It is considered to be a psychological mark, so breaching that level should take a bit more of consolidation. But, that will be clear in the days to come. Th fact is that the Sensex has crossed the 60,000 mark and is trading above that level in the first half of trade on 24th September. Who exactly delivered the knockout punch?
The above chart captures the gist of the rally since mid-August. The Sensex has traversed a little above 5,000 points in just 28 trading sessions. What has triggered this relentless rally in the Sensex, despite valuations being rich by most parameters? Let us first look at the Sensex story amidst the pandemic.
What a leap from pandemic lows?
We had made this point when the Sensex touched 50,000 just a couple of months back. In late March 2020, when the Sensex had crashed by over 35% to the 25,700 levels, it would have been hard to imagine such a frenetic rally in the midst of the gloom and doom scenario that had been predicted. From the lows of March 2020, the Sensex has now rallied 134% in a span of exactly 18 months. That is the kind of returns that the Sensex has not seen except during the heady days of 1992. What is more surprising is that these returns materialized despite elevated levels of the Sensex. What explains this stupendous journey?
Smart recovery from pandemic pessimism
This has been one standout feature of the Indian recovery. Despite being one of the worst affected nations due to the combined impact of COVID-19 and COVID 2.0, the production and GDP are back to pre-COVID levels. You can argue that 2 years have been lost, but that is still commendable when the economy emerges from the throes of such a crisis. While, the government and the RBI did their bit through fiscal and monetary measures, the real cutting edge came from the massive vaccination drive.
As of the end of Sep-21, India has already inoculated 85 crore persons and are adding 1.50 to 2 crore vaccinations on a daily basis. At that rate, India should be able to inoculate its entire adult population by December, which will help the economy to normalize a lot more. This has really put a full stop to the health crisis and while the problem may linger for a longer time, it is unlikely to be a show stopper.
Corporates have become leaner and meaner
What most people do not appreciate is that the pandemic has forced a lot of companies to become incredibly leaner and meaner. Debt equity ratio is at the lowest in a long time and cost structures have been tweaked smartly while inventory management has sharply improved. In the midst of the COVID 2.0 crisis, Indian companies displayed resilience in cutting costs, trimming inventories and boosting their operating and gross profits in substantial measure. The net result is that despite struggling on the top line, the Mar-21 quarter was the best quarter in history in terms of aggregate profits of corporate India. Once that is factored, combined with sharply lower interest rates, the valuation explanation is a lot simpler.
But it was the US Fed that delivered the knockout punch
Nothing is possible if sentiments are not boosted. In this case, the boost to 60,000 on the Sensex came from the Fed statement. That was the knockout punch. The Fed statement was ambiguous at its worst and emphatically ambiguous at its best. The statement just said “Conditions were ripe for taper” without clarifying if the Fed would actually taper.
Not just Indian markets, but even the global markets interpreted the ambiguous statement as a signal that the Fed was still not sure if the taper would help the cause. This was more so in the light of the Evergrande crisis in China and the debt ceiling debate coming up in October. It is, therefore, hardly surprising that the markets are celebrating.
So there is a fundamental story and there is a knockout punch for the Sensex to scale above 60,000. It is now up to the news flows and second quarter results to really match up.