Sensex crosses 32,000: Here are four charts that belie the stock market's exuberance
Tepid growth in IIP and GDP, corporate investment is shrinking, bank credit growth is at multi-decade low but Sensex at 32,000. Here's what is missing
The record breaking spree of the domestic equity indices continues unabated with the BSE Sensex on Thursday crossing the 32,000 mark for the first time and the NSE Nifty nearing 9,900. While the recent rally in the stock market has been attributed to hopes of reform after the goods and services tax rollout, Thursday's rise is on hopes of a rate cut from the central bank.
On Wednesday, the government's data showed retail inflation in June decelerated to a more than five-year low of 1.54 percent and the industrial output in May grew at a slower 1.7 percent. The tepid industrial growth and multi-year low inflation have given rise to rate cut call from industry and policy makers.
A positive lead from Asia after US Federal Reserve chief indicated a gradual approach to raising US interest rates also made investors here go in for fresh bets.
The Sensex closed the day at 32,037.38 and the Nifty at 9,891.70.
Commenting on the Sensex reaching 32000, Deepak Jasani, Head – Retail Research at HDFC Securities said, "The Sensex touched the psychological 32,000 mark on July 13 aided by expectations of a rate cut (post the low CPI and IIP numbers announced on July 12), good monsoons and overcoming the fears of disruption due to introduction of GST. The latest 1,000 point rally in the Sensex was driven by Reliance, large Pharma stocks, Bharti Airtel, ITC and Maruti. Unlike in the past, Banks & IT stocks did not contribute meaningfully to the latest rise. Local fund and non-fund inflows contributed to this rise."
He further said, the rise in the markets has been aided by the risk-on sentiments prevailing across the globe. Valuations look stretched going by historical parameters; however some more upside is possible in the coming few weeks.
The S&P BSE Sensex has rallied 444.18 points in the previous three sessions. So far this year the benchmark has risen 5427.87 points or 20.4 percent. With the Sensex closing at a new record high of 32,037.38, the total investor wealth on the Bombay Stock Exchange has soared to a record Rs 130.84 lakh crore. However, the market is only a feel-good factor. India may be a darling of portfolio investors, but the economy is definitely not booming. Two of the recent steps by the government has been majorly disruptive and their impact is yet unfolding. First is the demonetisation of Rs 500 and Rs 1,000 notes that happened on 8 November 2016 and second the rollout of GST. In this context, here's a look at a few economic indicators that belie the exuberance in the stock markets:
First and foremost, GDP growth during January-March stood at 6.1 percent -- slowest growth in 12 quarters since the new GDP series started in January 2015. Barring agriculture and public administration all other sectors showed a significant fall in growth figures during the quarter. Manufacturing growth slipped to 5.3 percent as against 12.7 percent in the year-ago quarter. The construction sector GDP declined 3.7 percent as against a growth of 6 percent in the corresponding period a year ago. The growth slowdown during the quarter has been attributed to demonetisation that impacted many sectors.
Gross fixed capital formation is a crucial indicator of the investment activity in the economy. In the past six quarters, this figure has shown a declining trend. From 7 percent registered in October-December of 2015-16, its growth slipped to just 1.7 percent in the third quarter 2016-17. In January-March, it actually contracted by 2.1 percent. The trend is getting reflected in inadequate jobs creation. Analysing the Labour Bureau data, brokerage JM Financial recently said that in the first nine months of 2016-17 only 0.19 million jobs (excluding banks) were created. This is much short of the 8.8 million who graduated in FY16.
Another indicator is industrial output growth data. The overall growth in the index of industrial production (IIP) slowed to 1.7 percent in May from 8 percent in May 2016. The output in the manufacturing sector growth slowed to 1.2 percent from 8.6 percent from a year-ago period. The capital goods sector witnessed a growth of 3.9 percent, sharply lower than 13.9 percent recorded in the year-ago period. Clearly, the economy has not yet fully recovered from the shocks of demonetisation.
With banks reeling under high bad debt burden and weak corporate demand, credit growth plunged to a whopping six-decade low of 5.08 percent in the 2016-17 compared with 10.7 percent a year ago, according to the Reserve Bank of India data. In 1953-54, credit had grown a paltry 1.7 percent, according to the apex bank data. The subdued demand for credit from corporates reflects the general demand condition in the economy.
For sure, the market is not looking at these indicators. However, nobody has yet warned about overheating.
Jasani of HDFC Securities advises retail investors to use this rise to reweight their broad asset allocation, relook at the stocks that they own and clean/shrink their bulging portfolios of stocks.
"They may avoid chasing stocks that are at steep valuations but keep hunting for opportunities in the small/midcap space where promoters show genuine interest in improving shareholder value by restructuring their businesses/companies. For investors who are under-invested in stocks, SIP in select equity stocks may be looked at," he said.
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