So long as the music’s playing, investors must get up and dance

In a caller probe enactment written successful a tongue-and-cheek manner, the brokerage reiterated what it said successful September: “The pond [that is the banal market] seems to person overheated of late, disposable successful the bubbles successful the water." However, galore investors remained oblivious to these bubbles successful the banal market, KIE said. 

Some of this overheating was due to the fact that of “a monthly plan". This is successful notation to systematic concern plans (SIPs) which are utilized by galore retail investors to put regularly and mostly successful equity communal funds (MFs), which put mostly successful stocks. Monthly flows into SIPs person been increasing each month, with adjacent to ₹21,000 crore invested successful May.

Also read: Expert view: IPO marketplace whitethorn spot a stronger propulsion aft the Budget 2024, says Mahavir Lunawat of Pantomath

All this money, the brokerage said, has led to the “water successful the pond… reaching higher and higher levels." This refers to each the caller wealth driving banal prices to newer highs. KIE analysts further said that “the pond’s h2o could beryllium astatine hazard of turning into steam and disappearing altogether," but investors are engaged “rolling successful the lucre."

So, is this an escalation of committedness connected KIE’s portion successful bid to support what it said successful September? Or is it conscionable unhappy astir however banal prices person continued to emergence accelerated aft its bearish telephone that month? Or is the banal marketplace ‘really’ irrationally exuberant?

Any banal brokerage that makes a bold telephone against the prevailing inclination needs to support defending what it has said. Now, fixed that the BSE 500 index, a precise wide practice of the wide banal market, has risen by much than 27% from 11 September, erstwhile KIE made its call, till past Friday, its caller writings mightiness look similar an escalation of commitment.

Nonetheless, the banal marketplace is intelligibly overvalued. The prices of galore stocks are importantly higher than what their existent net and prospects of aboriginal net justify. As this writer has mentioned successful the past, successful 2024-25, the price-to-book ratio (a valuation measure) of BSE 500 stocks has truthful acold been the highest since 2007-08.

Further, a caller quality study successful Mint quoting information from Prime Database points retired that successful the archetypal six months of 2024, promoters oregon owners of businesses person sold stocks worthy ₹62,000 crore. This is the highest successful the past six years, for which the study shared data, and lone fractional the twelvemonth has gone by.

Also read: Expert view: Indian banal marketplace not successful a bubble, inactive beneath the semipermanent trendline, says Devina Mehra of First Global

Promoters are the eventual insiders. The benignant of accusation entree they person astir their ain companies, nary 1 other does. And erstwhile truthful galore of them merchantability astatine the aforesaid time, what it fundamentally tells america is that they consciousness their stock prices are overvalued, and that they don’t expect the aboriginal net of their companies to emergence astatine a gait that justifies the emergence successful stock prices, and truthful determination is wealth to beryllium taken disconnected the table, and this is wherefore they are selling. They whitethorn person reckoned they could bargain backmost their holdings later, astatine a little price.

In fact, this is simply a constituent that economical historiographer Charles Kindleberger made successful his all-time classical Manias, Panics and Crashes: A History of Financial Crises, which was archetypal published successful 1978: “As the roar continues… the purchases of securities… by ‘outsiders’ [read retail investors] mean that the ‘insiders’ [read promoters]—those who ain these assets—sell them and recognize profits; if the outsiders are buyers, past the sellers indispensable beryllium insiders."

If we look astatine a circumstantial example, a loss-making and over-leveraged company, Vodafone Idea, precocious decided to rise ₹2,458 crore via a preferential contented of shares to its vendors successful bid to wide a information of what the institution owes them. Analysts consciousness that the institution could usage this modus operandi successful the aboriginal arsenic well.

It is capable to bash this simply due to the fact that its banal prices person rallied by 140% successful the past 1 year—despite a deficiency of earnings. This is again a large illustration of insiders utilizing outsiders to instrumentality immoderate wealth disconnected the table.

So, wherever does that permission KIE oregon everyone other who believes that the banal marketplace is overvalued? It’s worthy remembering a enactment often attributed to economist John Maynard Keynes, but really said by different economist Gary Shilling: “Markets tin stay irrational a batch longer than you and I tin stay solvent."

Indeed, it’s besides worthy remembering thing that Chuck Prince, the past main enforcement of Citigroup, told the Financial Times successful July 2007: “When the euphony stops, successful presumption of liquidity, things volition beryllium complicated. But arsenic agelong arsenic the euphony is playing, you’ve got to get up and dance. We’re inactive dancing." 

Also read: Banking roar sends Sensex soaring past the historical 78,000 mark

Which is wherefore erstwhile it comes to organization investors—be it banal brokerages, communal funds, backstage equity firms oregon security companies—those who tally them are ever bullish. In public, they ever judge that markets tin lone spell up. They conscionable can’t halt dancing.

KIE has stopped dancing. This brokerage mightiness yet crook retired to beryllium right. But close now, it is looking wrong. Indeed, terribly wrong.