More downs than ups : A Macroeconomic Analysis of Valuations in Stock Market


The stock market continues to cheer with a long bull run. The benchmark indices like Sensex and Nifty have reached to their historic all-time high. That is well and good but the markets are getting riskier with each trading session as valuations do not seem to be supported by macroeconomic fundamental perspective. Macroeconomic indicators of Indian economy are telling an altogether different story.

  • GDP estimates for Q1 of FY 18 are miserable as output has slumped to a 5.6% growth rate, the slowest since Q4 of FY 13. Further the growth rate of Q1 for FY17 have been 7.8%.

  • Manufacturing sector growth is found to be stagnant with a growth rate of dismal 1.2% while agriculture with a 2% rate of growth. Further, weak global demand and appreciation of rupee have led to the export growth of just 1.2% while our imports expanded by 13.4%.

  • At 5.1%, the last financial year witnessed the lowest bank credit growth rate lowest in last 60 years! There are no signs of recovery in credit growth rate even in this FY. The twin deficit problem that is eroding the profitability of corporate sector and strain in balance sheets of public sector banks which have turned into a massive Rs.8 lakh crore Non-Performing Asset(NPA) problem have caused the investment cycle to remain muted with growth in investment pegged at just 1.6%.

  • The hope of investment cycle getting kick-started by the use massive government spending to recover the output growth has also significantly diminished with the fact that government expenditure has already hit 93% of allotted fiscal space for FY17-18. Thus the tool of government spending to start consumption and investment cycle will come at the cost of compromising on fiscal prudence as it will breach the fiscal deficit target of 3.5% budgeted for this year.

  • With almost near to deflationary pressures, the interest rate cuts by the central bank accompanied by consistent rise in interest rate in USA by federal bank are going to reduce the interest rate differential between India and USA and thereby the process will discourage foreign investors to invest in India and so there is the possibility of strong capital outflow that India may witness in near term.

Thus a miserable GDP growth rate, stagnant manufacturing and agriculture sector, subdued investment cycle, low Gross Domestic Capital Formation(GDCF) rate, credit growth rate at historical low, a massive NPA problem, appreciation of rupee causing rise in imports and decline in exports, weak global demand, capital flight due to lower interest rates differentials and inadequate fiscal space, all these factors are suggesting a slowdown in economy demanding immediate attention on macro-economy of India.

Despite all that, money continues to flow into stocks. In August itself, the foreign portfolio investors sold over Rs.14000 crore plus stocks but even that could not affect indices negatively as domestic investors pumped in the money buying over Rs.16000 crore of stocks in this period.

Surprisingly not just the macroeconomic indicators are signalling a slowdown but even the stock market fundamentals are showing the signs of shaky ground. One possible explanation of surge in stock market indices was investor expectations of a rise in corporate earnings from this quarter and now on which even could not materialize in corporate results. The Nifty 50 saw 29 earning downgrades and Nifty 100 saw 62 downgrades. The profit growth was almost flat across largest businesses.

In such a scenario, Valuations running at PE ratio of 26+ look quite unjustified and a valuation bubble seems to be present in the market which is waiting for a significant correction anytime soon to reflect the real ground realities. A word of caution is suggested to the investors

Journalist| Blogger| Policy Analyst| Macroeconomy Enthusiast| Analytical Thinker| Expressive Writer


Please enter your comment!
Please enter your name here