India overtook Hong Kong on January 23, 2024 to claim the fourth position in the global equity market rankings by market capitalisation. According to Bloomberg data, India’s market cap reached $4.33 trillion, beating Hong Kong’s $4.29 trillion market cap. While the US leads the global stock market, China with a market cap of $8.44 trillion and Japan at $6.36 trillion lead India in the second and third place, respectively.
Though China is ahead of India in terms of market cap, in terms of growth, India leads China. China’s SSE Composite Index, the market index of all stocks that are traded at the Shanghai Stock Exchange is trading at the same level as five years ago. According to Google Finance data, on March 1 2019, the index was at 2,904, higher than 2,820 where it stands as on January 24, 2023.
Meanwhile, India’s Nifty Index registered 7.9 per cent increase just in December 2023, outperforming even other emerging economies, such as Brazil (5.4 per cent) and South Africa (1.8 per cent).
In such a scenario, investors often get caught up in hype and speculation rather than sound analysis. However, it should be noted that India’s growth has a few reasons, including growing retail investor base, sustained foreign institutional investments (FII), strong corporate earnings, and stable domestic macroeconomic fundamentals. However, this ‘bull run’ without any pause calls for caution from investors.
Historically, rapid increases in stock prices without fundamental justifications have often led to market bubbles. Here are a few things to take note of.
IPO Surge And Overconfidence In Investors: A sudden increase in initial public offerings (IPOs) may indicate that companies are rushing to capitalise on a false market optimism which may fade away soon. Widespread investor overconfidence, often seen when there is a prolonged bull market can also result in an impending bubble burst.
Valuation Metrics: One should watch out for overshooting in stock valuations, especially whenever there is excitement in a particular sector. In September-October 2023, there was some drop in valuation which had been built up in the previous 6-12 months, and which later saw some correction. But many experts have said that the correction was minimal and more correction can be expected ahead. So, conducting thorough research can help.
Other Indicators: Market to GDP is one indicator that one should consider. Currently, this ratio has reached around 120 per cent. One should also look out for a rapid increase in trading volume, which indicates that investors are buying and selling at an unsustainable rate.
Expert Insights
Ajay Pruthi, a Securities and Exchange Board of India (Sebi) registered investment advisor and founder of PLNR, says that bubbles are difficult to identify because when it’s happening, people get swayed by it and ignore the indicators.
“Market to GDP is one such indicator, and currently, this ratio has reached around 120 per cent. If the GDP doesn’t catch up, then in future, the market could correct from that level. But one should not look at any such indicator in isolation, and should take exposure into equity based on their risk appetite, goals, and time horizon,” he says.
Says Avinash Luthria, Sebi RIA at Fiduciaries: “It is not possible to figure out whether the Indian market is overvalued. Instead, always limit the equity allocation to 50 per cent of the portfolio and use the largecap Nifty 50 index fund.”
Reflecting on past market crashes, he highlighted the importance of managing risk in your portfolio. “In 2008-09, Rs 1 crore in the largecap Nifty 100 [TRI] crashed to Rs 39 lakh, and the same amount in Midcap 150 [TRI] crashed to Rs 27 lakh. Further, due to the 25 per cent fall in rupee, $1 lakh in Midcap 150 [TRI] fell to $20,000,” says Luthria.
