Is a Major Correction Looming for Indian Stock Markets?
Introduction:
While the Indian stock markets, as represented by the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), have indeed seen a remarkable rally following the demonetization impact, there are clear signs that a significant correction could be on the horizon. Will the Indian stock markets NSE and BSE crash more and when? This question is particularly pertinent, given the history of such corrections, most notably the 2008 financial crisis.
Market Performance
Despite a solid performance in 2017, evidence suggests that the current rally might be unsustainable. The benchmark indices, Nifty and Sensex, have seen impressive gains this year, significantly outperforming global markets. However, the underlying fundamentals may not support these highs, raising concerns about a major correction.
Key Warning Signals
There are five critical warning signals that indicate the potential for a 2008-like market crash.
Earnings Stagnation
Earnings per share (EPS) have been stagnant for the past three years, despite market prices rising continuously. The NSE Nifty 50 index has only risen 50% over the same period, yet market valuations have surged. Fund managers warn that this could lead to a sharp decline in the market if second quarter earnings disappoint, as investor complacency could lead to a hard landing.
Liquidity-Fueled Rally
High liquidity in the market system is sustaining the rally. Equity Mutual Funds are holding over 6% in cash, and foreign investors have already begun selling off. If mutual funds start selling heavily, it could create a significant downward pressure, leading to market crashes.
IPO Bubble
The IPO market has seen a record-breaking year, with over Rs 50,000 crores raised. Many companies have been selling their shares at high valuations, and some have seen oversubscriptions of over 100 times. However, with the bull market driven mainly by liquidity, these valuations might not be sustainable, leading to potential crashes.
Irrational Movement
Indian equities have risen consistently since January 2017, despite economic growth decelerating to its weakest in years. The Nifty's price-earnings (P/E) ratio is approximately two standard deviations above its 10-year average, indicating historically high valuations. History suggests that such high valuations often precede significant corrections.
GDP Under Stress
The GDP growth has slowed down significantly, especially following demonetization's negative impact. The first quarter of fiscal 2017-18 saw a 3-year low growth of 5.7%, which is much lower than the previous year's 7.9%. This slowdown indicates economic weaknesses that could affect the stock market's performance.
Expert Opinions and Market Predictions
Market analysts and experts warn that Indian markets are overvalued and are trading at close to 20 times one-year forward earnings, well above historical averages of around 15 times. Brokerages like Macquarie have cautioned that there is a clear and present risk to the earnings turnaround in financial year 2019, emphasizing the importance of continued consumer growth and job creation.
Overall, while it's impossible to predict accurately when and how much the markets will decline, the warning signals are clear. Investors should be prepared for potential volatility and consider setting aside some capital to buy equities during market dips or crashes.
Conclusion:
The Indian stock markets, including NSE and BSE, may be on the verge of a major correction. Key warning signals include earnings stagnation, liquidity-driven rallies, an IPO bubble, irrational movement, and GDP under stress. While market experts advise setting aside some capital for potential dips, it is crucial to be prepared for market uncertainties and avoid complacency.