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Friday, June 25, 2021

Explained: Why the Sensex breached 50,000 again this week

Markets buoyed by decline in Covid-19 cases and business moving from informal sector to better placed listed universe.

Written by Sandeep Singh , Edited by Explained Desk | New Delhi |
Updated: May 22, 2021 9:50:54 am
Outside the BSE in Mumbai. (Express Photo: Nirmal Harindran, File)

While the benchmark indices at BSE and NSE fell but did not crash under the pressure of rising Covid cases that breached 400,000 mark in a day in the first week of May, the constant decline in cases over the last one week has lifted the market sentiment and the benchmark Sensex and Nifty breached the 50,000 and 15,000 mark, respectively, on Tuesday.

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Why are the markets rising?

Around afternoon on Tuesday, the Sensex was up by around 650 points or 1.3 per cent and was trading at 50,240. Between Monday and Tuesday it has gained 1,500 points or 3.1 per cent. If a strong fourth quarter performance by a number of companies has provided strength to the market, there are many who feel that the pain on account of second wave of Covid may be limited for another four to six more weeks as both Covid cases would decline and ample amount of vaccine will become available to provide pace to the vaccination drive. If the resistance of union government to announce a nationwide lockdown provided a big relief to the markets in March and April, opening up of vaccination for all adults and the decline in cases over the last 10 days has boosted hopes of a less hindered industrial activity going forward.

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Are large listed companies benefitting at the cost of relatively smaller ones?

The second wave has impacted rural India much more than it did in its first phase last year. It has also impacted smaller companies in the unorganised sector more. Before they could come out of the pressures following the first wave, the second wave hit them hard.

Market participants and senior officials with some large listed companies across sectors say that they have benefitted at the cost of smaller players who found it tough to get going over the last few quarters when their business got impacted due to Covid-19. “Large companies are benefitting at the cost of smaller ones and are seeing an increase in market share. That is leading to a rise in their share prices and market valuations thereby resulting into growth in Sensex and other leading indices,” said the CEO of a financial services firm who did not wish to be named.

Some say that while this formalisation of the economy and shifting of market share from smaller companies to large companies started after the announcement of demonetisation in November 2016, it continued during the implementation of GST and has further precipitated over the last 15-months of pandemic. The result has been that the large companies who were better positioned to weather out the Covid stress, have ended up garnering market share and business in their respective sectors.

Why did the markets not fall much between March and May 1st week, even as cases kept rising?

On February 15, 2021 the Sensex closed at its al time high of 52,154. As the cases started rising in March and grew exponentially between March 1 and May 6 to hit an all time high of over 4.1 lakh cases (May 6), the market weakened but there was no collapse as was seen in February-March 2020. Since closing at its peak on February 16, the Sensex fell to 47,705 on April 20 (the lowest closing over the last three months), registering a fall of 4,450 points or 8.5 per cent. On Tuesday, it was trading back at over 50,000 mark.

As the cases rose, the foreign portfolio investors reduced their inflow into Indian equities beginning March and pulled out a net of Rs 9,659 crore in April and a net of Rs 8,909 crore in May (till date). However, as FPIs weakened their participation, the domestic institutions have pulled up and while they invested a net of Rs 11,088 crore in April, they have invested a net of Rs 2,839 crore in May (till date).

If a good fourth quarter results have helped providing strength to the markets, no announcement of a nationwide lockdown and opening up of vaccination for all adults lifted market sentiments. Now, a dip in daily cases over the last 10-days have only raised hopes that the second wave is on its path of decline. The governments decision to allow more vaccines to be administered in the Indian market has further raised hopes of a faster vaccination over the next 3-4 months and an unhindered economic activity going forward.

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