ON A WEAK BASE

EQUITY MARKETS ARE BUOYANT IN SPITE OF MAYHEM IN THE REAL WORLD. BUT THE RISKS BUILDING UP ARE TOO BIG TO BE IGNORED

- RASHMI PRATAP

There is an old saying that when a pigeon sees a cat, it closes its eyes, and assumes that it is safe. Indian equity markets are being just that pigeon, ignoring risks and overlooking facts. Despite reality staring in the face, investors refuse to pay heed to econom ic and financial risks due to the disruption from the second wave of coronavirus. Defying the rising death count, case load and slow pace of vaccination, the benchmark BSE Sensex reclaimed mount 50K even as daily official deaths hit an all-time high of 4,329 on May 18 and state after state announced lockdowns to slow the spread of the virus.

With this, Sensex is up 5.1 per cent since the beginning of the calendar year, trading at a price to earnings (P/E) multiple of 32 times, becoming one of the most expensive equity indices in the world. Sensex is nearly 25 per cent higher than the 25.5 times that Dow Jones Industrial Average, the world's top equity index, is trading at. Sensex is also among the most expensive in Asia and nearly twice as expensive as the Shanghai Stock Exchange Composite Index (see The Risks).

The rally in second and third tier stocks has been even more ferocious. BSE Mid-Cap Index is up 18.3 per cent year to date (YTD). It is trading at nearly 55 times trailing earnings per share. BSE Small Index is up 26 per cent YTD; its P/E multiple is 62 times.

Since domestic investors largely bet on small- and mid-cap stocks, while foreign portfolio investors (FPI) focus more on large-cap and index stocks, there are indications that domestic investors have been far more optimistic about India Inc.’s future than foreign investors. In their optimism, they are overlooking several big risks staring them in the face.

A 2020-like Rally? Not Easy