Markets Are Holding Higher, Valuation Fears Spread

While the Sensex and Nifty are still below their all time highs, the overall market has grown more which is better reflected in the mid cap and small cap indices

23 May 2024 12:30 AM GMT

On Episode 299 of The Core Report, financial journalist Govindraj Ethiraj talks to G Chokkalingam, veteran market analyst and founder of Equinomics Research as well as Rafeeque Ahmed, chairman of the Farida Group.

Our Top Reports For Today


(00:00) Stories Of The Day

(01:00) Markets are holding higher, valuation fears spread.

(03:54) Why you should worry about price to earnings ratios

(15:42) RBI transfers 2.1 lakh crore to Govt, much more than expected

(17:37) Indians are blowing more money travelling overseas, despite more restrictions.

(19:03) Order books for India’s exporters have jumped in recent months. What is driving this?

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.


Valuation Fears Are Back

The stock markets held the $5 trillion market capitalisation mark in Wednesday’s trade.

With continued exuberance comes apprehension, particularly among institutional investors who have seen boom and bust cycles.

Technically, valuations are at an all time high in many major markets across the world, more than a dozen, including India.

But as you keep peeling off the layers of the onion, so to speak, then questions start to arise.

How are companies quoting at a PE ratio of 100 and more when they belong to traditional industries and there is no sign of them achieving the earnings growth to match the stock price ?

Institutional memory as they say can be a good thing because it prevents you from taking wild bets and it can be a bad thing because it prevents you from taking wild bets.

The interesting thing is that all the panic we saw, including among the market regulator the Securities & Exchange Board of India, over runaway mid caps and small cap stocks appears to have dissipated for now.

Remember, mutual funds were asked to do stress tests on what would happen if investors suddenly wanted to pull out their money.

Well, they have not and the markets are still going up.

So who is the genius here ? I don’t know as I too suffer from an institutional memory problem.

Anyway, on Wednesday, the BSE Sensex closed the day at 74,221, up 268 points while the Nifty50, on the other hand, ended at 22,598, up 69 points.

In the broader market, which we track more closely now than in previous months, the BSE MidCap index fell very slightly while the BSE SmallCap rose marginally.

So while the Sensex and Nifty are still below their all time highs, the overall market has grown more which is better reflected in the mid cap and small cap indices and thus also a reflection of the sheer rise in valuations.

Just to glance back at the benchmark indices, the BSE Sensex has risen 20 per cent over the past one year, while the Nifty50 has gained around 24%.

While in the broader markets, the Nifty MidCap 100 has soared 60 per cent in one year, and the Nifty SmallCap 100 has jumped 71.2 per cent.

The ET says that ever since voting for Lok Sabha elections began on April 19, foreign institutional investors (FIIs) have sold Indian stocks worth around Rs 37,700 crore, translating into an average daily sell-off of Rs 1,800 crore in the last 21 trading sessions.

Reflecting the increased nervousness on Dalal Street on the probable outcome of Lok Sabha election, market's fear gauge India VIX has also shot up by about 67% to fresh 52-week high levels.

Why Do Price To Earnings Matter And What Do They Mean?

Why should we be thinking a little more deeply about market valuations and how, to go back to some basics, are they measured and how do they compare with the past or anything for that matter.

I reached out to G Chokkalingam, veteran market analyst from and Founder of Equinomics Research and began by asking him to give us a short explanation on what price to earnings means in the context of valuations and share prices that we are seeing currently ?


Elsewhere, Sebi has issued fresh guidelines to manage the stock market impact arising out of market rumours, according to a circular dated May 21.

The purpose is to exclude price disruption caused by rumours while arriving at the price for an acquisition in a M&A or a buyout situation.

The regulations shall be applicable to the top 100 listed entities with effect from June 1, and on the next 150 entities starting December 2024.

The regulation requires the listed entity to verify market rumours once there has been a material price movement.

In this regard, the Sebi circular states, "unaffected price shall be considered for transactions on which pricing norms specified by SEBI or the stock exchanges are applicable, provided the rumour pertaining to such transaction has been confirmed within 24 hours from the trigger of material price movement."

So what is this unaffected price you might ask ?

Unaffected price here implies the share price level that would have existed if there was no rumour in the market. And there is a computation for it.

All this matters if news about potential M&A deals often gets reported by the media before the formal announcement, causing a surge in the target company’s stock price.

