How significant is this 10,000 points move since the beginning of this year? Here is a quick look at how the Sensex gained 10,000 points twice during 2020.
The 10,000 points leap in Sensex
This is not the first time that the Sensex has rallied 10,000 points in such a short span of time. After the Sensex touched a low of 25,800 in late Mar-20, it rallied the 10,000 points in just 60 trading sessions. However, that can be called the low-base effect because the index had corrected 32% since the onset of COVID. It was more a reversal from lower levels.
The next 10,000 points took 116 trading sessions. In short, from the lows of late Mar-20, the Sensex rallied 20,000 points in a span of just 176 trading sessions. Compared to that the 2021 gain of 10,000 points on the Nifty has taken a total of 165 trading sessions. However, for the Sensex to rally after such a frenetic rise is what makes the 10,000 point rally of 2021 unique. But, there is a little more to the story of Sensex-2021.
Why the 2021 Sensex rally is special for markets
The chart captures the number of days it took in 2021 for the Sensex to traverse each journey of 1000 points.
Data Source: BSE
If you are wondering about the imposing skyscraper in the middle, it is the time taken for the Sensex to move from 52,000 to 53,000. Ironically, out of the 165 trading sessions taken by the Sensex to traverse from 48,000 to 58,000, it spent nearly 96 sessions just to traverse the 1000 points from 52K to 53K. The reasons are not far to seek.
COVID 2.0 first became pronounced in early February and by March the lockdowns were in place in most major cities in India. That led to a sharp correction. However, post May-21 the rapid response of the government to the health crisis and the spurt in vaccination numbers gave confidence to the markets. Effectively, the Sensex did nothing between January and April and the actual 10,000 point journey of the Sensex only started from early May-21.
Out of the 10 sets of 1000 point moves in the Sensex in 2021, 7 sets happened in less than 10 days with the Sensex traversing 1000 points in less than 5 days on 5 occasions. The fact that the Sensex has made a 10,000 point rally in 2021 despite the high base and the overhang of COVID-2.0 is the real story. Here is what triggered the 2021 rally?
Five factors that triggered the 10,000 point rally in Sensex 2021
That brings us to the million dollar question; what triggered such a frenetic rally despite COVID 2.0 and despite starting on a relatively high base. There were 5 key factors.
• Markets were impressed with the speed and purposefulness in handling COVID 2.0. Unlike in the first round, the government was better prepared in terms of pre-empting the crisis as well as ensuring that economic output does not suffer. That explained why the impact on production and even on corporate profits was limited this time around.
• There is a new confidence in the markets in the form of IPOs. In the first 8 months of 2021, FPIs have infused $7.10 billion net. Out of that $5 billion has come through IPOs and only $2.10 billion through secondary markets. The big guns like Zomato have seen tremendous institutional appetite and fresh quality paper has boosted markets.
• Apart from institutional buying, which has been robust, there is an army of new investors in the equity markets. Millions have entered Indian equity markets due to low yields on debt and tepid realty markets. That is evident from the large number of fresh demat accounts and mutual fund SIP accounts opened.
• Corporate results continue to be robust and the EBITDA for the Jun-21 quarter was the highest ever despite lower sales. That is largely due to aggressive cost cuts resulting in better operating margins, despite the pressure of higher input costs in most major industries. That has also come as a boost for the markets.
• Finally, liquidity has been robust with the RBI and the Fed continuing to keep markets well supplied. Of course, things could change later this year if the Fed goes for a taper, but that is likely to be cautious and calibrated.
For now, the markets are excited with the combination of higher profits and lower interest rates resulting in a positive re-rating of markets. Of course, the road ahead could be slightly bumpier, if the Fed taper actually happens towards the end of this year!