After the initial crash of global stock markets at the beginning of the pandemic, stock markets have seen a sustained rise globally. The Indian stock market especially has surpassed all expectations and seen the bull run of a lifetime. So what are the reasons for this sustained rally in the Indian stock market and where can we expect it to go from here?
First of all, the primary reason for this bull run has been the liquidity infused in the global economy by Central Banks across the world. The US Federal Reserve in particular induced a massive financial thrust by engaging in a huge bond purchase program. By buying marketable bonds worth billions of dollars from the open market the US Federal Reserve released massive amounts of cash in the global economy. Similar actions were taken by Central Banks of other countries to give a push to the stranded economy. Interest rates were lowered because of low demand for funds and low economic activity. This propelled billions of dollars into emerging markets, especially India.
The liberal economic policies pursued by the Modi government and comfortable environment created for Indian as well as International businessmen to do business in India have also added to positive sentiments in the economy and the financial markets.
So what can we say about where the stock market is headed from here?
According to most analysts, the stock market valuations are very high. The Sensex and Nifty PE is over 30 and the Market Capitalisation to GDP Ratio is over 120 which is very high. It is possible however that in the light of easy liquidity environment and positive sentiments in the economy this market may not see a correction or downturn. But at the same time it is likely that it will not see new heights in the near future.
Stock Market Indices keep pace with the profits earned by the Companies and they have more than discounted the likely earnings of companies for the near future. It is therefore likely that the market may remain range bound for the next couple of years. It would be an excellent strategy in the current scenario to not pursue high valuations and wait for valuations of indices to soften, which is likely to happen within a year or two. So it will be a good idea to stick to cash and take long positions when the valuations become more reasonable.
Also with the resumption of normal economic activity, Central Banks will try to reduce the liquidity in the economy and if inflation starts to rise interest rates in the economy will also rise leading to a correction of the market indices. So we can wait for these events to occur and then take long positions in the market.
Mungekar Wealth 