US is as yet undecided on significant interest rate hikes. The weakness in the US dollar is driving money towards stocks of international companies with expectations of significant profit growth. Very few other asset classes are holding the attention of investors.
And this wave of benign liquidity is reaching India’s shores. Global investors have discounted all the worrying indicators about India and have significantly increased their exposure, buying stocks worth nearly Rs 54,000 crores since January alone, signifying that they are prepared to put up with higher price earnings ratios. Indian investors have looked at the frenzied foreign buying and followed suit pumping in another Rs 25,000 crores making India the most expensive market in the world.
So where do we go from here? Have foreign investors accepted a “new normal” for the Indian markets ?
Historically that has always been the talk before the bubble bursts. And burst it will. When global money retreats, many of those rushing to invest at NIFTY 10K will find their investment vanish into thin air.
And what will make global liquidity retreat? Any number of factors: a more than expected rise in US interest rates, a Chinese debt meltdown, an outbreak of hostilities in a global hotspot, a sudden revelation of banking
misdemeanors – any one of these “black swans” could start the panic and an eventual flight to safety for global money.
Those having money and watching the Indian markets with greedy eyes, beware. Good times, like bad times, never last.