Raghav's Take: Why Stocks Are at Lifetime Highs When Economy Is at Its Weakest?

Indian markets are at an all-time high despite a volley of bad news.

(Photo: Aroop Mishra / The Quint)

Indian markets are at an all-time high despite a volley of bad news. COVID-19 remains a colossal threat with barely a tenth of our adult population fully vaccinated. This means a potential third wave may be inevitable, leading yet again to frequent lockdowns, low personal incomes and consumption, job losses, unemployment – ie, a perfect storm in which demand has eviscerated and national income is yet to recover to levels reached two years ago. In other words, ordinary folks are suffering through an unprecedented economic vacuum. Inflation is high, fueled by insane taxes on fuel, and record commodity and food prices. And now, inflation is filtering through to manufactured goods as well.

The government is borrowing insatiably, throwing bond yields out of kelter. The central bank is trying every hook, crook, and tactic to hold them down, but the logic of markets is relentless – interest rates will and must rise. America’s Fed has already indicated it’s ready to raise interest rates earlier than expected, ie, it could stop creating reckless money in what will be called Taper Tantrum 2.0.

All of this – high inflation, low demand, shrinking national income, high interest rates, a tapering Fed – should be terrible news for Indian stocks, right? Yes, and yet they are at all-time highs. Why?

Demonetisation, GST, & Digital Revolution – Powering India’s Formal Economy

While there are and always will be several complex intersections to explain sky-high stock markets, I would zero in on a few critical and core factors. You’ve heard it trotted out before as the principal reason, and it’s true – a tidal wave of cheap money has been created in the West, especially in America, which has inflated asset prices all across the world. Indian stock markets, too, have been buoyed by this unrelenting inflow of dollars, shoving forex reserves to well above USD 600 billion.

But India is also host to a unique and accelerating phenomenon that has played out invisibly but “violently” over the last five years, beginning with Demonetisation in 2016, exacerbated by the launch of GST in 2017, finally becoming an inevitable outcome via the COVID-instigated Digital Revolution of 2020. These three forces have resulted in a massive “formalisation” of India’s economy as organised corporates virtually swallowed the share of small, unorganised, informal sectors. Put another way, the footprint of the organised corporate sector has expanded in our national income, creating extremely high profitability for bigger companies, their market shares and product prices rising, as wages and self-employed earnings are falling.

Stock Markets Represent Big Companies, Not the Whole Economy, Stupid!

Now ask yourself a truly elementary question - what is the stock market? Isn’t it a sum of the market values of BIG companies? Often, mistakenly, we believe that the stock market is a barometer of the whole economy. No sir, that’s not true. It simply captures and represents the value of a handful of large companies, perhaps no more than 1000 such entities in India. These large companies could be posting an earnings growth of 40 percent - yes, 40 percent - over last year, clearly growing at the expense of smaller players. So, it’s a sine qua non that the indices which capture their value – the Sensex and Nifty – should be hitting all-time highs. Ironically, therefore, one of the reasons that the stock markets are high is because of the vicious pain inflicted on the rest of the economy.

When the Proverbial “Paanwallah” Becomes a Stock “Analyst”

Finally, as stock markets hit lifetime highs, the signs of froth are unmistakably emerging:

• When penny stocks begin to double every month

• When the total market capitalisation becomes much larger than the GDP – at 115 percent, it’s currently at a 13-year high

• When people borrow crazily to invest in IPOs at obviously questionable valuations. For instance, fresh fund raising is now at a 14-year high, and we’ve got a lot of the year still to go!

• When after Zomato’s spectacular debut, PayTM, another loss-making new-age company, is looking to scoop up over USD 2 billion, making 2021 the highest-ever IPO and fund-raising year in India’s history!

• When illiquid shares of unlisted companies rise 20-30 percent in a month in the grey market, with punters hoping to cash out in anticipated IPOs

• When people with long memories also forget what triggered the horrible crash of 2008, when markets melted by 75 percent. To refresh your memory, it was the IPO of Anil Ambani’s Reliance Power, which got bids of over Rs 8 lakh cr from gamblers for its utterly high-priced shares. Now, I am not saying these examples are directly comparable, but Zomato got a demand of over Rs 2 lakh cr, which is the third highest ever; and if around Diwali, PayTM were to break Reliance Power’s infamous record, well, you’d better watch this space very closely!

You know what, markets become truly frothy when the proverbial “paanwallah” begins to give you stock tips. Then you can be sure that the top – and end – are near.

The bulls and gamers will tell you that “this time it’s different”, but believe me, it’s never different. Because since time immemorial, markets have yo-yoed between deep fear and excessive greed – and they always top off when greed gets the better of sanity and judgement. We are almost there! Not yet at the end point, but pretty damn near it.

So, I reckon you now get it? These three reasons – the deluge of cheap global money; big companies becoming bigger, swallowing smaller players; and nearing the point of excessive greed – best explain why the stock markets are at their highest point while the economy is at its lowest.