Record stock market upsurge hints at mayhem for banks and economy
The stock market is booming. It is said to be a global trend despite a not-so-much-boom in the world economy. Why and how is it happening? Is it real or an indication of a global crash?
Whatever goes up comes down, is the stock market dictum. The Indian stock market is on an upswing. It touched the record (it goes on setting such records) of 32,074 at the Mumbai Sensex indicator on July 17, though the very next day it fell by 363 points, the highest in seven months.
Two days later again it fell by 50 points to close at 31,904. It jumped by 124 points on July 21. The Nifty of the NSE is also in a similar surge-fall cycle. Is it a good time for investors? It is difficult to say. Speculative investors put their money during such “boom”, the real investors wait for good time – the bearish phase.
Market experts are awaiting a correction, the euphemism for finding the realistic level, or a fall in trading. Last week’s fall was led by the GST Council’s decision to impose a cess on cigarettes and the largest tobacco company’s stocks led the fall.
The stock market can be affected if some more shots are fired on the India-Pakistan border or if the Doklam stand-off between India and China aggravates. But Doklam as of now may not be the reason. However, there are stock-specific concerns as many shares are trading at high valuations. Some are priced so high that these may lead to stagnation.
The Indian economy’s high growth rate is touted as the major reason behind the major rally. The belief is that high economic growth should lead to higher earnings and this leads to support of higher prices. But the market also says that nothing can be infinite and prices have a limit to their rise.
The global markets are in a bull run. That means some people are putting in large sums in the capital market. Does this mean that falling bank interests and inflation lead to improvement in the health of the capital market? If it is so, it is a danger for the economy.
It is an indicator that bank deposits are being utilised to buy shares and do speculative trading. Interest rates are low and so are the commodity prices. It means while the common bank depositors are gasping as their interest hedging is coming down, equity market speculators’ earning is going up. In other words as the poor suffer, the rich are gaining.
This is a danger both for the economic and sociological factors. Some large companies have come out with results of huge profit in the April-June quarter. It is said that some more may be doing it. While announcing profits, many of these companies carefully conceal their debt in the balance sheet.
In other words, the performance of these groups may further be affecting the health of the banking sector. It may be recalled that two of the worst stock scams – involving Harshad Mehta and Ketan Parekh - were funded by the public sector banks.
The UTI and LIC scams were of similar nature. Public money was lost and the public institutions bore the brunt. The lurking question is whether the better performing equity market would increase bank NPAs.
That the fears are not unfounded is supported by the Comptroller and Auditor General’s (CAG) latest report that found that major telecom companies – Bharti Airtel, Vodafone, Idea, Reliance Communications and Aircel - revealed “total understatement of adjusted gross revenues (AGR) of Rs 60,064.50 crore” between 2010-11 and 2014-15. The CAG says it is for saving taxes. But such understatements are not uncommon. Satyam had also grossly inflated its statements.
The CAG said the understatement of AGR was linked to promotional schemes, which included free talk time, discounts as well as non-inclusion of profit from sale of investment. The recent boom in prices is significantly linked to the announcement of many such free schemes by one of the biggest operators.
The government in 2014 had issued show-cause notices to some of the top telecom firms for under-reporting revenues.
So the fear of bank money being utilised for speculative investment may be real. It means there are larger threats to the Indian economy than being perceived.
An interesting aspect is that mid-cap and small-cap stocks have seen greater increase in their prices based on “future” earnings growth. If it fails to keep up with expectations, a sharp fall in their prices would be the only possibility. The risk factor is serious as many of these companies lack a strong track record of sustainable earnings.
India’s own macro and micro environmental factors are stable and in much better shape than a few years ago, it is often said. Strong leadership, political stability and pro-business attitude of the government have set a solid ground for future growth. If all goes well we could be at the beginning of the mother of all bull runs. But a lot depends on how demand picks up locally and globally from here in the coming years and how fast corporates can translate it into their quarterly results.
Presently, if the CAG report is to be believed, much of it is window dressing despite the rules having been made more stringent by SEBI and other government agencies.
There are, however, a few positive factors. India is doing better than slow moving Europe and the US, which cannot grow more than 1-2 per cent a year. Indian growth is to hover around 7 per cent.
The second aspect is that global and domestic liquidity is stated to be high. While the west is awash with cash, in India large amounts of money is flowing into stocks with bank money.
Another factor is helping the stock market. It is the underperformance of other assets like gold, real estate and even debt. In short term, the revival of these assets is not foreseen. So the money flows into the stocks.
The mutual funds are also playing big. They have invested Rs 2,21,033 crore between May 2014 and June 2017. During the past three months itself they invested Rs 26,503 crore.
So would not the market fall? A market crash is inevitable. But when will it occur? Nobody can say. If it happens there can be mayhem.