The strong rebound of the equity market in the last seven months is probably one of the best recoveries we have ever seen in the equity market. It will be recorded as one of the biggest financial stories in the annals of stock market history. After losing 40 per cent of its value in the first quarter of the year, bellwether equity indices are at a kissing distance of their lifetime high while some sectoral indices are already trading at their lifetime high. Even the broader markets have moved in tandem with frontline indices and are up by more than 50 per cent from their recent lows.
The small-cap index is actually up by more than 70 per cent. This spectacular rise in the equity market might, however, not be a reflection of the economic reality, which is yet to recover from the ongoing corona virus pandemic. This current rise in the equity market is primarily driven by liquidity in the market. The graph below shows the performance of the indices year-till-date.
The graph shows that we almost have a V-shaped recovery in the equity market without a corresponding rise in the performance of India Inc. Corporate earnings for the second quarter of FY21 have witnessed a remarkable improvement on a sequential basis; however, it will take some time for companies to fully recover from the output lost in the first quarter of this fiscal. The rise in equity market along with loss in economic activity has led to stretched valuation of the equity market in India. The valuation of the equity bellwether indices are trading above 2 SD (standard deviation) of their long-term average. Besides, what is also disturbing is that return on equities (ROE) is also lower than the long-term average.
This story is from the November 09, 2020 edition of Dalal Street Investment Journal.
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This story is from the November 09, 2020 edition of Dalal Street Investment Journal.
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