Is Dalal Street in a bubble?

There has been a lot of bubble talk going around. With the Nasdaq touching dizzying heights – it has left many on D Street thinking whether the rally we just saw is authentic.

Lets cut the noise and look at some concrete data points;

It has been an intelligent rally. Make no mistake, Mr. Market is smarter than you – If one looks at the rally post. March one realizes that the narrative has shifted very intelligently from Doomsday to businesses that will survive and thrive post-COVID. Most Smart Money has gone to COVID central themes like Pharma, Chemicals, Gold, etc.

The central theme of polarization exists – Polarization is basically the concentration of money into a very narrow range of stocks. This has been the case in India for a few years now. Reliance now accounts for about 10% of India’s Mcap and has a 14% weight in the Nifty. The top 15 stocks in the Nifty 50 would represent the benchmark at 15,000 while with the rest 35, the index would still be at 9000 levels, indicating massive Concentration in select few stocks.

The Nifty PE conundrum – While there has been a lot of attention to the fact that the Nifty PE crossed the high threshold of 30 – we have to understand that is the 12-month Trailing PE ratio that is being quoted. Since Earnings have been declining since ~ March and stock values have rebounded significantly – this would make the 12 months Trailing Nifty PE artificially higher and not a good barometer for valuations. The better barometer would be the CAPE ratio which is the Prices/ 10 year average EPS as it would give a better perspective on valuation. The CAPE is around 26 with a 10 year average of 24, indicating a bit of froth in the market but not a bubble

The liquidity argument – Money is like honey, once it starts flowing it gets everywhere. In a world with sub-zero interest rates, a considerable amount of FII money will look for emerging markets. While news channels would tell you the billions of dollars have come into public equities in the last month, it is important to note that FII turned net buyers for the first time just 2 weeks ago. Simply put until now, most of the money that has been coming in was simply the money that had flown out in March.

The major essence of the current rally was due to new retail and domesticInstitutional money.