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Friday, March 05, 2021

Explained: Why Sensex @ 50,000 presents an opportunity for investors

The Indian markets have been rising ever since the country relaxed lockdown measures in June-July — it has, in fact, risen by nearly 70 per cent since April 1, 2020.

Written by Sandeep Singh , Edited by Explained Desk | New Delhi |
January 21, 2021 11:38:08 am
sensex price today, bse sensex, market today, stock market, sensex mark, bse sensex share price, share market today, share market live, market, market today, market today newsA pedestrian wearing a protective mask walks near the Bombay Stock Exchange (BSE) building in Mumbai. (Bloomberg Photo)

The benchmark Sensex at the BSE breached the 50,000 mark on Thursday (January 21) taking cues from the US markets following the swearing-in of Joe Biden as the 46th President of the United States.

As Biden addressed his fellow Americans and the world and called for a United America, promised them hope and growth, and offered to improve ties with countries around the world, the Dow Jones rose to close at a new high of 31,188 on Wednesday.

The Indian markets too picked the optimism, and breached the 50,000 mark in the early trading hours on Thursday.

Why the rise?

The current rise is primarily on account of stability in US politics and a smooth transition of power after the siege at Capitol Hill on January 6.

As Biden offered hope and promised to take all Americans along, and also told hinted at improving relations with the world, there is a sense among market participants that there could be an improvement in the geopolitical environment and trade relations. This lifted market sentiments to touch new highs.

This has come on top of the Biden’s proposed stimulus of $1.9 trillion, which is likely to keep the markets at elevated levels for now.

Will the markets continue to rise?

As of now, that indeed looks to be the case. Except for some dips in the interim, the markets are likely to remain at elevated levels, and rise further. There are several reasons that back this possibility.

If change of hands in US politics is more comforting for markets for various reasons, the expectation of additional stimulus and some of it finding its way into Indian equity markets would be another key factor.

Besides, the fact that the Covid-19 cases are on the decline in India and the vaccination programme has begun, provides further hope to the economy. Many feel that the pace of vaccination will provide much needed confidence to the economy, and will define the pace of the economic recovery.

The forthcoming Budget, just 10 days away from now, will also prove to be critical for the markets, as it may showcase the government’s agenda for reforms and growth of the economy going forward.

The Indian markets have been rising ever since the country relaxed lockdown measures in June-July — it has, in fact, risen by nearly 70 per cent since April 1, 2020.

To a large extent, this rally has been driven by the huge liquidity in global markets, a part of which has found its way into the Indian markets too. Since April 1, foreign portfolio investors have pumped in a record Rs 2.38 lakh crore into Indian equities.

And what are the concerns at this point?

While the investor wants the rally to continue, she also knows that markets are trading in an expensive zone, and negative news may just pull the trigger for a correction.

While vaccination has come as the biggest hope since November 2020, new mutations of the virus and the effectiveness of the vaccines against them are reasons for concern for markets.

The other major concern is the time period of the stimulus provided by central banks around the world. Many feel that the duration of the stimulus programme will be key for the markets.

If central banks decide to pull the plug earlier than expected, then markets could see a correction as economies would need to come back on track before the stimulus is rolled back.

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Rise in inflation and a tightening of the monetary policy, and increase in interest rates will also be critical for the markets. If the US decides to increase rates, then money will start flowing back from emerging market equities to US treasuries, and that may result in a correction.

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