The stock market at present is largely driven by irrational exuberance among non-institutional and certain institutional investors, Kotak Institutional Equities said in its latest note. The domestic brokerage said it is impossible to model the behavior or psychology of a crowd, saying the high valuations across sectors in general and frothy valuations in specific sectors largely reflect the extremely bullish sentiment.
Arguments such as excessive liquidity, too much money and household savings moving to equities from bank deposits are economically unsound explanations, it said.
"It is virtually impossible to model the behavior of a mob; it can stay irrational for an extended period of time. There is limited point in (1) searching for clues in past cycles, (2) trying to guess peak valuations of stocks; they can be anything and (3) modeling flows of households into equity markets, which is technically incorrect incidentally, Kotak said. Kotak said big stock market corrections typically stem from four areas including macroeconomic challenges such as inflation spike or balance of payment crisis. The most obvious ones are the Asian currency crisis in 1995-96 and taper tantrum in EMs in 2013. There could be leverage issues with banks, companies, government, households -- examples are US household mortgage crisis of 2007-08 and the Euro crisis of 2010-11. Political or social instability could also bring market corrections such as recurring bouts in many EMs. Besides, there could be natural or man-made disasters such as pandemic war. The Covid-19 pandemic was the latest one.
"However, we do not see any issues on the first three points as imminent sources of risk for the Indian market and the fourth is impossible to forecast anyway. India’s macroeconomic position is in good shape; Indian banks, companies and households are in financially sound health; government debt may be on the higher side but almost all of public debt is domestic debt; and India’s political and social situation is quite stable despite the shock results in the 2024 general elections," Kotak said. .: Here are some of the investment stocks that Kotak says are trading at very expensive valuations: