Nifty at life-highs: Time to rejoice or time to be cautious?

There are diverse set of reasons for the market touching new highs. However, some of the positives at this point of time are really compelling.

April 16, 2019 3:43 IST | India Infoline News Service
It was perhaps a form of poetic justice that the Nifty and the Sensex touched a life-time high just as the 5-year term of the current government is about to conclude. The chart below captures the performance of the Nifty and the Sensex over the last 5 years.

Chart Source: Bloomberg

The Nifty and the Sensex have given total returns of over 71% in the last five years, which translates into 11.4% annualized. That is in tune with the historical average of the Nifty over the last 24 years. But what really matters is that these returns came at a point when the market cap of the Indian stock market was already well over $1 trillion. That is what makes this round of wealth creation special. What is the message now; is it time to celebrate or the time to be sceptical about the market? Here are 6 points to consider.

Why are the markets at a new high ahead of elections?
There are diverse set of reasons for the market touching new highs. However, some of the positives at this point of time are really compelling. Let us look at them.
  1. The election outcome may still be more than a month away, but the poll estimates are already indicating that the NDA will get an encore. Markets are more worried about stability and a reform focus. The current government has managed to push some far-reaching reforms like Bankruptcy Code, GST and RERA which have made a substantive difference at the grass root level. One can argue about the merits and demerits of demonetization but that is off the point. There is a reforms focus and there is also the political will to take tough decisions. That is what investors want!
  2. You really cannot argue with flows because money normally moves to the avenue of highest risk-adjusted returns. And why not? FIIs have infused over Rs60,000cr into Indian markets since the last week of February. With the rupee closer to its purchasing power parity and also stable, FIIs don’t see too much currency risk in India. That is working in favour of the markets.
  3. Monsoons have been a key factor for markets; or so it seems. The markets are celebrating that IMD has predicted a normal monsoon this year as that would not have any negative impact on inflation. Also, some of the previous drought years like 2004, 2009 and 2014 have actually set the base for long term bull markets. The link between rains and markets is tenuous at best.
  4. Domestic macros favour a rate cut and the RBI appears to be willing to bite the bullet. Inflation has moved higher in March but is well within the RBI comfort level. Manufacturing and IIP are really sluggish. US Fed has also turned dovish and Indian real rates are among the highest at over 4%. The stage is set for a series of rate cuts and the markets feel that the RBI may go the whole hog with aggressive rate cuts.
  5. There is a real financialization of savings in India. MF AUM has gone up 3-fold in five years to Rs25 trillion. Monthly SIPs are at record highs of Rs8,200cr per month. Meanwhile, other asset classes continue to disappoint.
  6. Finally, we come to the global cues, which have turned positive in more ways than one. Firstly, equities are rallying across the board and India is no exception. Secondly, oil prices are likely to remain subdued if the OPEC and Russia push supply. That should favour India. In terms of growth, EU is growing its factory output and Chinese exports are picking up. BREXIT has been delayed and even the US is confident of the trade war coming to an end. All in all; a perfect recipe for a new high in India.
Nifty new high appears to be more of a calibrated outcome than a knee-jerk reaction. It is time to celebrate the high!

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