Almost everyone has been going “gaga” about the current stock markets valuations. It defies logic. With due respects to all sentiments around, it’s almost like a Rajinikanth movie fight scene or a comparatively slightly calmer cult — James Bond movie scenes, that we enjoy. And yet the outcome is that it brings happiness to participants. Whether such outcome is produced by defiance to gravity or logic or logical reasoning does not matter.

There is simply no disbelief that many of those (stunt) acts are humanly not possible. Such is the current sense of euphoria about stock market valuations and the misplaced sense that it is indicative of our economic status.

Enough of the ‘congrats, its 60,000’ messages would have filled few of Twitter servers. So would WhatsApp forwards boasting of the quickest 10,000 points in a few months and that being the shortest in the world. Minor corrections here and there don’t seem to matter. Not to miss the message highlights that many individuals would either simply retweet the kudos or add their own laudatory message. The smarter Content Factories would be loving this moment for their revenue increase! It is also quite natural that supply chain stakeholders in the equities market would be happier to push positive messaging, as it helps in developing their business further.

The real fact is that actual kudos & credit have to be given to those who tirelessly brought ease of technology and convenience of equities trading to retail investors and those who brought regulations that opened the trading doors to many more investors. They have been the pioneers and are the backbone of any robust trading market. A stark comparison is our much shallower debt markets.

Ask those analysts who are not in the limelight generally. Some of them, including the silent PMS fund managers, are astute investors. Many of them believe this upward indices cycle will continue for a few more months, and they would rather buy into stocks, only when they correct. They are happy to book profits and sit on cash! Let someone mention this in any webinar, and that panelist could be booed out!

Understanding Interconnected Variables

Never before has the disconnect been more stark, between the fundamentals of the still-getting-out-of-Covid-impacted-economic state and stock market valuations; and the increased euphoric investor participation, is often mistaken as tacit understanding or approval, of investors about its valuations. It is not true to assume that all market participants have an absolutely rational understanding of expectations of discounted future earnings attributable to investment and consumption effects. Every investor has his/her own market entry point and their profits are governed by the market exit point as well. The supporters of “public markets know best” theory would propound that investing public (especially retail investors) are supposed to understand the risk and be ready for any consequence of their investments. Well, we cannot forget that the financial literacy rate across investor segments is low too.

Debt markets have been subdued and with lower returns and higher risk perception, and investors have been staying away. Fixed deposits are giving low returns. Realty, as an investment asset class, is worrying investors, due to project completion issues. These worries have pushed newer investors to take their punt on stocks! Within 130 crore Indian citizens, less than 5% invest in equities.

With news like “fastest 10,000 points” being pushed out, it might invite newer investors to try their luck to make a fortune. “Market” is a tough taskmaster. The beginner’s luck might tantalise someone to pour in more monies, and not to have desired returns as no one controls the market individually. Many of us forget the lesson that markets can make us lose, if we are not disciplined or lucky or both!

Foundation Of Productive Economic Activity

Glorious milestone statistics being achieved by the markets is good news. Let us not forget that standalone numbers (market index) do no good and long-term investors use ratios for investment decisions instead!

Our markets have not just risen due to the inherent belief in future valuations, but also thanks to the surplus liquidity in the system that has not seen much lending to real-economy sectors. And that is the missed story, which needs working upon.

According to a RBI observation, loans to corporates and individuals had dried up for the past many months. That the (low) interest rate has not been the key driver for credit offtake is evident now. Of late, the retail lending (personal loans, vehicle loans, etc) has started picking up. Also it would be worth noting that IPO investment lending has also been on the rise, despite RBI cap on the quantum per retail investor. It would be worth an assessment how much of it has contributed to new investors entering the market and existing ones staying in. The Pre-Covid lending velocity of around 11% of the overall credit growth has slowed to a trickle. Banks strengthening their balance sheets by cleansing asset quality are naturally being choosy about the new assets they underwrite.

While retail lending is slowly improving, offtake from corporates and the industrial sector is stagnant. Bond markets, which are offering better rates, are seeing takers now. But most of the non-banking lending institutions are still struggling to raise debt. Bond markets have allowed those with stable balance sheets, especially large borrowers from industrial segments, to secure better rates. Hopefully this could be the start of strengthening and building up our bond markets, which have been shallow for too long.

The lack of credit lending or credit offtake could directly impact demand and economic growth. With rapid Covid vaccination that’s been driven across the country, there is a sense of optimism that we shall overcome the economic storm blowing since some time now.

The bullishness around digital startups’ rush to their IPOs is another aspect of the market’s euphoria. But we also need to understand that many of those businesses are still some time away from profitability. It’s time to find further ways to encourage entrepreneurship, not just digital startups, and to make it acceptable for genuine business failures. The day influential individuals speak openly about failures being acceptable, then we mark the start of true entrepreneurship. For society’s frenzy for success stories, it would also be nice to have business leaders openly talk about failures being stepping stones for potential success.

Looking at direct tax collections and GST collections, this further increases confidence about the improving economy. The question is what will drive consumer confidence to increase consumption and demand? And what will drive investments into industrial growth?

Any brash rhetoric and rash-rush of laudatory messages about capital markets won’t pull the economy on its own steam. An exuberant Content Factory has taken this far ahead; with a mass-forwarded content that has prophesied that the Sensex would cross 75,000 by August 2022, to mark the completion of 75 years of our nation’s independence.

Since when did our stock markets have such strong correlation to sheer national fervour alone, forgetting that the efforts, productivity and profitability of millions of our enterprises (big, medium, small, one-person units) make up the actual real economy?

Srinath Sridharan is corporate adviser and independent markets commentator. The views expressed are personal.

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