Sensex touched 50,000: What should investors do now?

republic 2 Sensex touched 50,000: What should investors do now?

On 21 January, in the 72nd year since we went Republic the Sensex touched the magic mark of 50,000. Isn’t it time to celebrate? Yes It Is!!! We did celebrate at Tradeplus, check out our celebration here.

It has not been an easy journey. What is really surprising is the extent of the recovery from the lows of March 2020. Sensex had touched a low of 25,981 in late March 2020. From there to traverse nearly 100% higher calls for a lot of inherent strength in the market. Let us track the journey of the Sensex from the lows of March 2020 to the level of 50,000.

Data Source: BSE (21 Jan data at 10.00 AM)

Exactly 13 years back when the Sensex had made a high on 21 January 2008 and then corrected sharply to touch a lower circuit, it set the tone for the end of the 5-year structural bull market that began in 2003. But that is history and we shall not get into that. Before we go ahead to the actual valuations, here is a sneak peak at the key milestones in the journey of the Sensex.

How the Sensex got to 50,000 over 42 years

Let us focus on how each journey of 10,000 points was covered over the last 42 years. You can always argue about the base effect and that is a fair argument but we will leave that aside for the time being. To scale the first level of 10,000 the Sensex needed 27 years from 1979 to 2006. However, the fairy tale trip from 10,000 to 20,000 took just 23 months. Then came the famous sub-prime crisis and the journey from 20,000 to 30,000 took a full 9 years and 4 months and was only achieved around mid-2017.

The next leg of the journey from 30,000 to 40,000 was covered in just 30 months while the last leg from 40,000 to 50,000 was achieved in less than 14 months. This is notwithstanding the 32% correction between Jan and March on account of COVID. Some Sensex trivia for you. If you thought that the Sensex was a slow move in the initial years, then think again. In the 12-years between 1979 and late 1991, the Sensex gave an impressive compounded annual return of 36.77%. That is incidentally the best 12-year returns in any period in the history of the Sensex.

What really took the Sensex to 50,000

There was no one factor but a confluence of factors scripted this story. Let us look at some key factors that made the 50,000 level possible.

  • Yes, the Joe Biden factor did work in favour of the Indian markets. More than anything, after the risks and uncertainty that Trump created, investors are almost nostalgic about stability. That is what Biden has promised. One thing it will do is to bring to the world stage a leader who can firm with China, without exacerbating matters.
  • FPI money is flowing into India like there is no tomorrow. Consider the numbers. Nearly Rs.130,000 crore came into Indian equities in November and December. If you add up the first 3 weeks of January 2021, you have closer to Rs.160,000 crore of flows. When there is so much liquidity it is best you don’t argue with the liquidity.
  • Sales may not be flashing wonders but quarterly profits are getting better. It is partly due to better cost control, lower borrowings and better inventory management. That is also driving sentiments in a big way as it reassures investors that the earnings will catch up with the Sensex valuations; sooner rather than later.

Is Sensex at 50,000 too risky for investors?

If you look at the P/E on a rolling basis at around 35-37 times earnings, this is the steepest valuations the Sensex has ever enjoyed. Even if you look at the Buffett ratio of Market cap to GDP, the ratio is exacerbated by the fact that markets are headed higher but GDP is likely to contract 7.7%. So the Buffett ratio will be closer to 130% for India compared to median of around 75-80% in the past.

Then there is the worry that liquidity may be tightened. We have seen signals from the RBI and even from the Federal Reserve. While central banks are assuring of unlimited liquidity, we all know it is not feasible. At some point the taps will be shut, though we do not know when.

So, what should investors do at 50,000 Sensex?

Investors must keep in mind 3 rules while trading equities at these levels.

  • It always pays to hedge your risks. You can hedge through a diversified portfolio or through the use of futures and options. Either ways, the idea is to mitigate your risk. At these levels managing risk is more significant than chasing returns.
  • This is not the market for a macro approach. There is value in large caps but a lot more value is hidden in mid caps. You need to adopt a bottom-up approach to stocks. Every stock has a business behind it so try to understand that business better.
  • Lastly, the best answer in these kind situations is asset allocation. Have your mix of equity and non-equity in such a way that it syncs with your risk. When there is divergence from allocation shift. That can solve all your problems.

With this hope, let us join our hands and Salute our Nation on Republic day.

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