This results in a higher open offer price, which makes the acquisition more costly for the acquirer.

So these disruptions in stock prices will be excluded when determining the open offer price.

Nothing happens to the stock price itself of course.

Back and now in the currency markets, the rupee inched up to 83.22 per dollar on Wednesday, the highest since April 10.

Some research reports are suggesting that the Reserve Bank could let the rupee appreciate very slightly though recent history suggests that the overall movement in the rupee is very limited and narrow, also making it the least volatile among many currencies.

Oil Slips Again

Oil prices are down again after an industry report suggested that US crude inventories are rising, Bloomberg reported.

In general, US crude inventory is a critical signal for oil prices, the higher the inventory, the lower crude oil prices, at least relatively.

Brent crude is now around $82 a barrel, near its lowest in three months, after the American Petroleum Institute reported crude stockpiles rose by 2.5 million barrels last week, said Bloomberg.

Overall Brent prices are around 7% higher so far this year, supported by OPEC supply cuts, although prices have cooled since mid-April.

Prices are of course stable, all things considered, particularly given the heightened geopolitical risks continue including drone strikes on Russian refineries.

Reserve Bank of India Transfers More Funds Than Expected

The Reserve Bank of India (RBI) is set to transfer Rs 2,10,874 crore as surplus to the central government for the accounting year 2023-24, the central bank said in a press statement.

This figure is much higher, almost 140% than what was generally estimated and projected by analysts, around Rs 120,000 crore.

The contingency risk buffer (CRB) has been hiked to 6.5 per cent from 6 percent previously.

In FY23, the central bank had transferred Rs 87,416 crore to the Centre as surplus.

The ET reports that as per interim budget documents for the ongoing financial year, the Narendra Modi government had budgeted a dividend of Rs 1.02 lakh crore from the RBI, PSBs and other financial institutions.

Economists say this sum and additional sum gives the government more elbow room to manage any welfare spending and sustain its high levels of capex spending. Particularly if proceeds from disinvestment are low..which of course they will be since hardly any disinvestment has happened in the last year.

A Kotak Mahindra Bank economist told Reuters that higher interest rates on both domestic and foreign securities, significantly higher gross sale of foreign exchange and little impact from the central bank's liquidity operations possibly lead to such a "whopping dividend".

The level of surplus or profits the RBI pays to the government has been a somewhat contentious issue in the past.

The government has naturally sought higher payouts saying the RBI was maintaining reserves or capital buffers that were much higher than many other global central banks’ buffers.

And that it, being the Government, could put the funds to good use, for example in projects, physical or otherwise for the benefit of the common man.

The quantum of the transfer has been the subject of debate, not the transfer itself.

The issue is a live one in many countries.

Indians Step Up Spending

Travelling Indians spent some $31.7 billion overseas last year, marking a 17 per cent surge from the $27.1 billion spent in FY23.

This increase in spending persisted despite the implementation of measures such as tax collection at the source, aimed at curbing overseas expenditure, according to a report by The Times of India (TOI).

The figures obviously suggest Indians continue to travel extensively overseas.

Which in itself is not so surprising given the high costs of travelling domestically and an increasing number of affordable destinations including newer ones from Vietnam to Kazakhstan within 4-5 hours of direct flights from cities like Mumbai and Delhi.

Indians spent 17 billion on international travel last year, up almost 25% compared to the $13.6 billion spent in the previous year, the report stated.

Amounts spent on overseas education appear to be falling , though it is not clear how or why because anecdotal evidence suggests otherwise.

More on that at a later date including if spending categories are shifting.

The TOI report said Indians have allocated a larger amount towards supporting relatives abroad, totalling $4.6 billion, surpassing the expenditure on fees.

Order Books For Indian Exporters Are Looking Strong

There has been some concern about overall merchandise or physical export numbers but the overall picture is looking better than before.

India's total goods exports in FY24 fell 3.1% to $437 billion from $451 billion in the previous fiscal.

This year could be better.

Many markets including Europe and the United States are stepping up their imports and thus boosting India’s exports.

This is despite all the geopolitical tensions and logistics challenges which are affecting some industries but not all.

Export order books are up anywhere between 15% and 20% for industries like footwear.

I spoke with Chennai-based Rafeeq Ahmed, chairman, Farida Group, one of India's largest shoe manufacturers and exporters.

And I began by asking him how he was seeing demand trends.

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