ABSTRACT
This research paper evaluates the current standing of the Indian stock market, with a primary focus on the inevitable bubble talks. The paper assesses the immediate overvaluation of specific stocks, correlating with the stock market data regarding the Nifty 50 reaching its lifetime high, and the same was the case for Sensex also. It presents the arguments of two opposing parties: one that sees a bubble forming and one that does not see it. In fact, at the root of the issue, the study attempts to give a proper rationale for understanding why the stock market is rising or falling and what these developments imply for investors and the overall economy.
INTRODUCTION
The Indian stock market has experienced remarkable growth over the past few years, with indices like Nifty 50 and Sensex reaching unprecedented levels. On 1st August 2024, Nifty50 and BSE Sensex reached their all-time highs, i.e., 25,078.30 points and 81,129.49, respectively. This surge has sparked debates between analysts, investors, and economists about whether the market is in a bubble. The Nifty 50 and the Sensex have reached all-time highs, reflecting a strong bullish sentiment among market participants. This surge is attributed to several factors. However, this meteoric rise has also raised concerns about the sustainability of these valuations and the potential formation of a market bubble. Several key factors that could have been the reason for the sudden growth are now being settled.
The Indian stock market is not immune to political events, and history has shown that elections can significantly impact market performance. During election periods, markets often experience high volatility due to the uncertainty surrounding potential policy changes and economic direction. In the run-up to the general elections, which are scheduled periodically every five years, the market tends to react to the political landscape, speculating on the outcomes and their potential impact on economic policies. This creates a debate about whether the market is going into a bubble or these are just speculations. On one side, some argue that the market is in a bubble, driven by speculative behavior and excessive optimism. A report published by Kotak Institutional Equities states that the price-to-earnings (P/E) ratio of more than 100 companies is more than 50 which is much higher than the ideal ratio of 30. The Warren Buffett indicator, also known as the market capitalization-to-GDP ratio, which is calculated by dividing the stock market cap by Gross Domestic Product (GDP), is currently at 1.02 (approx.), significantly higher than the historical average, i.e., 0.91 (approx.). SEBI also warns that micro-cap and small-cap segments are highly risky and unpredictable. This group argues that the market is vulnerable to a sharp correction, which could have far-reaching consequences for investors and the broader economy.
On the other hand, skeptics of the bubble theory argue that strong economic fundamentals and growth prospects justify the current market valuations. They highlight the robust performance of corporate earnings, the positive impact of structural reforms, and the overall resilience of the Indian economy. Ridhim Desai of Morgan Stanley, Chief Strategist of India, affirms that “there is more to come for India’s bull market. Because, along with liquidity, people also have an unshaken faith in the market about high returns.” This group believes that the market's rise reflects genuine investor confidence in India's long-term economic trajectory and that concerns about a bubble are exaggerated.
LITERARY REVIEW
Devina Mehra, an analyst, feels that equity markets, especially large-cap stocks, are not in a bubble in India and are below the long-term trend line. She notes that between the period 2010 to 2020, the market delivered a poor returns period, with the Nifty/Sensex compounding on to only about 5-8% annually. She thinks that this will lead to a bull market this decade.
Mehra is profoundly specific with micro-caps and small-caps, stating that these are risky and uncertain segments. She also explains that market movements are often justified. Another opinion suggests that the Indian stock market has been overbought and is in risky territory of a crash because of the ‘emotional’ mania of the markets pumping up stock prices.
The Buffett indicator and other similar ratios, such as the price-earnings (P-E) ratio, point towards overvaluation. The BSE Sensex is again soaring high, and it recently crossed the 82 thousand mark; the market capitalization of the Bombay Stock Exchange is also 16 percent higher than in March 2024. This is recorded to make it easier to track as compared to other measures such as the Buffett indicator, which is at 1.02 (approx.), which is far above the sample historical average of 0.91 (approx.), showing that the market bubble is even higher than before the 2008-09 financial crisis. Similarly, various P-E ratios for the Sensex, midcap, and smallcap indices are also high, indicating that the companies are overvalued.
Thus, while Mehra also calls for a wider definition of reforms, the key to the generation of sustained economic growth, she stresses, lies in spending on nutrition, education, and health. She also expects that the cooperation of many political parties in the form of a coalition is healthy for the economy and the markets because all parties are involved, hence the best solution. In her investment plan, she cautions investors from investing in micro-caps and small-caps, saying that investors should take their profits and repurchase better-ranked stocks. Thus, she has earmarked industrial machinery and capital goods as positive for almost 27 months, stating that the growth of the sector has started leveling off.
Instead, she is increasing positions in automobiles, auto components, pharmaceuticals, construction, and some metals and sees potential in the IT sector, though she is waiting for it to bottom out.
