{"id":389551,"date":"2024-09-11T14:03:20","date_gmt":"2024-09-11T08:33:20","guid":{"rendered":"https:\/\/zerodha.com\/z-connect\/?p=389551"},"modified":"2024-09-11T17:24:58","modified_gmt":"2024-09-11T11:54:58","slug":"its-the-economy-stupid-the-markets-must-be-crazy","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-the-markets-must-be-crazy","title":{"rendered":"It\u2019s the economy, stupid! The markets must be crazy!"},"content":{"rendered":"\n

We love IndiaDataHub\u2019s weekly newsletter, \u2018<\/em>This Week in Data<\/em><\/a>\u2019, which neatly wraps up all major macro data stories for the week. We love it so much, in fact, that we\u2019ve taken it upon ourselves to create a simple, digestible version of their newsletter for those of you that don\u2019t like econ-speak. Think of us as a cover band, reproducing their ideas in our own style. Attribute all insights, here, to IndiaDataHub. All mistakes, of course, are our own. <\/em><\/p>\n\n\n\n

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The money tsunami that\u2019s drowning the markets<\/strong><\/h2>\n\n\n\n

By a generous estimate, no more than half of India\u2019s economic activity happens in its ‘formal sector’. Of all its formal sector firms \u2014 roughly 1.7 million in number \u2014 just ~8,000 firms are listed publicly. And only a small fraction of these are actually on investors\u2019 radars. So, when the stock markets value these 8,000 firms at one-and-a-half times the size of India\u2019s GDP, you have to wonder if we\u2019re all going a bit crazy.<\/p>\n\n\n\n

See, India\u2019s equity market capitalisation \u2014 the total value our stock markets place on all the companies listed within them \u2014 has hit \u20b9465 trillion, or $5.6 trillion. This is ~150%<\/em> of our GDP. Just last year, it was at two-thirds that figure. There’s no way these companies grew their businesses so much in the last year that they’re worth an extra trillion-and-a-half dollars. Is everyone just going mental<\/em>?<\/p>\n\n\n\n

Before you panic too much, there’s a caveat: the comparison between market capitalisations and the GDP breaks down pretty quickly. Market capitalisation is a \u2018stock\u2019 measure \u2014 it\u2019s a measure of the total <\/em>value that investors place on India\u2019s listed companies. GDP, on the other hand, is a \u2018flow\u2019 measure \u2014 it looks at India\u2019s economic activity in a specific period<\/em>. This is a little like comparing all of someone\u2019s money with someone else\u2019s salary package. The stock measure will always look bigger by comparison. <\/p>\n\n\n

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Stocks and Flows | Source<\/a><\/em><\/figcaption><\/figure>\n<\/div>\n\n\n

But even considering that, this is a useful comparison to make. The GDP, if nothing else, is an extremely large number, which is tied to the size of India’s economy. Perhaps comparing a GDP figure to market capitalisation tells us nothing concrete. It is, however, a rough thumb rule to see how expensive stocks are. And right now, the answer seems to be: \u201cvery\u201d. <\/p>\n\n\n\n

Want to know the last (and only other) time valuations were this high? December 2007. And you know what happened after that<\/em>.<\/p>\n\n\n\n

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Foreigners warm up to Indian debt<\/strong><\/h2>\n\n\n\n

Foreign portfolio investors bought $2 billion worth of Indian debt in August. That might sound like a lot, but honestly, it\u2019s almost been par for the course, this year. FPIs have bought roughly the same amount of Indian debt every month since October last year, save for a sudden and sharp fall this April. <\/p>\n\n\n\n

Why is everyone suddenly interested in our debt? It\u2019s probably no coincidence that this sudden and sustained influx began last October, a mere month after<\/a> JP Morgan announced India\u2019s addition to its emerging market bond index from this June.\u00a0That was a near-guarantee that every month, going ahead, a large amount of foreign money would automatically be allocated to Indian government bonds. Of course investors rushed to capitalise on this. <\/p>\n\n\n\n

The results are clear: in the last nine months, Indian debt securities have pulled in a net of US$ ~17 billion. In total, FPIs now own ~US$ 65 billion in Indian debt, with just this year\u2019s additions making for almost a quarter of their total Indian debt holdings. <\/p>\n\n\n\n

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I know, that sounds like a lot. This is still tiny compared to equities, though. As of August, foreign investors hold US$ 900 billion<\/em> in Indian equities \u2014 one whole order of magnitude larger than their debt holdings.\u00a0<\/p>\n\n\n\n

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Energy usage declines (and that\u2019s probably not a bad thing)<\/strong><\/h2>\n\n\n\n

This August, Indians used a lot less energy than last year: <\/p>\n\n\n\n