Beware the market’s optimism bias
BSE Sensex, scaled new peaks. This was driven by positive domestic as well as global newsflow. For one, the Reserve Bank of India raised its gross domestic product growth forecast for FY2024 to 7% from 6.5% after September-quarter (Q2FY24) growth came in better than expected.
Anticipation of interest rate cuts by the US Federal Reserve also fuelled sentiments. As such, liquidity influx by both domestic and foreign institutional investors into Indian stocks has been robust. Amid the oozing optimism, the fear gauge that is the NSE volatility index (VIX) has risen by 35% in the previous six months.
Theoretically, the movements in VIX and benchmark indices are inversely related. Simply put, this means that the Street is currently fixated on positives, turning a blind eye towards potential threats. This is despite India’s expensive valuations.
The MSCI India index is trading at a one-year forward multiple of nearly 22 times, a glaring premium to the MSCI Asia Ex-Japan and MSCI EM Index, show Bloomberg data–thus leaving no room for disappointment. Particular hotspots are pricey Indian midcap and smallcap stocks, which beat large caps massively in 2023. Another positive factor was the outcome of recent state elections in favour of the Bharatiya Janata Party, which administers the Union government.
It has soothed investors’ worries about policy and administrative uncertainty as the market braces for the general election this year, likely in April or May. But despite increased investor confidence about continued political stability, predicting the outcome of the general election is tricky. “An analysis of the past five general elections (which are more relevant given incumbent governments have served full 5-year terms), indicates
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