The most-hated bull market started from the US in the aftermath of Donald Trump's victory is turning out to be a full-flown global equity ecstasy. Almost all market indices in developed markets, emerging markets and many frontier markets are trading near life-time high. However, pundits are warning about an ensuing bubble bust as investment wizards and fund managers warn about complacency.
However, investors' optimism remained galactic. A small eye care company's IPO in Hong Kong was oversubscribed by nearly 1,500 times as IPO Euphoria and crazy bull chase in secondary markets engulfed Hong Kong, Malaysia and many Asian equity markets.
Taking cue from its global peers, India's Sensex and Nifty are also traded at life-time high around 34,500 and 10,650, respectively. That said, euphoria in India's primary market is a little tamed in comparison with its global peers. Massive capital infusion, uncontrolled risk appetite and bull market in everything—from bond to bitcoin and equity to art and high-end properties—is fueling liquidity bubble and paper wealth. Many markets, especially Nasdaq, Hang Sang and Topix (Japan) have turned into vertical bull markets.
However, bears and short-sellers are witnessing the worst phase in the last 100 years.
Almost 11 trillion worth of sovereign capital in the EU is yielding in negative that penalizes fixed income and saving. Hedge funds, super HNIs, and institutional investors like pension funds and family trusts, and millionaires are compelled to chase paper assets.
This is typically called the virtuous cycle or a feedback loop in which rising asset price attracts capital. Influx of capital further boosts asset prices. Sentiments is turning euphoric. Investors are ignoring the bad news such as the record global debt, worsening geopolitical risks in the Middle East, Korea and rot in cryptocurrencies. At the same time, markets are hailing every bit of positive news like the tax bill passage and strong rebound in the US, and broad-based recovery in Europe and Japan. BRICS economies have made a smart comeback but this phenomena seems to have gone unnoticed.
India joined the $2-trillion market cap club, and grabbed the 10th spot among the top 10 stock markets. Sensex rose to a record-high on Monday, up 30 per cent year-on-year and 78 per cent in the last three years. Policies like demonetisation, Aadhaar-bank account linkage, implementation of RERA and PMLA have forced unofficial money into official channels. It has turned out that capital markets are the only parking centres for money that can absorb such big moneyflow. Moreover, gold and real estate are underperforming.
Bond markets are underdeveloped, FD rates are discouraging for savers, and hence mutual funds and direct investments into equity have become an appeal investment avenue. DIIs and banks are flush with funds. Mutual fund investors, who made a vast fortuning in the early stage of bull market, are reinvesting a part of the profit. Approximately, Rs 4,500 crore are earmarked for monthly SIP schemes. This is a committed liquidity pool, and it is big enough to give upward thrust to the equity juggernaut.
Meanwhile, equity investors are enjoying the joy ride. However, there are some potholes that could make the ride bumpy and jumpy. Inflation still remains benign, but rising crude oil prices and renewed bull run in coal, steel and basic resources may infuriate inflation pressure. The US Fed is in gradual tightening mode, but if it goes for rapid tightening, ECB and other banks will have to follow suit. Such scenario could force the Reserve Bank of India to hike rates which is surely not a good news.
Macroeconomic headwinds also does not seem very rosy. Despite massive capital infusion, NPAs still look like a problem. Government spending overshot the fiscal deficit target in financial year 2017-18. Technically speaking, most of the markets are pricey and looks expensive. If one goes by the Elliott-Wave theory, currently the fifth wave of upward impulse is in progress. Euphoric sentiment always coexist in the fifth wave. The current wave may extend toward 36,000-39,000. However, party could end abruptly and may produce a meaningful correction. Fundamentals also points some caution. Bond yields are on the rise and earnings growth consensus expectations make the party a self-fulfilling, biased prophecy. Stay vigil, stay awesome.
–The author is the CEO of Paradigm Commodity Advisors
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily represent the views of the publication.
