Every market that is rising quickly is not a bubble. And any market that has been rising for a long time and is not falling is also not necessarily a bubble. They could be, but you will never know ahead of time. Instead, why not just continue to follow the existing trends and not worry about bubbles
— GREGORY HARMON, founder, Dragonfly Capital Management
This pithy comment from the US-based options trader could well be running through the minds of Indian mutual fund (MF) managers given that the benchmark indices, the Sensex and Nifty, ended CY19 with 15% and 12% gains, amid growing dissonance between the economy and equities. The year gone by was marked by a 45-year low employment rate, seven consecutive quarters of falling GDP growth from 8.1% in Q4FY18 to 4.5% in Q2FY20, rising bad loans, and promoter defaults. Add to that, skeletons tumbling out of NBFC closets.
What’s more stark is that in the past decade, according to a Motilal Oswal Research report, Nifty earnings has not even doubled -— it stood at Rs.251 in FY09 and grew to Rs.481 in FY19, revealing a challenging business environment for India Inc. It’s not without reason. R Srinivasan, head-equity at SBI Mutual Fund, explains: “Corporate earnings, especially over the past five years, have been extremely disappointing owing to a breakdown in the correlation between nominal GDP growth (already impacted by lower inflation) and sales growth, a resultant negative operating leverage, high real interest rates and higher taxes as a percentage of sales. Monetary policy, for now, is easy and should address interest rates. If sales pick up, hopefully, the operating leverage will turn positive.”
Yet, the indices have been courting new highs — with foreign investors pumping in Rs.1 trillion into equities (a six-year high) and MFs mopping up