India’s stockmarket mania leaves equities vulnerable

India's BSE Sensex stockmarket index has gained 93% since March 2020. But the gains are not justified by the economic fundamentals.

“Stockmarket mania” is in full flower in India, says Mike Bird in The Wall Street Journal. The BSE Sensex stock index has gained 93% since March 2020. Last month it closed above 50,000 points for the first time.

The BSE Sensex’s gains have matched those of America’s S&P 500 since early last year, notes Bird. This rally is not justified by the economic fundamentals: GDP crashed by 24% in the second quarter of last year. Poverty has soared. In the country’s banking sector, long the economy’s Achilles’ heel, gross non-performing assets are set to rocket as the pandemic chokes off activity. Indian equities are priced for perfection, leaving them vulnerable to bad news ahead. 

Modi’s magic money tree

Last month’s government budget provided an extra fillip for Indian shares. Finance minister Nirmala Sitharaman is turning on the fiscal taps, with the deficit set to hit 9.5% of GDP this fiscal year and 7% next year. Investors were pleased to be spared rumoured tax hikes.

New Delhi says it can “raise truckloads of money” by selling off stakes in state assets, says Prathamesh Mulye for Quartz India. Planned divestments include a life insurer, several logistics businesses and “beleaguered national carrier” Air India. It remains to be seen whether words are met with action: “Some of these names have been floating around for... years now but haven’t found any takers.” 

It is 30 years since India began to tear up its cumbersome “licence raj” and put itself on a faster growth track, says Banyan in The Economist. Yet in recent years reforms have slowed and “even, in some respects, reversed” as Indian prime minister Narendra Modi’s government resurrects “older ideas of protectionism and state control”.

Modi is giving up his longstanding commitment to fiscal discipline, says Mihir Sharma on Bloomberg. Government deficits will remain elevated for years. India’s debt-to-GDP ratio looks on course to breach 90%. The government argues that it doesn’t matter if it overspends so long as the money is invested. That is a dangerous game for India to play. Unlike other big economies, India has neither a reserve currency nor a deflation problem. Inflation topped 7% last autumn: “Numbers more associated with Latin American stagnation than your typical Asian tiger.”

Things could come to a head if ratings agencies decide to downgrade India’s credit rating in the next few years, says Reshma Kapadia in Barron’s. The current rally certainly has momentum. Morgan Stanley thinks the BSE Sensex could hit 55,000 by the end of the year, but “investors should tread carefully”. As Bird notes, the country’s shares are trading on 24 times forward earnings, making them more expensive than America’s grossly overvalued S&P 500. 

Recommended

Early repayment charges: should you abandon your fixed-rate mortgage for a new deal now?
Mortgages

Early repayment charges: should you abandon your fixed-rate mortgage for a new deal now?

Increasing numbers of homeowners are paying an early repayment charge to leave their fixed-rate mortgage deal early, and lock in a new deal now. Shoul…
30 Sep 2022
Energy meter reading day: why you need submit your gas and electricity readings now
Personal finance

Energy meter reading day: why you need submit your gas and electricity readings now

Energy meter reading day - you need to submit your gas and electricity readings as soon as possible ahead of the October energy price increase
30 Sep 2022
Should you fix your mortgage? Here are the best rates available now
Mortgages

Should you fix your mortgage? Here are the best rates available now

Rising interest rates look set to spring a nasty surprise on millions of homeowners next year. You need to take steps today to protect yourself from a…
30 Sep 2022
Why the Bank of England intervened in the bond market
Government bonds

Why the Bank of England intervened in the bond market

A sudden crisis for pension funds exposed to rapidly rising bond yields meant the Bank of England had to act. Cris Sholto Heaton looks at the lessons …
30 Sep 2022

Most Popular

Why everyone is over-reacting to the mini-Budget
Budget

Why everyone is over-reacting to the mini-Budget

Most analyses of the chancellor’s mini-Budget speech have failed to grasp its purpose and significance, says Max King
29 Sep 2022
How the end of cheap money could spark a house price crash
House prices

How the end of cheap money could spark a house price crash

Rock bottom interest rates drove property prices to unaffordable levels. But with rates set to climb and cheap money off the table, we could see house…
28 Sep 2022
Why UK firms should start buying French companies
UK stockmarkets

Why UK firms should start buying French companies

The French are on a buying spree, snapping up British companies. We should turn the tables, says Matthew Lynn, and start buying French companies. Here…
28 Sep 2022