For the real story, look at market cap, not Sensex or Nifty

Let us look at some interesting statistics about the Sensex in 2021.

May 25, 2021 8:08 IST | India Infoline News Service
There was almost a sense of déjà vu as the Nifty once again breached above the 15,000 mark and the Sensex settled above 50,000. In the last few months, this level has been breached a number of times, but each time the Nifty and the Sensex appear to come back below these levels. Let us look at some interesting statistics about the Sensex in 2021.

Sensex above 50,000 – Is this time different?

Since Jan-21, there have been 95 trading sessions. Out of 95 trading sessions, Sensex closed above 50,000 in 31 (one-third) trading sessions. However, the Sensex High was above 50,000 on 46 (half) trading days. That effectively means that on 15 occasions the Sensex made a high of above 50,000 intraday but closed below the 50,000 mark. That is a quick picture of why the 50,000 level on the Sensex has been a major mental block for markets.

Let us narrow this down to the time since April 01st when we saw the first signs of the resurgence of COVID. In the 34 trading sessions in FY22, the Sensex High scaled 50,000 on 9 trading days but Sensex closed above 50,000 only on 4 trading sessions. This indicates that the pressure of 50,000 levels still persists. There is something more interesting. Out of the 4  days that Sensex closed above 50,000; 3 days occurred in the last 1 week. That is what is inducing investors to ask, if this time it is different?

It could be different this time around

It has always been a mean task to predict the Sensex or Nifty levels. The best of traders would tell you that you have got to be either God or a liar to consistently predict the index correctly. However, there are a few reasons why this time could be different for the Sensex and Nifty.

• COVID numbers have fallen sharply from above 4 lakhs per day to around 2.50 lakhs per day. There is a rapid move on enhancing and expanding inoculation and that should be the added boost to market sentiments.

• Quarterly numbers for the Mar-21 quarter are much better than expected. The general consensus was that Dec-20 may have been peak corporate performance for Indian companies. But, if you look at Mar-21 results so far, top line is up 7.2% while the bottom line is up 15.3% on a sequential basis.

• Above all, the Fed minutes have given the much needed comfort that rate hikes are still some time away. While the Fed did hint at a taper, the Fed is clearly not in a hurry to tighten the US economy. That does away with the short term uncertainty over market liquidity and RBI policy.

If you add up these three factors, we could be at a tipping point where the Sensex settling above 50,000 could actually be a genuine hint. After all, when your corporate net profits as percentage of GDP stand at a 4-year low of 2.6%, you really cannot go too wrong as a long term investor.

Real story is about market cap and not index levels

In the obsession over the levels of the Sensex, you perhaps missed out a very important milestone of the Sensex recently crossing the of $3 trillion market cap level for the first time in its history. How did the Sensex market cap scale $3 trillion, when the Sensex is still below its peaks? There are two reasons for the same.

In the last few months, mid-caps and large caps have vastly outperformed the diversified indices. Check the graphic below.

Data Source: BSE

The chart above is self-explicit. Between Jan and May 2021, the Sensex has given 6.07% returns but the returns given by the mid-cap and small cap indices in the same period are 23.73% and 27.63% respectively. In short, the mid-caps and small caps have added heft to the market cap and that is a good sign that the market is broadening and also deepening.

The second reason is the surge in IPOs in the market since September 2020 and more than 90% of the IPOs are quoting at a premium to the issue price. That, in a nutshell, is a lot of fresh value created in the market.

Sensex 50,000 may be decisively breached sooner, rather than later. But the real cause of celebration in the stock markets is that BSE market cap has crossed $3 trillion. Today, only the US, China (HK included), Japan and the UK have a market cap that is more than India. That is surely a good reason to raise a toast to the Indian equity story.

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