What is a Market Bubble?

Economist Robert Schiller defines a market bubble as a phase where an increase in asset prices revives enthusiasm among investors. This enthusiasm begins to spread across a wider base of investors resulting in a further increase in prices. The inflated prices, even though may exceed their intrinsic valsue, continues to attract a new class of investors who tend to follow the herd and are looking to make a quick buck, this continues till prices are driven irrationally high.

Is the current state of the market much like this bubble?

The early equity call

Retail investors have piled in multiples into the stock market and their emergence in the financial markets is a force to reckon with. But, based on a broad outlook of the market one would imagine it to be true that the current market rally is likely to burst like a bubble and cause a steep fall. But, Maneesh Dangi’s view states otherwise. His bullishness towards equity began in the early days of the pandemic and was centered around 3 factors:

  •  Increase in Liquidity
  •  Supportive policy measures
  •  Reasonable valuations

His call proved to be right, today the equity markets are at an all-time high with the Sensex rising to twice its growth from a dip to 25k points in March 2020 to cross the 50k point threshold by Feb 2021. Maneesh views the market from a macroeconomic point of view.

India from a Macroeconomic standpoint

In India (as an emerging country), our borrowings are low and we have an impeccable track record of clearing our debts over the years, this is in comparison to other emerging and even some developed countries too. Our primary deficit is at bay, we have had nominal GDP growth from the early 2000s which has been higher than interests and we have not accumulated debt (beyond public debt) as a percentage of GDP over the past 3 to 4 decades. All these positives coupled with the recent budget of 2021 are stepping stones towards a ‘Build India’ outlook. Globally, infrastructure will anchor economic revival. This much-needed push towards better infrastructure tackles the problem of labour and unemployment keeping inflation at bay and if well-executed, could make India a power to reckon with in the near future.

Macroeconomics and asset classes

Liquidity in India is still abundant and dollar depreciation may be a further boon for emerging markets like ours. This would increase the amount of FDIs flowing into India. These inflows could boost the real estate sector in India; this we are already witnessing today with the emergence of REITs and influx of billions of dollars by groups like Blackstone and Brookfield in the real estate market. FDIs would further fuel the manufacturing sector, employing a larger workforce, keeping inflation at bay, and deploying stronger capabilities to manufacture more products are lower costs.

Interest rates in fixed income instruments currently have been lowered and may continue to remain at depreciated levels for a longer period. These market conditions will lure investors towards equity as an asset class for want of better returns. A wisely managed rupee by RBI can further help the growth story in the coming future.

Post copy: Can the macroeconomics of a country play a vital role in determining an asset class’s future trend? Click here to know more about India’s debt vs equity story.