Friday, November 17, 2006

When will the bubble burst?

No, I am not talking about the Indian economy, which I believe will continue on its growth run for at least 4-5 years. I am talking about the Stock Market and Real Estate.

The Sensex today has reached 13500 and is hovering around that mark. It just seems it has now maxed now and might take a dive anytime soon. But , with loads of new money floating in (Mutual Funds and FIIs), the downward spiral isn't coming and somehow just manages to hold on for a bit. But for how long?

In the midst of this incredible rally, market analysts have all but forgotten the fundamental pricing of stocks and seem to re-evaluate the prices based on the effervescent market conditions. The Sensex index is up about 50.35 per cent from its year lows in June and has been hitting new record highs almost daily in recent weeks. My wife's colleague, Ramdeo Agarwal, managing director at Motilal Oswal, sums it up so aptly.

"Whenever there is over-valuation, it's like that last drink at the party; the lights are going off, yet you like the party so much you don't want to leave,"

There is no doubt there is over-valuation, but in the middle of the meteoric rise, no one takes the risk of raising the alarm for the fear of being branded a party-pooper. After all, everyone benefits in the booming market. People who have bought stocks at ridiculous prices also seem to profit, but the prices keep climbing, where more fools will buy the stocks. It like something like the pyramid scheme.

Mr. Agarwal (my wife's colleague) goes on to say that valuations are still fair, but I don't agree. Something, that inflates so quickly, is bound to be structurally weak.

So, I am not saying that the crash will come soon, but when it comes, the effects will be felt far and wide.

With respect to property prices, I am all the more sure. Lending has become more difficult and there is hardly any logic to the way property rates have risen in a year's time. In Pune, a few flats at Aundh are in the market for 5000 Rs per sq feet. Why would I buy 5k psf property in Pune, when I can get a better one for the same rate in a good Mumbai locality?

Many analysts are still rooting for prices to keep going north, but from what I see - my high DINK colleagues have given up on their dreams of a property purchase - the prices have to correct big time.
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