NIFTY reaching 16,000… Signs of bubble trouble?
Stock markets have been making new highs everyday and there has been a lot of buzz that whether we are in a bubble territory now? Today we analyse that are we really in a bubble trouble?
Nifty 50 is trading at an all-time high now and all set to reach 16,000 mark. This is almost 25% higher than the past highs recorded in the middle of January’21 before the tax proposals in the Union Budget for FY’21 and the COVID-19 pandemic bounce back. The market capitalization of listed equities currently at approx 210 Crores has grown by about 39% as compared to January’20. Lucky were those who bought the dips in COVID fall of April’20, because you name any stock and it has given multiplier returns from that time (except of course ITC!). Hence a common question which has started to come up is that “Are the Markets already in the bubble territory”? So, before coming to an answer to this question, let us decipher first what exactly a bubble in stock market is?
Speaking in the layman terms, ‘A bubble in stock market dictionary can be understood as a euphoric situation when the stock prices rise to an unsustainable level and their rise cannot be justified through rational modes of underlying economic activities.” The rise though can be in one particular segment or can prevail overall in the market. In the past too we’ve had a lot of bubbles like the commodity bubble post liberalization which got burst in 1992, commonly referred to as the Harshad Mehta scam. Another famous one was the DotCom bubble in early 2000s which inflated the housing prices to unchecked levels and finally pushed the global economy to recession in 2008 and many others. So, the next question which arises is that what exactly are the conditions for a bubble to form?
As per the past analysis of the past bubbles, there seems to be a central theme which forms and that theme inflates the bubble. Like in 1990s and 2000s, many companies changed their main business to IT. Every parent wanted their kid to be an engineer and even more a Computer Science engineer. Software and Banking were becoming preferred choices of profession. Not only this, other economic activities were showing frenzy too, like business houses were rushing to acquire licenses for mining, telecom; households were buying properties in Tier 2/3 towns at a massive valuations and businesses were investing crazily in infrastructure. Are we witnessing any of these frenzy currently? The answer is a straight “NO”.
Rather businesses are getting rid of non-core activities. They are not investing in heavy CAPEX and there isn’t a central theme which is driving prices. Healthcare, eCommerce and sustainability are some of the hot themes during current times, but they are still far away to be termed as frantic in a broader sense. There isn’t a doubt that there is a significant divergence from the real economy in terms of market prices, but being a forward-looking force, market seems to be overwhelming on high unexpected recovery post COVID.
Also, the rise in the stock prices of top 500 companies actually seem to be in full consonance with macro-economic trends because of the high consolidation of large companies post events of Demonetization , GST and COVID. There is also availability of easy liquidity, lower interest rates for borrowing and wage rate rationalization which are significantly contributing in better profitability of larger companies. Furthermore, uncontrolled leverage had been the biggest factor of bubbles in the past which currently due to better liquidity with traders, stringent margining rules, and tighter credit norms for stock market trading seems to be at a manageable level.
Hence from the above deductions, it may be easily concluded that markets may seem to rise sharply and some stocks might be trading at unsustainable levels, but the overall market bull run seems to be far from the bubble trouble territory. One may expect a decent correction, but a crash isn’t imminent, unless there’s a shocker event like COVID which occurs to freeze the economy. Until then, keep investing in the equity markets and don’t forget to subscribe us if you haven’t till now.
By: Anmol Gupta | Isha Garg