In contrast, the other perspective underscores the risks of overvaluation, particularly in small and mid-cap stocks, driven by fanciful narratives and investor optimism fueled by government statements. Analysts warn that unforeseen events, similar to past crises like the COVID-19 pandemic or the Russia-Ukraine war, could trigger significant downturns, severely impacting retail investors' wealth. Historical examples like Wipro, Infosys, and DLF demonstrate how even robust stocks can take decades to recover from crashes, emphasizing the dangers of the current market exuberance.
The Economic Survey, 2024, presented by the government in Parliament stated, “India can ill-afford the economy’s over financialization at its current development stage.” In the Union Budget 2024, the Finance Minister announced an increase in short-term capital gains on financial assets to 20% (up from 15%) and long-term capital gains to 12.5% (up from 10%). However, the exemption limit for long-term capital gains was increased to Rs. 1.25 lakh from Rs. 1 lakh per year. Experts believe that the increase in the capital gains tax by the government is an indication of the fact that the stock market is overvalued, and it is in the best interest of retail investors to discourage their investments in small-cap and mid-cap stock.
RESULTS
With overvaluation, it becomes easy to identify a bubble, as one of the significant signs of a bubble is highly overbought stocks. The index level of the Nifty 50 and BSE Sensex index have touched their record high level, casting doubt on whether the current stock prices are quite justified. Most of the stocks in these indices boast P/E ratios that surpass their typical values of previous years. These all act as indicators of the state of the Indian stock market. This has mainly been empowered by several factors, such as the economic recovery from the COVID-19 pandemic phase and generally increased market liquidity.
However, diverging opinions on the market bubble: The so much-discussed outlook on the Indian stock market in a bubble can be further divided into two extremes:
The Supporters: This group argues that the current P/E ratios cannot be justified; they are a result of speculation with stocks rather than fundamentals. Mainly, they use references to past experiences and valuations such as price-to-earnings (P/E) as well as market capitalization-to-GDP ratios to support this aspect. It can be disabling to think that they claim to be aware that a market correction is due, and this should prove disastrous to investors.
The Skeptics: On the other hand, the prevailing market is justified by basic economic factors that have to do with corporate earnings and economic growth. They think that the current valuation is justified by the expectation of higher Indian earnings as well as structural changes enacted by the government. They explain them as absurd and negative analyses of the situation while pointing out the opportunities for market expansion.
DISCUSSION
Implications of Findings:
- The bull run in the Indian stock market emphasizes a potential bubble that could lead to a correction or crash triggered by a significant event.
- This particularly refers to the small and mid-cap stocks, where overvaluation advises investors to be cautious and embark on risk management.
Various Reasons:
- The fundamental driver of growth on large-cap stocks is backed by long-term trends and a return to economic normalcy.
- Overvaluation concerns stem from high Buffett indicator and P-E ratios, driven by investor optimism and speculative behavior.
Future Consequences:
- This paper shows that if overvaluation continues, it will lead to colossal crashes that are occasioned by international occurrences affecting the investor’s wealth and the market system.
- Potential long-term effects might be in long periods of averaging or a couple of years in recuperation even for strong stocks, as various samples show.
Future Scope of Research:
- Research the effects of macroeconomic policies and how they can be used to avoid bubbles.
- Examine approaches that can be used in investment to eradicate the aspects that lead to overvaluation.
- Study how these occurrences impact the market and learn how to apply corrections for the fluctuating markets.
CONCLUSION
This paper, therefore, analyzes the plausibility of a market bubble concerning the Indian stock market, following the recent attainment of record equity values. As per the bubble theory backers, the existing valuations are unrealistic, and critics think that the current rally is based on fundamentals and earnings growth. It is in this context that this paper has analyzed the causes of the overvaluation of stocks and the state of the market.
However, it is imperative to conclude that concerning the general scenario of the Indian stock market, at least the issue of a bubble will always remain relatively disputable among the observers. They should look at the current threats; This paper, therefore, analyzes the plausibility of a market bubble concerning the Indian stock market, following the recent attainment of record equity values. As per the bubble theory backers, the existing valuations are unrealistic, and critics are of the opinion that the current rally is based on fundamentals and earnings growth. It is in this context that this paper has analyzed the causes of the overvaluation of stocks and the state of the market. example, the New Union Budget 2024 saw the government increasing capital gains taxes and securities transaction taxes, resulting in losses.
On the other hand, these augmented taxes contend that the latter curtail savings and investments, as reflected in the downtrend of the stock indices as well as the performances of the disinvestment candidates. However, the optimism about the future growth rate of the economy of India is not ill-placed. But again, we cannot ignore the behavior of the stock market index and the possible impacts of market forces on stock pricing. It remains rather unclear how all these policy changes will affect the long-term behavior of investors and the stability of the markets.
By: Prabhmeet Singh and Sadhika Gulati
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