The date 21 January has a rather eerie history in the Indian capital markets. The 5-year structural rally that began in early 2003 actually came to an end on 21 January 2008. From that point, the Nifty and Sensex had corrected over 50% as the US Sub-Prime crisis had rubbed off on stock markets across the world.
Now, if you thought that 13 is an unlucky number, then think again. Exactly 13 years after that fateful date in 2008, the Sensex has scaled the historic level of 50,000. How convincingly it will sustain is a different story but like the global markets, the Sensex also celebrated the swearing in of Joe Biden with a thumbs-up.
The above chart captures the Sensex movement since the bottom of March 2020. In exactly 10 months, the Sensex has almost doubled. This is a fitting culmination to a number of things that have been incredible in the recent days.
After the Indian cricket team, it is now the Indian index
The reason we call it a fitting culmination is that it happened just 2 days after the Indian cricket team won, what is perhaps, the most incredible victories by beating the Australians in their backyard. They did that with a team that was almost like a collection of young enthusiasts, most of them partially injured.
What is the analogy? The analogy is quite simple. If you look back at March 2020, when the government had just announced the COVID lockdown, most of the market sceptics were talking about further downsides in the index. However, not only did the index show an incredible reversal but also nearly doubled in just about 10 months.
Biden, liquidity and quarterly encouragement
Why are the Indian markets so excited about Joe Biden? There can be no one reason but it is a kind of a feel good factor that has infected markets across the world. One reason appears to be that after the cold uncertainty of the Trump era, the warm stability of Joe Biden looks like a welcome change. But what this warm stability has done is to revive the animal spirits of risk-on investing and India has been a big beneficiary.
FPIs infused Rs130,000cr into Indian equities in November and December and have put in another Rs25,000cr into equities in January. With more than a week to go, it looks likely that India could see total flows of close to Rs170,000 crore between Nov-20 and Jan-21. One of the unwritten rules of the market is that you can argue on a lot of things in the market but you don’t argue with liquidity.
We cannot ignore that quarterly results till now have been broadly encouraging. Some sectors have seen pressure but the good news has been that across the board there has been a tightening of balance sheets and costs. That is likely to translate into much better return ratios in the coming quarters. All these factors are driving markets higher.
Is there life after 50,000 for the Sensex?
Let us look at this question differently. If we rewind back to the fateful day on 2008, the Sensex had peaked on that day at around 21,000. If you look at the journey to 50,000 in 2021, it implies a compounded annual return of around 6.9%. That is hardly a ringer of a disconcerting bull market because you would have earned more than that in a debt fund or even in other asset classes like gold. To that extend, 50,000 is just a number for the Sensex.
The moral of the story is that the whole issue of overvaluation may have been blown out of proportion. Yes, the corporate profits have to pick up and justify these levels but that should eventually happen. For now, it is time to raise a toast to the incredible journey of the Sensex!