On the eve of our 75th Independence Day, the stock market seems to have declared its independence from the rest of the economy. It doesn’t matter that the Reserve Bank of India doesn’t believe the economy is strong enough to be able to cope with a withdrawal of liquidity. It doesn’t matter that the index of industrial production for June 2021 is still lower than what it was for June 2018. It resolutely ignores the RBI surveys that show consumer sentiment is down in the dumps. It isn’t worried that, according to the RBI’s own calculations, GDP will be only slightly higher at the end of 2021-22 than what it was for 2019-20.
To be sure, the economy is improving and corporate results for the June quarter have been good, but the market has priced in not just any old recovery, but a rip-roaring, rollicking one, the mother of all recoveries. It’s not only as if the pandemic never happened, it’s as if the virus has unleashed the animal spirits of investors.
A scary climate change report? Will that force companies to start accounting for their carbon reduction efforts? Nah, all that’s long-term. Coal prices at a decade high? Well, should be good for Coal India, right? Are the OECD’s leading indicators pointing to a moderation of growth in the leading economies? That’s because of supply disruptions and in any case India isn’t affected. Won’t the scarcity of semiconductor chips hurt the auto industry? Yes, but we’re going to make them in India. Month-on-month inflation went up in July? So what if our Monsoon Watch shows that uneven rains are affecting fertiliser prices, while our recovery tracker shows four out of six weekly indicators in the red? Don’t worry, the RBI will support growth, come what may.
Hasn’t the Prime Minister himself asked industry to step up to the plate, take risks and invest? True, RBI surveys show that average capacity utilisation was a low 69.4 per cent in the March quarter, but that’s bound to go up soon. And isn’t the government spending on infrastructure? Well, total central government spending was up all of 0.7 per cent in the June quarter, compared to the same period last year. But that will no doubt go up soon. As for the coronavirus, while our herd immunity tracker shows that 57 per cent of the Indian adult population hasn’t yet got even one dose of the vaccine, the markets are behaving as if we’re all fully vaccinated and it’s pretty sure there won’t be a third wave. The spurt in the Zomato stock is a sign of the times, although we said, rather timidly for these heady times, that only those who have a head for heights should invest in it.
After all, such euphoria is only natural when the world is awash in capital and the central banks of the major economies are all looking out for the markets. American economist Thomas Palley has explained this process of financialization in his paper, evocatively titled: ‘Financialization revisited: the economics and political economy of the vampire squid economy’. But perhaps the old numbers no longer hold in the brave new world of negative interest rates and massive government debt.
Of course, the recovery is happening. Indeed, many firms have used the low interest rates and buoyant market conditions to pay down debt and strengthen their balance sheets. They have the resources to invest. But what stock pickers are bothered about are the valuations.
That is why we advised investors to give the Chemplast Sanmar IPO a miss and asked punters to bet on Aptus Value Housing Finance strictly for the listing pop.
This was a week replete with corporate results. Given stratospheric valuations, we recommended that investors to stay on the sidelines for Jindal Steel and Power, Radico Khaitan, Gujarat Gas, Pidilite, Lupin and Thermax. Add to that stocks we prudently recommended buying on dips or for the long term — These include Hindalco, M&M, SAIL, Motherson Sumi, Aarti Industries, V-Mart, Cadila and Zee Entertainment. That’s probably the longest list of stocks we were cautious about at any one time.
Where to put your money then? Stocks which we thought had decent valuations include Indian Hotels, Bharat Electronics, Goldiam International, Muthoot Finance, Power Grid, Dollar and Rupa, Bharat Forge, Eicher Motors, Control Print, Gabriel India, AU Small Finance Bank and Va Tech Wabag.
We also looked at which life insurer offers the best risk-reward ratio; the clash of the edible oil titans Adani Wilmar and Ruchi Soya; how a lifeline to Amrapali shows the way for other stranded housing projects; how Sebi’s recent rule changes will help start-ups get listed; whether a secondary market for corporate loans will boost bank credit; and three pressing issues the GST Council must address. Prashant Jain, CEO of JSW Energy talked to us about his plans for going green.
We considered how best to play the rush of money into mutual funds. And if you want to stretch your wings, you can now start trading in foreign stocks.
As the nation celebrates its 75th Independence Day, maybe the stock market is not just blinded by greed, but is seeing something we are missing — perhaps a new and vibrant India on the horizon. A small beginning has been made by India deciding to fly its flag in the South China Sea.
Happy Independence Day,