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Market mark-up

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The overall market cap of Indian equity markets has grown beyond the Hong Kong market to become the fourth largest in the world. This is a time to be cautious and keep the faith of investors with diligence

By Sujit Bhar

There has been euphoria within financially-inclined circles over a recent notification in the media which said that India has now overtaken Hong Kong as the world’s fourth largest equity market by market capitalisation. In the face of it, this seems a worthy cause for joy, but within these tough economic times, it is necessary to take a somewhat deeper look into this.

The media report said that the combined market cap of Indian stock markets is now $4.33 trillion, which is more than Hong Kong’s $4.29 trillion, as per data from Bloomberg. This happened through a sustained rally in Indian stock markets over the last two months, a rally that had pushed the BSE Sensex over the 73,000 mark in January this year. A major correction followed pre-budget, but that was expected.

The total market cap of a market is the total value of all outstanding shares listed on the stock markets being considered. As of now, US stock markets are on top, way ahead of the rest of the world with a market cap of $50.86 trillion. They are followed by mainland China and Japan with market caps of $8.44 trillion and $6.36 trillion, respectively. Hong Kong is not counted as part of the overall Chinese market, going by China’s one nation two systems policy.

The path to glory

Before considering the possible after-effects of such a “promotion” of Indian stock markets, so to say, one needs to know how this came to be. On December 5, the Indian stock market capitalisation crossed the $4 trillion mark for the first time, as rallies continued on the back of encouraging global indicators, strong corporate earnings and expectations of upbeat macro data points, a generally speculative position.

On the BSE, the total market cap of listed firms crossed the $1 trillion market cap marker in May 2007, taking another full decade to move to $2 trillion. The $3 trillion marker was crossed in May 2021.

The indicators

According to experts, one of the reasons for this surge in equity values over the past four years was the “economic resurgence” that India has seen, in the face of less than happy charts for other global powers. This is one of the many reasons cited, including “robust macro-economic fundamentals” that may have led to strong corporate results, improving investor confidence, and hence the surge in the equity prices.

These are some of the broad opinions doing the rounds. The other consideration has been “political stability”. With a strong government at the centre, one expects policy stability and forward looking financial objectives. Now that the Opposition alliance is in disarray, this emotion has grown.

This same set of emotions, when applied to China and Hong Kong, has been giving different outcomes. While there is a strong government in place in China as well (by extension, in Hong Kong, too), recent drastic policy changes have wreaked havoc with those markets.

There is a problem in the assumptions, however. One of the considerations has been “improved corporate governance practices” in India. It is being said that this has bolstered India’s appeal to international investors. The FDI inflow (into the stock markets of India) in 2023 was $21 billion, a new benchmark, but one cannot forget the Adani-Hindenberg fiasco that had “wiped out” nearly $100 billion from the Adani empire at one time.

And when one considers the less than satisfactory functioning of the Securities and Exchange Board of India (SEBI), specifically within the context of the controversial Adani-Hindenberg issue, one finds SEBI less than authoritative in dealing with such complexities. This may have been intentional, through political interference, but might also have been incompetence, the Supreme Court’s clean chit to the SEBI inquiry notwithstanding. Within this, “improved corporate governance practices” fails to find footing.

A deeper look

Let us look at some other studies and observations.

The Hong Kong exchange lists some of China’s most influential and innovative firms. When China came out with stringent anti-Covid-19 curbs, and started regulatory crackdowns on major corporations, hot money started fleeing and experts believe they landed on Indian shores.

If that was the case, then it was not the improved Indian corporate ecosphere that pulled the monies into India. Instead  it is more likely a temporary shelter, considering that the West, too, is suffering from a real estate crisis, coupled with wars on several fronts that do not serve any purpose.

It has been estimated that the total market cap knockdown experienced by Chinese and Hong Kong equities has been in the region of over $6 trillion, a crash from its 2021 peaks. The situation is so bad that new listings have dried up.

However, let us be real in assessing this position, vis-a-vis the Indian markets’ huge market cap growth. Two things are worrying financial experts about this situation. The first is the fact that the firms listed on the Chinese and Hong Kong markets are world leading giants that have massive presence across borders. Many of these are Chinese companies that have proven themselves, even through astronomical dealings with massive US firms. Experts believe that while monies fled those markets in fear, they will be back soon enough, as the dust settles, as it is bound to. The field of play there is too big to miss.

The second is about India. Worldwide experts have said it in public that Indian stock prices are higher than what they should be. Hence, very few would possibly exist in the “buy” category at this moment. The fear is that if the Indian markets have peaked, then this is the beginning of a decline, even if that takes a few months. One has to discount the big dip before the budget, though, because that was possibly a major correction.

Political bias

The other factor for hot monies preferring India for the moment is India’s political position, especially as the country moves into general election mode with the Opposition in complete disarray. The immediate post-election sentiment is bound to drive prices even higher, and that would be a good time to book profits and exit.

All this is not to see the Indian market surge in a bad light, but to warn ourselves of the pitfalls that are clear to see. Administratively, the Indian stock markets are still in development mode, unable to strongly handle major issues such as the Adani case, or even the several cases of promoters failing to adhere to the 25% public holding rule for all listed companies.

Moreover, the absurd leveraging that the promoters do with debt, even pledging all their shares, leaves the company in poor shape. The fundamentals of many of the leading Indian firms are shaky at best. That these companies are, year after year, providing excellent returns, is due to the excellent managers that India has.

The scale of operations of most Indian companies, compared to international giants, is weak. That, in the long term, will reflect in the markets. Any fund manager will be wary of those.  

Added responsibility

The promotion of Indian markets on the world stage means that Indian controllers —the SEBI, the Reserve Bank of India, etc—must exert their independence and exercise caution without fear of interference.

If the Indian stock markets are to mature beyond their teenage, euphoric characters, and retain the monies that have come in, then they must accept the added responsibility of protecting the investor, right down to the little ones, finding out the frauds and dealing with them with a strict hand.

As of now, that is a tall order.

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