Stock Market in a Bubble
A stock market bubble is a type of economic bubble that takes place when the investors made the stock price more than its intrinsic value. So, What is the intrinsic value? It is nothing but the real value of a stock. The stock market in a bubble zone means when the market is overvalued. Nowadays Indian stock market is in this bubble zone. In the past, we saw that whenever the bubble has burst it mostly affects the retail investors more than institutional investors. The damage caused by the bursting of a bubble depends on the economic sector(s) involved, and also whether the extent of participation is widespread or localized. For example, the bursting of the equity and real estate bubbles in Japan in 1989–1992 led to a prolonged period of stagnation for the Japanese economy — so long that the 1990s are referred to as the Lost Decade.1 In the U.S., the burst of the dot-com bubble in 2000 and the housing bubble in 2008 led to severe recessions. Now the retail investors of India going to see the After Corona bubble according to my prediction. RBI predicts a disastrous GDP fall of 7.5%, yet the stock market has soared. The Sensex crossed 50,000 last week, up from 40,000 a year ago. According to RBI, this bubble is going to stay for a long since it’s a global bubble. Domestic investment in our stock markets is now substantial, cushioning foreign outflows. However, by historical standards, Indian markets are highly overvalued. The ratio of Sensex share prices to company earnings is now over 34, against under 20 historically. China’s ratio today is just 17.5%. The Sensex has been bloated by the global flood of central bank money. The flood will ebb one day. Brokerage firm Axis Capital has a warning for domestic equity investors because of this issue. On 18 December, the price to earnings (PE) ratio of the Nifty 50 stock market index reached an all-time high of 37.84. This was around 87% higher than the average PE ratio of 20.26 since 1 January 1999. The PE ratios of the Nifty 50 and other broader indices continue to remain at extremely high levels. This ratio is essentially the number of rupees that investors are ready to pay for every rupee of earnings over the last 12 months of the stocks that make up any index. The average yearly PE ratio of the Nifty 50 has been largely rising since 2013. This basically means that share prices have risen much faster than company earnings. This is true for other indices as well. Interestingly, the overall net profit of listed companies in India hasn’t grown in many years. Their overall net profit in 2019–20 was lower than in 2007–08. Of course, 2019–20 profits would have been slightly hit by the covid pandemic, but even the overall net profit for 2018–19 was lower than that in 2010–11. If all these factors don’t make for a stock market bubble, one doesn’t know what does.
