The Indian stock market scenario has seen a consistent increase with the frontline Indices Nifty 50 and BSE 30 rising steeply post correction amidst huge fiscal stimulus by central banks globally. The markets during the Corona Virus break out saw huge selling pressure due to the unknown character of the virus coupled with a stringent lock down enforced by governments globally.
However the markets gained optimism on the back of availability of vaccine and lock down being restricted to a few weeks which does not have a major impact as the previous corona virus attack.
Though markets after current rally is expensive there is euphoria in the market as the economy is bound to bounce back on a low base.
The Market Cap to GDP ratio shows that markets are overvalued but the optimism of about 9% GDP growth in FY22 and 7% GDP growth from FY23-FY25 has resulted in strong upward momentum in the markets. The Indian stock markets are showing strong resilience on expectations of strong GDP growth.
The Mid and small-cap stocks have seen a spectacular rally and are trading at multiyear highs. Though markets are expensive investors are better off to adopt a stock specific opportunity which will give better returns.
RBI data shows that the household financial savings are estimated to have increased sharply during 2020-21. According to the data, in the fortnight ending June 18, the currency with the public further increased to hit a new high of Rs 28 lakh crore.
The demand for deposits with banks declined from close to 20 lakh crore to 18 lakh crore. The significant increase in household financial assets and moderation in household financial liabilities led to a rise in household financial savings in Q1:2020-21, and a substantial part of it was directed towards Mutual Funds.
Apart from retail investors, Foreign Institutional Investors (FIIs) in fiscal 2020-21 invested more than Rs 2.75 lakh crore in the Indian stock markets, the highest in the last two decades.
However, despite FII’S selling pressure in April and May, the stock market continued its northward movement due to retail buying directly and via mutual funds.
However investors should thus be careful while betting big on such an overvalued market.
Such overvalued equity market phenomena due to the herding effect is a significant factual issue because of the apparent negative wealth effect on individual investors‘ portfolios and the aggregate market instability risk.
The outbreak of Corona Virus from China has led to global community turning against China and global companies looking to invest in India which is likely to result in substantial increase in FDI in the country.
The governments spend on Infra sector has seen strong order inflows in the railways, roads & Capital Goods sector.
The governments globally has increased their spend on Infra sector which has seen strong demand for Steel, Cement etc which has seen uptick in realizations for the companies in the sector.
We remain positive on the Indian economy which is likely to show strong GDP growth over the next 5 years. This has been the reason for the resilience in the Indian stock market despite the Market Cap to GDP being above 100. However one has to take into consideration the GDP growth and the ratio should not be looked into in isolation. However considering the fact that the Indian markets are not cheap we would recommend a staggered investment strategy and adopt a stock specific approach which would provide multibagger returns to investors.