What are the odds of Sensex touching 50,000 in 2020?
Before we get into the fundamentals of the market, let us look at 3 cyclical issues in the market. Firstly, if the markets have to scale 50,000 in 2020, then it would call for a 10,000 point rally in one year itself. That has not been recorded in the past, although we cannot ignore the base effect. Secondly, from the levels of 41,000, it would require an upside of 20% from current levels. This is assuming that the markets still have steam left in them after giving 14% returns on the Sensex in 2019. That would certainly be a little ambitious. Thirdly, the valuations of the Sensex are already close to 24X on a historical basis. So a 20% rally would make the markets a lot more expensive unless earnings are able to catch up; something that looks remote at this point of time.
Don’t rule out the power of Kurtosis
What exactly do we mean by the power of Kurtosis? This is a trend that is visible in most large economies including the US and India. The rally in the US markets is largely driven by a handful of stocks like Apple, Amazon, Alphabet and Microsoft. Similarly, the rally in the Sensex has been driven by few stocks like TCS, Reliance Industries, HDFC Bank, HDFC, ICICI Bank, Infosys, Kotak Bank, Hindustan Unilever, etc. This concentration of the market interest in a handful of stocks is kurtosis and it is this kurtosis that could push the Sensex closer to 50,000. Kurtosis was the factor in 2019 and if it again becomes the driving force of markets, then 50,000 in 2020 may be perfectly achievable.
But why would Kurtosis repeat in 2020?
There are a number of reasons why this kurtosis or the concentration of buying interest in a handful of stocks could make the difference in 2020.
- One trend that we have seen in the last one year is the increased flow into passive vehicles like exchange traded funds (ETFs). These ETFs are pegged to either the Nifty or the Sensex and flows typically go into index heavyweights. ETFs have seen monthly collections almost at par with diversified equity funds and multi-cap funds. These ETF flows could inflate values but could actually push stock markets higher.
- MSCI EM index has just upgraded India’s weight by 80 bps and that is expected to lead to an infusion of $2.5 billion into Indian index heavyweights. This could entice FIIs to go overweight on India and that would imply that we could again see kurtosis at play in the markets.
- Lastly, there is a huge financialization of savings that we are seeing today. With repo rates at 15-year lows and bond profits of 2019 unlikely to repeat, we could see a greater flow of money into Indian heavyweights. Whether the flows come into equity funds or ETFs, the eventual beneficiary would be these heavyweights. Again it could be kurtosis at play.
The one big risk for a smart market rally in 2020 could be the macros. GDP growth has fallen to a low of 4.5% in the second quarter and most estimates are pegging GDP growth at below 5% for the full year. In addition, the price of Brent Crude is getting closer to $70/bbl and that could impact Indian trade deficit with an 85% dependence on oil imports. But, a revival in growth could hold the key to the Sensex scaling the psychological mark. Just to play devil’s advocate, the US economy has grown at under 2% last year, but the Dow Jones is up by 23% and the NASDAQ is up by 35% in 2019. That surely gives hope for Sensex 50K in 2020!
Wishing you a financially happy 2020!