Sensex on fire: why are the bulls charging?

The Sensex and Nifty, India’s benchmark indices, have risen by 20% since the beginning of the year — among the highest in the world.

Written by Khushboo Narayan | Published:July 17, 2017 1:44 am
sensex, sensex high, nifty high, bombay stock exchange, stock market The Sensex and Nifty, India’s benchmark indices, have risen by 20% since the beginning of the year — among the highest in the world.(Representational image)

The benchmark index has risen by 5,500 points in the last six-and-a-half months. The Indian Express explains why, and what can happen now

The BSE Sensex has gone from 26,500 at the beginning of the year to 32,000 now. How have other major global indices performed in comparison?

The Sensex and Nifty, India’s benchmark indices, have risen by 20% since the beginning of the year — among the highest in the world. On Thursday, the Sensex breached the 32,000 mark for the first time while the Nifty stopped nine points short of 9,900. The Sensex retreated marginally on Friday but still closed above 32,000, and ended the week with a gain of 660 points (2.1%), the biggest since mid-March. The Nifty breached the 9,900 mark intra-day before falling back. India’s market capitalisation (the total value of all stocks listed in the country) has now crossed $ 2 trillion; the nation’s stock market is now the world’s ninth biggest and is closing the gap with Germany and Canada. These are psychologically important marks for the markets, and indicates that sentiment is very bullish.

From where is the liquidity coming to power the markets?

Foreign central banks keep a loose monetary policy and buy financial assets. Some part of that money is finding its way into India too. Internally, a lot of domestic savings is flowing to mutual funds, which too are buying. Therefore, both foreign portfolio investors and domestic institutional investors — the two largest categories — have been buying consistently. In this year (2017) so far, foreign investors have bought $ 8.37 billion (Rs 54,400 crore) worth of Indian stocks, while domestic mutual funds and insurance companies have bought nearly Rs 25,000 crore.

What are the reasons behind the confidence?

Despite hiccups, India is still one of the fastest growing big economies in the world, with the potential to do more. The current account deficit and fiscal deficit are under control. Retail inflation has fallen to 1.54%. The demonetisation exercise has not scarred the economy very much. The government is focusing on ease of doing business and implementing crucial reforms such as the Goods and Services Tax (GST). All these factors could push up the growth rate for Indian companies and the economy in general, is the belief.

But despite the economy growing and stock markets booming, the rate of job creation remains extremely slow. Is there a contradiction here?

According to D K Joshi, chief economist at the rating agency Crisil, growth does not always lead to job creation. “Growth need not be job creating. The primary reason for low job creation in the country could be due to continued weakness in two of the most labour intensive sectors — manufacturing and construction. As far as the stock markets are concerned, they respond to different signals, such as liquidity,” Joshi said.

So, which stocks are doing well, specifically?

Realty stocks as a group (BSE Realty Index) have risen nearly 70% since the beginning of the year because they had been beaten down badly earlier, and also because of reform measures such as the Real Estate (Regulation and Development) Act, 2016 (RERA), and the government’s thrust on affordable housing. Consumer durables rose 42% in response to a lot of pent-up demand. Other stock groupings that have done well in this particular market rally include finance stocks and fast moving consumer goods. Stocks in sectors that have been hit — such as steel, power and telecom — haven’t done well.

Till when can the party be reasonably expected to last? What factors will determine when the correction comes?

Trying to predict the stock market is a mug’s game. Still, the consensus among analysts and markets strategists seems to be that the market will consolidate its gains now after rising sharply for six months. Some brokerages like Morgan Stanley predict that the Sensex would cross 33,000 by the end of this year, based on their belief that India is at the cusp of a new multi-year growth cycle, which will see company earnings rise by 20% annually over the next five years. On the other hand, there are those like Bank of America-Merrill Lynch, which have cut their prediction to 30,000.

How best can the ordinary investor take advantage of the current situation?

Investors would do well to study the stocks before buying. Trying to time the market is not advisable. A better way to invest — depending on a person’s risk appetite — is to invest in a systematic investment plan in a mutual fund.

What risks should the investor be aware of, and what should she realistically expect out of her investments?

Well, downside risks are always there. In the present case, we are looking at stocks that are expensive. This is measured by a yardstick called price-to-earnings ratio. The Sensex, for example, is trading at nearly 19 times its estimated earnings for the current financial year. In comparison, other markets are less expensive. MSCI World, a gauge of developed nation stocks, is trading at 16 times. This expensive valuation becomes all the more dangerous if the earnings promise cannot be fulfilled. Factors like a supply chain disruption arising from GST, and a less than normal monsoon could disrupt corporate earnings and trigger a slide in the markets.

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