Sensex at life highs; getting ready for the pre-budget rally?

When the resistances become the support for the market, it is the first clear indication that the tide of the market is turning.

Dec 20, 2019 01:12 IST India Infoline News Service

For a better part of 2019, the Nifty had struggled to breach 12,000 and the Sensex had struggled to breach 40,000. The indices did manage this breach in May and June but failed to sustain above these levels. However, the indices broke above these levels decisively post October and have managed to hold higher. In our October note, we had written that the breach was for good and since then these psychological levels have become a kind of support for the Nifty and Sensex.

Daily Nifty and Sensex Movement
Data Source: NSE and BSE
 
New Highs: Sensex 41,700 and Nifty 12,280
 
When the resistances become the support for the market, it is the first clear indication that the tide of the market is turning. The trigger came much earlier on September 20, 2019 when the FM announced the corporate tax rate cut to 22%. Post October, the Sensex and Nifty have consistently traded above these levels only. That brings us to the million dollar question, is this rally for real and what is driving this strength in the market. More so, when the GDP growth has been falling and IIP and Infrastructure growth have been negative for 3 months in succession! If you are wondering what is driving the market; here are 5 triggers.
 
Big Bang budget expectations
 
Indian industry leaders have already walked up to the FM with their charter of demands. From individual tax cuts to further cuts in corporate tax rates, the industry bodies have asked for everything. There have been demands for revival package for SME and a rescue package for NBFCs and real estate. The market is anticipating that Nirmala Sitharaman will incorporate most of these ideas and make it a Big Bang budget in Feb-20. With so much expectations built in, the onus will be on the FM not to disappoint the markets.
 
Lag effect of fiscal and monetary measures
 
Since January 2019, the RBI has cut repo rates by 135 basis points and has still kept the window open for more rate cuts if required. However, the transmission is now picking up steam and markets expect this to directly boost the bottom-line of banks. Also fiscal measures like the tax cuts on corporates and income tax benefits is expected to trigger a spending and investment cycle. Markets will be the obvious beneficiary.
 
MSCI revamp inflow of $2.5 billion
 
This is more technical in nature. The revamp of the benchmark MSCI index has increased India’s weightage by over 100 basis points. That would mean, huge inflows into Indian markets in the form of ETF and index fund allocations. The FPI buying has already started in anticipation of this revamp and that is keeping the markets buoyant. The total inflow expected is $2.5 billion but the actual impact could be much more if you add the bandwagon investor flows also.
 
Richly valued stocks are getting richer
 
In the third week of December, HDFC Bank became the third Indian company to touch the market cap level of $100 billion. Till now, only Reliance Industries and TCS have breached the $100 billion market cap barrier. The key takeaway is that domestic and foreign money continues to pour into the heavyweights like HDFC Bank, HDFC, RIL, TCS, Infosys, ICICI Bank, Kotak Bank, etc. This has led to value divergence between the top weight stocks and the middle rung stocks; but who is to argue with the logic of markets? The sustained buying interest in heavyweights and limited sector rotation has given a big impetus to the rally.
 
New sectoral stories have emerged
 
Globally, two important events have reduced the uncertainty quotient in the markets. The US-China trade deal has been initiated and the Conservatives scored a decisive win in the UK elections. These have raised hopes of a global revival in growth. China is also expected to announce another stimulus package and Indian metal stocks have been rallying. With oil prices rallying after a long time, upstream oil companies and refiners are finally seeing good times. The surprise package has been telecom, which saw a sharp revival in fortunes after the markets started celebrating the higher degree of predictability in the industry after the AGR verdict.
 
The December rally in the Nifty and Sensex is not driven by hope alone. There are also rational expectations that the lag effect of fiscal and monetary measures would have a multiplier effect on growth. But the one big differentiator for the Nifty and the Sensex could be a big bang budget in February 2020. Only the Finance Minister can fill that gap!

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