Back in the mid-2005 there were some brave projections made about the Sensex scaling 50,000 at some indefinite period in the future. Back then, the Sensex was at around 6000 levels and that was the level at which the last peak had been made during the technology boom of 1999. By mid-2005, the Sensex had broken the previous highs and had trended towards 7,000. That was the point, most analysts decided that the rally was done and dusted. Of course, discussions about 50,000 Sensex would still happen but they would be either academic debates or perhaps small talk over evening tea.
The first big shift in the market happened in the second half of 2005. A combination of low rates, massive capital investment and a surge in bank credit and consumer demand triggered a growth boom that was unprecedented in scale and audacity. The Sensex eventually halted its rally in early 2008 but by then the level of 21,000 had been successfully scaled by the Sensex.
Sensex 50,000 looks a lot more real today
On 04 December 2020, the Sensex closed above 45,000 for the first time. But it is the journey of the last one month that is a lot more interesting.
Data Source: NSE
Clearly, this rally since October end is both intriguing and gratifying. The Nifty and the Sensex have given 14% returns in just 25 trading sessions. But what really matters is that this has come after a sharp 50% rally in the indices between April and October 2020. That is what gives the November rally a lot more conviction. But there were a number of factors at play, boosting the indices over the last one month.
Firstly, the election of Biden over Trump in the US elections did away with the single biggest risk of an uncertain geopolitics. This led to a risk on thrust to global investing and favoured EMs like India. At the same time, the political outcomes of elections clarified that the COVID pandemic would not really impair the reforms process.
Secondly, we look at the recovery story. There was recovery in terms of GDP and in terms of corporate bottom lines. GDP contraction in the Sep-20 quarter was substantially lower than the Jun-20 quarter. Also, high frequency indicators like PMI, IIP and core sector are hinting at a much quicker recovery. At the corporate level, sales continued to lag by 5-7% in Q2 but net profits almost doubled in Q2. That opened the doors for re-rating of valuations. Stimulus 3.0 only added fuel to the recovery story.
Finally, there was the story of foreign investors. Normally, foreign investments or FPI flows are the outcome and not the cause. In this case, foreign investors were back with a bang. They had infused Rs.35,000 crore between Apr-20 and Oct-20. In the month of Nov-20 alone, the FPI infusion stood at Rs.62,500 crore. That best summed up the momentum.
December monetary policy gave a significant boost
One can argue that the monetary policy announced by the RBI on 04 December was only a reiteration of what was expected. That is not the point. What matters is the language and the conviction of the RBI and its clear hint at accommodation that really impressed markets. Consider these very significant points made by the RBI in its fifth policy of FY21.
- The biggest boost was the reduction in GDP contraction estimates. RBI cut its estimate for full year GDP contraction in GDP from 9.5% to just about 7.5% for FY21.
- Going by the RBI estimates, Sep-20 may have been the last quarter of negative GDP growth and the next four quarters are expected to be positive GDP quarters.
- That is a lot of optimism in just one quarter and gives hope that full year GDP contraction could see more upgrades by March and even turn out better.
- There were some questions about whether the RBI would maintain accommodative stance or shift to neutral. RBI has explicitly voted in favour of accommodation.
- This assures that liquidity will continue to be abundant in the financial system and also that rates will remain low for much longer till the growth levers are fully back.
Where does the Sensex go from here?
The Sensex and nifty are in uncharted territory so it is hard to really project. It looks like a global shift back to equity and that is evident in the way gold prices have fallen. Of course, let us not forget that in the long run, the stock market is a weighing machine and not a slotting machine. That means; fundamentals like growth and profits of Indian companies will have to catch up with the index levels. That must happen sooner, rather than later!