Bull run sparks bubble talk on Dalal Street

MUMBAI: It’s common to find a section of Dalal Street raising the red flag about an imminent crash on assumptions of a bubble every time there is a rally in the stock market that takes leading the benchmarks—sensex and nifty—to new peaks. The situation is no different this time around.
These naysayers have reasons to back their conviction though. The tech-led rally from mid-1999 to early 2000, which took the sensex past the 6,000 level for the first time, culminated into a sharp fall of over 50%.Then the rally from 2006 till early 2008 which saw the sensex scale a high of 21,000, ended with the index crashing nearly 70% in less than a year.
This time, however, things look different, fund managers and investment advisers said. Though they agree that at a level of 27,000 markets are not cheap, but at the same time they feel it is fairly valued.
It’s been about a year since the bull-run started, back in August 2013 when the sensex was at around 18,000. And at current levels, it’s up about 50%. But they feel there is more left in the market for investors.
“Earnings growth has to pick up now. So while stock prices have risen, earnings have not and that has seen valuations rise considerably,” said Nimesh Shah, MD & CEO, ICICI Prudential MF. “The levers are in place for the markets to do well over the next few years, provided the investment cycle, structural changes and de-bottlenecking of the industry take place in the next few years,” he said. Shah feels that so far there were only primary signs that the economy is improving with industrial growth picking up and inflation moderating. “If the earnings growth can pick up pace in the next few years, equity as a structural story is well poised,” said Shah, who manages equities worth about Rs 45,000 crore through the mutual fund, advisory and portfolio management routes.

At the ground level, investment advisers said that there were several reasons to believe that the current rally is robust. “For one, most of the buying in the last one year was by institutional buyers who are known as strong hands in the market, meaning they are not easily shaken by short-term ups and downs. In addition, they have made money, so they won’t sell easily. Seen from another angle, retail investors are yet to buy into the market,” said Arun Kejriwal, director, KRIS, an investment advisory firm.
Another reason is while the economy is showing signs of turning around from a phase of slowdown, corporate numbers are yet to follow suit. “EPS (earnings per share) expansion has to happen. And as that happens, P/E (price-to-earnings ratio) will come down and market will again become cheap. This will prevent the indices to come down in a hurry,” Kejriwal explained.