In the last few days, the Sensex has decisively and comprehensively broken above the 40,000 mark. It was only the Nifty which was waiting to breach the 12,000 mark. On November 06, 2019, the Nifty breach of the 12,000 level happened for the third time this year. The question is whether it will be sustainable?
Nifty and Sensex – the 2019 story so far
We have presented the Nifty and the Sensex (daily highs) on a dual scale on an YTD basis. The 40,000 level of the Sensex has been made to correspond with the 12,000 of the Nifty on the dual scale so as to give a clear picture of the breach of these levels. As can be seen in the chart above, there have been three occasions. In May, the indices did cross these levels but retreated on profit booking. On the budget day, once again, these levels were touched but then the markets fell due to certain announcements like the public shareholding hike, buyback tax and the FPI surcharge.
In the post September 2019 phase, when the Nifty and Sensex bottomed out, there have been two key triggers that took the markets to new highs. Firstly, on September 20, 2019, the big corporate tax cut made a lasting difference to the market sentiments resulting in a 2,100 point rally on the Sensex. The month of October has seen a secular uptrend in the indices on the back of sustained FPI buying. As we stand now, the Sensex has decisively settled above the 40,000 mark and it should be a matter of time before the Nifty follows suit. Here is why.
Why Nifty could decisively breach 12,000 now?
It is said that in the markets the toughest job is to predict index levels. To get these levels consistently right, you have to either be god or a liar. However, at times plain logic also works and here is the logic for the Nifty to sustain above 12,000.
- The adoption of the lower tax formula has been much quicker than originally imagined. It is estimated that out of the companies that declared results for the September quarter; more than 60% have opted for the new tax regime. That means, the $20 billion tax benefit touted by the finance minister should become a reality soon. That has been the big value boost for the market indices.
- If tax cuts were one side of the story, the other side was the FPI flows. In the month of October 2019, foreign portfolio investors infused nearly Rs16,500cr into equity and debt with equity predominating. FPIs are making a big bet on Indian companies in the aftermath of the tax cuts and the concomitant benefits. If this trend continues in November (as it appears to be), then Nifty should also be able to settle comfortably above the psychological levels.
- Global cues are finally turning favorable for the markets. It is no longer a case of risk-off investing. Now investors are seeing logic in taking on risk because things are changing for the better. Donald Trump is now rushing for a trade truce with China ahead of 2020 elections. BREXIT may not have happened but it looks likely to be less chaotic than imagined. Above all, the big trigger could come from China in the form of a growth stimulus.
- When nothing else works, short covering works. Normally, shorts have held Nifty around the 12,000 levels even as Sensex has breached the 40,000 mark. That is because, the futures OI is much higher on the Nifty. Once Nifty is able to settle above the 12,000 mark for a couple of days, the shorts are bound to panic and that could see the next decisive move. That is what markets need to be prepared for.