Launched on January 2, 1986 (base year:1978-79 = 100), the country’s first equity index has risen from 124 in April 1979 to 50,000 today, a compounded annual growth rate of 15.9% over 42 years. From 1990, when it hit 1,000, the CAGR of the S&P BSE Sensex is 13.5%.
Thirty-five years ago, there were no IT companies and banking stocks in the benchmark index; it now has 9 stocks from banking and finance, and 4 information technology companies. Only five companies that were initially part of the index retain their place — Reliance Industries, HUL, ITC, L&T, and M&M.
The continuous rally that followed the crash triggered by the Covid-19 pandemic in February and March 2020, was driven by foreign portfolio investors (FPIs); since April 1, 2020, inflows have hit a record Rs 2.41 lakh crore. The system is flush with liquidity, which is one reason for the non-stop rally.
The latest spike that has pushed the Sensex past 50,000 is primarily on account of the smooth transition of power in the United States after the deadly January 6 siege of the Capitol. As President Joe Biden offered hope – promising to take all Americans along and hinting at improving relations with the rest of the world – market sentiments were lifted. Biden’s proposed $1.9 trillion stimulus is likely to keep global markets at elevated levels for now.
Analysts expect the combination of strong capital inflows, low interest rates, leaner corporate balance sheets, and steps taken by the government, to quicken the pace of economic recovery in India. GDP, which contracted by 23.9% in the June quarter, is expected to rise by 0.1% in the December quarter. In the first half of 2021-22, the economy will grow at 14.2%, according to a Reserve Bank of India study. Apart from robust FPI inflows, a big reason for the rally has been the impressive corporate results in the second and third quarters.
The Sensex, which fell by 36% between February and March 23, 2020 – when it closed at 25,981 – has risen by 68% since April 1. On Thursday, it hit an all-time high of 50,184, before retreating to close at 49,624. While this has been the gain for the 30-stock index at BSE, the broader markets too have been part of the rally.
Over the same period, the BSE mid cap index has risen over 80%, and the small cap index by over 95%. Almost all major sectors have participated in the rally – the auto index has jumped 117%; and metal and IT indices have risen 110% and 105% respectively. The technology, capital goods and healthcare, banking and consumer durable indices have risen by over 60%; the oil and gas index by 47%; and the telecom and FMCG indices by 46% and 24% respectively.
There is optimism for several reasons. The sharp decline in Covid-19 numbers and the beginning of mass vaccination have raised hopes for normalisation of the economy, and the strong showing by companies in the third quarter has been a positive sign.
With the uptick in demand for steel, cement, and real estate, as well as in consumption, analysts expect to see a restarting of investment by the corporate sector over a period of 12 months from now.
While the low interest rate scenario is likely to continue for sometime both on the domestic and global fronts, there is talk of a fiscal stimulus in the Budget on February 1, which could provide a fillip to the economy and markets. Many see the Budget exercise as an opportunity for the government to showcase its agenda for reforms and growth of the economy going forward.
Finally, the soothing words from President Biden at his inauguration have brought hope of improvement in the global trade environment, and a rebuilding of trust and better trading relations between countries.
As of now, the bulls seem energetic – and barring temporary blips, markets are likely to remain at elevated levels, and rise further. While the transition in the US is comforting for markets, there is expectation of additional stimulus, some of which are likely to find its way into Indian equity markets. There is hope that the worst of the pandemic is over, and that rapid vaccination will bring confidence and define the pace of recovery in the economy.
The Indian rally has been driven by the huge liquidity in global markets, and FPIs are expected to bring more funds into Indian equities in the coming financial year as global interest rates remain low and India’s economic fundamentals make the country an attractive investment destination.
While investors want the rally to continue, they know that the markets are trading in an expensive zone, and a dose of negative news may just pull the trigger for a correction. Vaccines have been great news for markets since November 2020, but some concerns remain over new mutant strains of the virus, and the effectiveness of vaccines against them.
Many feel that the duration of the stimulus programme will be key. If the central banks decide to pull the plug earlier than expected, then the markets could see correction as economies need to come back on track before the stimulus is rolled back.
“As of now, liquidity is pushing up the market. When the liquidity tap closes, there could be some correction. The RBI can’t keep on pumping liquidity into the system as it will push up inflation. Some marketmen also feel fundamentals are being ignored. Retail investors should not blindly put money in stocks. Retail investors have burnt their fingers several times in the past,”a veteran stock broker Pawan Dharnidharka said.
The aspect of inclusivity has been flagged. Small businesses and individuals at the bottom of the pyramid were worst hit by the pandemic, but the recovery so far remains largely limited to large and medium corporates. “The government’s fiscal support will have to take care of this, because if growth is not inclusive, it will not be sustainable in the long term,” the CEO of a leading mutual fund said.
Analysts say that the rise in inflation, tightening of monetary policy, and increase in interest rates will also be critical for the markets. If the US decides to increase rates, money will start flowing back from emerging market equities to US treasuries, and that may result in a correction.
“Investors should not get carried away by the euphoria of this bull run. At high levels, markets are vulnerable to corrections,” V K Vijayakumar, chief investment strategist at Geojit Financial Services, said.
It won’t be a bad idea to book some profits on investments that have achieved their targeted growth, and for investors who need to go for asset allocation. However, one has to be clear on the new investment destination, as booking profits to reinvest when markets fall, may not pan out as expected.
It must always be remembered that while investments should be made in a regular and disciplined manner, redemption or profit-booking must be planned and executed when the markets are on a high, or when the expected gains have been achieved. Experts say it is better to pull out from individual stock investments, and to allow the mutual funds to play out because mutual fund investments are diversified and less risky.