Global liquidity is good fuel for the markets.

Global liquidity is good fuel for the markets.

To be sure, a surge in global liquidity is good fuel for the markets. With interest rates abysmally low in certain countries and even negative in other people, of course, some of the cash sloshing around would find its way in riskier assets.

Not surprisingly, these funds start to chase assets where yields are positive. This seems to be a cue for dealers willing grow into markets that are emerging and to take some risk. In November so much, inflows from foreign institutional investors (FIIs) are in an eight-month high. FIIs purchased Indian equity value $2.54 billion in the month while they have been net buyers of $12.49 billion in the calendar year up to now.

On the other side of the geographical divide, domestic institutions have also been injecting more money into the markets. Retail investors continue to have a high level of optimism regarding stock purchases. Retail systematic investment plan (SIP) flows have been consistently steady, at approximately $8,000 crore per month, demonstrating that retail investors still want a shot at equity profits. SIPs allow people to spend a fixed amount in a mutual fund scheme. Nonetheless, in September the finance minister reversed the stance and even opened up its financial handbag. Afterwards, the government’s tax reduction statement was the catalyst the market had, and since then there has been. “Markets are helped by continuing inflows, foreign and domestic,” says Gautam Chhaochharia, ED and head of India Research at UBS Securities India Pvt. Ltd..

A’hedged’ bet

It shouldn’t be forgotten that the majority of the assurance is limited to a few big stocks. Only eight of the 30 Sensex constituents have gained over 20 percent in the year so far, while the standard Sensex and Nifty are up 11-13%. The participation of Sensex stocks to India’s market cap has increased from 44.77percent in January to 47.23% at present levels. The BSE MidCap and BSE SmallCap indices have lost 4% and 8%, respectively, in 2019 so far. Investors are buying pick stocks with the hope that these will probably be immune to a huge correction once the market sentiment turns.

But what this has done is it made some stocks expensive. In any case, it’s driven the valuations of the Nifty sky-high. In fact, stock markets are becoming less expensive as the 2008 age when valuations were pushed north on high international economic growth before the Lehman crisis hit.

The Sensex currently trades at a 12-month forward price-to-earnings ratio of 19.44 times, compared with 20.22 times on 10 January 2008, the peak before the international financial crisis, according to Bloomberg data. “The industry has been pushed with a select few superior stocks. Following the rally in massive caps, valuations are fully priced in,” states ICICI Pru’s Naren. At current levels the Indian economy remains the most expensive among peers. A corporate earnings recovery, critical at this juncture, may be derailed because of liquidity concerns as well as the downturn in customer demand.

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