Global Economy

Bad News! 5 charts show this bull market may be nearing tipping point

MUMBAI: The domestic equity market’s once-in-a-generation rally from the lows of March 2020 is making headlines globally. India’s stock market is the best performing among large economies so far in 2021, having risen over 27 per cent.

The optimism is such that pink papers are littered with predictions of the stock market’s total market capitalisation hitting $5 trillion from around $3.5 trillion currently over the next year or so.

However, a glance at history suggests the bulls in this market are nearing the end of their stamina. While historical comparisons can be dodgy given the differing macro-economic environment in different market cycles, the past does also provide a reference point to the future.

Brokerage firm Jefferies India in a recent report highlighted how several metrics in the stock market are suggesting that a tipping point for investors may be near. Given the fact that investors have been lulled into complacency by streaks of record highs and freak stock price movements, the rollover when it comes could be painful.

Below five charts show why the benchmark indices could see negative returns over the next 12 months:

Chart 1 JefferiesAgencies

The Nifty50 index in dollar terms has so far outperformed the emerging market pack by 19 percentage points over the past three months, 22 percentage points over six months and 33 percentage points over 12 months. Such periods of outperformance are usually followed by India underperforming by 11 percentage points, 6 percentage points and 7 percentage points on average in the following 90, 180 and 365 days, respectively, said Jefferies India.

Chart 2 JefferiesAgencies

The gap between Nifty50’s earnings yield and the 10-year government bond yield is now at its widest in over two years. The current yield gap of 165 basis points is uncomfortably high for Jefferies given that average earnings yield-to-bond yield gap is around 97 basis points. Interestingly, in the seven instances over the past decade when the yield gap has been this wide, it has been a harbinger of negative returns for the market in subsequent periods.

Chart 3 JefferiesAgencies

Jefferies believes that a tsunami of initial public offerings that may hit the primary market over the next six months could overwhelm the market. So far 79 companies have filed draft IPO papers with the regulator and Jefferies expects that number to rise to 160-170, which will be a record. “We believe equity supply could be around 1.5 times the H1FY22 level in H2, which could cap the near-term upside, particularly if FPI flows were not to substantially pick-up,” the brokerage firm said.

Chart 4 JefferiesAgencies

Since investors these days scoff at the mention of price-to-earnings ratio when the market has moved on to “price-to-story”, it is better to look at the old timers’ favourite price-to-book value ratio. Nifty50’s one-year forward PB ratio is currently at 3.3 times, a 28 per cent premium to historical average suggesting that if investors looked down then they may be vulnerable to vertigo.

For all the chatter about how China’s problems could be India’s solutions, the Indian stock market has so far seen net FPI inflows of merely Rs 8,297 crore in 2021-22. The decline in the pace of FPI buying even before the beginning of the tapering of the US Federal Reserve’s bond-buying program may be a concern for the bulls betting on the market’s current momentum to sustain till perpetuity.


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