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Tuesday, September 28, 2021

Explained: What is driving up the Sensex?

As the Sensex crossed the 55,000 mark on Friday, experts cautioned retail investors to be extra vigilant and advised against putting money in stocks when valuations are high.

Written by George Mathew , Edited by Explained Desk | Mumbai |
August 13, 2021 11:56:00 am
share market, sensex share price, share market today, market today, share market news, stock market, nifty share price, bse/nse share price, sensex share market, stock market india, stock market live, stock market todayThe Bombay Stock Exchange in Mumbai. (Express Photo: Amit Chakravarty, File)

The benchmark Sensex crossed the 55,000 mark and hit a record high on sustained buying support by retail investors and mutual funds in intra-day trading on Friday. The Sensex rallied 593.31 points to end at a fresh lifetime high of 55,437. The NSE Nifty Index also soared 164.70 points to record 16,529 even as experts cautioned retail investors to be extra vigilant and advised against putting money in stocks when valuations are high.

What’s powering the bull rally?

Retail investors and mutual funds are driving the ongoing bull rally, analysts said. The retail holding of NSE-listed companies hit a record high of 7.18 per cent in the quarter ended June 2021, in line with the sharp rise in new investor accounts over the last 18-months, and a jump in retail participation in both secondary and primary markets. It stood at 6.42 per cent in December 2019.

“Retail investors are buying stocks without any serious consideration for value. Now, we don’t know when and how this rally will end. But we know it will end… and when it does, the new retail investors who have flocked to the market recently will be hit hard,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

On the other hand, aided by new fund offers and bullish stock markets, equity mutual funds saw record inflows worth Rs 22,583.52 crore in the month of July as compared to Rs 5,988.17 crore inflows in June. This money is also flowing into the stock markets.

“The market has not seen a correction in the recent past. Investors should not burn their fingers in the rally,” said BSE broker Pawan Dharnidharka.

Do fundamentals justify the rally?

Global support to the rally is intact with the Dow and S&P setting yet another record high.

While IIP data for June shows double digit growth, it continues to remain low compared to pre-pandemic levels, and therefore, the economy still requires policy support.

“Notably, July CPI at 5.6 per cent offers comfort as it went below RBI’s target range of 2-6 per cent, which should offer space to the RBI to maintain its soft monetary policy stance in subsequent quarters as well. This certainly augurs well for corporate earnings. Further, the recent rally in the domestic market was not a broad-based rally as heavy profit booking was seen in midcap and smallcap stocks, while selling pressure appears to have eased now,” said Binod Modi, Head Strategy at Reliance Securities.

After slipping into contraction for the first time in 11 months during June, the seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) moved back above the critical 50.0 threshold in July. The headline figure was up from 48.1 to 55.3, pointing to the strongest rate of growth in three months, IHS Markit said. Factory orders rose amid reports of improved demand and the easing of some local Covid-19 restrictions. The upturn was sharp and compared with a marked decline in June.

Will the rally continue?

The market rally is supported by the ample liquidity in the system and hopes of a sustained economic recovery, analysts said. If the fund flow to the stock market continues, the rally will get further momentum.

While concerns over global growth due to the recent rise in cases of the delta variant in different parts of the world continue to persist, many analysts said the underlying strength of the domestic market remains intact. “In our view, progress of monsoon, festive demand and Covid-19 positivity rates will be in focus in the coming days. We note higher government’s capex and revival in industrials’ capex should aid economic recovery. Investors must focus on quality stocks with robust earnings visibility and margins of safety,” Modi said.

The sharp improvement in key economic indicators like GST collection, auto sales volume despite supply disruption, and other high frequency indicators like e-way bills in July indicate sustainable rebound in corporate earnings in subsequent quarters. This should aid the market to sustain premium valuations.

Notably, June quarter earnings so far have been encouraging and most companies succeeded to beat consensus estimates, which offered comfort.

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