Making sense of Sensex

Sandeep Dikshit

The Indian stock market is today the apple of the eye of the Central Government as it embarks on a pre-General Election exercise to showcase its achievements in the economic sphere.

Can Covid resurgence pose risk?

On December 20, the bull run in the stock markets faced an unexpected speedbump. Both Nifty 50 and Sensex fell by 1 per cent each. That was the day when news broke about a rising tide of Covid patients. The trend continued the next day as well. However, a couple of days later, the markets had rebounded. The sense of cautiousness among investors, it seemed, had passed. The green flag from the World Health Organisation (WHO) could be one reason. The WHO considers the latest Covid variant JN.1 to be a ‘variant of interest’ but feels it will present a lower risk. Long-timers in the stock market feel there is no reason to feel overly perturbed. This is because the government, bolstered by the experience of battling three previous waves of Covid, is expected to be better prepared this time. The vaccines, too, will not be too long in coming.

A flawed and risky barometer

Stock markets the world over tend to crash inexplicably whenever a hidden dark side is exposed — it could be hidden overvaluation, an undetected sectoral bubble or a catastrophic geo-political event. A simple reading of a rise in the stock market indices does not account for inflation, which makes the gains from selling scrips overblown. But the market does bring in funds that create long-term benefits to the economy. However, the stock market is never an indicator of the health of the economy.

The market dynamics

• Ironically, the stock market first stabilised under a centrist government formed with the support of the Communist parties in 2004. The markets had dipped soon after the announcement of a UPA-Left alliance, but thereafter, stock prices stabilised and since then, except for two major blips in 2008 and 2019, they never looked back.
• A rising Indian middle class was the most avid consumer of products and services by companies whose stocks are covered by Sensex and Nifty. The scrips that fuelled the bull run were from sectors such as FMCG, financial services, IT, auto, pharma and realty. Some of these sectors later began giving negative returns or began stagnating.
• Ever since the UPA government was formed, external shocks led to major crashes. The first was in 2008, when stock markets the world over came under pressure after the housing bubble burst in the US. Nifty fell by about 2,000 points. The second major jolt was due to the Covid pandemic, when the market slid by nearly 5,000 points.
• But this steady rise hides several sharp dips that have taken place from time to time. There have been several reasons for the mini-crashes but the lesson is that stock market investing is not for the faint-hearted.

For the discerning, there is a problem with the Indian economy. Or two, if the International Monetary Fund’s latest Article IV consultation with India is taken into account. The first is the government of the world’s fastest-growing major economy having decided that 80 crore of the population needs to be provided free foodgrains for the next five years. The second is the IMF flagging the prospects of a high government debt burden which, it has warned, could reach 100 per cent of the GDP.

The government has ready answers to the IMF’s observations. The government debt in India is overwhelmingly rupee-denominated, with external borrowings contributing a minimal amount. Domestically issued debt is mostly medium or long-term. Therefore, the rollover risk is low for domestic debt, and the exposure to volatility in exchange rates tends to be on the lower end.

Domestic prediction on target ICICI Direct Research had projected the Nifty target for 2023 at 21,400

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Stock market has largely been a consistent performer since the UPA years

Getting it wrong

The highly regarded Nomura Securities got it wrong when it predicted that Nifty would only touch 19,030 in 2023

The answer to the contradiction of the government having to feed 80 crore people amid a booming stock market, shining expressways and targeting a seat at the UN Security Council is to be found in the kind of economic growth that has taken place after the effects of the Covid pandemic had worn off. Sales of small cars have declined while SUVs have long booking periods. There is practically no demand for houses costing below Rs 50 lakh while luxury apartments costing upwards of Rs 2 crore are being snapped up at will.

Economists term this as ‘K’-shaped growth where economic growth in one section of the population keeps on zooming up and that of the other section nosedives.

The stock market today is predominantly meant for the zoomers. The average Indian, groaning under 6 per cent inflation rate and privatisation of health, education and transport, has hardly any savings left to take a risk in the stock market.

But for those with disposable incomes and non-aversion to the risk of losing all in a stock market crash, the growth story has been unabated. From the time 2023 dawned, the Indian stock market took off on an unabated bull run that left many Cassandras disappointed. October was the month of anxiety for the punters as even Indian blue-chip stocks slipped badly.

But November brought back the vigour in the stock market. By the end of the month, the BSE Sensex had touched 66,666 points and the NSE Nifty 20,000. This, however, was no flash in the pan. In 2021 and 2022 also, the Indian stock market had risen by over 20 per cent whereas globally the stock markets fell by over 15 per cent. Both the BSE and NSE reflect a section of the economy where the corporates rule. And, in this time frame that continued into 2023, the corporates have walked off with healthy profits.

The main reason is the growth prospects though there are four other supplementary causes as well. India through the Modi years has retained its place as South Asia’s fastest growing economy. The growth rate, even if it does not satisfy a section of the domestic audience, has been the best among all the major economies of the world. The recent impetus to stock markets came from the release of the latest growth figures. The first reading of third-quarter GDP showed the economy growing at 7.6 per cent, which was much faster than what anyone had anticipated. The lone voice before the results were made public was that of RBI Governor Shaktikanta Das, who had predicted that the third quarter figures will surprise everyone.

If the economy did well, or at least the parts of the economy that are reflected in stock market indices, so did the earnings from the stock market due to its sound fundamentals. Provided there is no Black Swan event, the Indian stock markets are destined to boost earnings in 2024 by 17.8 per cent, according to HSBC. The growth will be especially marked for seven sectors — banks, healthcare, energy, autos, retailers, real estate and telecom.

Fat cats with deep pockets are seen as traditional stock market investors but in India, after the government offered income-tax slab rates with no concessions for investing in life insurance, etc, the tendency among the young and upwardly mobile has been to save in the stock markets by systematic investment plans (SIP) through a plethora of mutual funds. Hence, when in October and November, a number of foreign funds booked profits and shifted to the US, the stock market in India barely registered a blip. The large number of domestic investors more than filled up the vacuum.

This increasing trend of domestic participation was also noted by the HSBC.

“While foreign investors tend to be active in large caps, it is local investors that dominate the small and mid-cap space, which partly explains the outperformance — fund flows into mid-cap small schemes of domestic MFs (i.e. mutual funds with a mandate to invest in small/mid-caps) have been disproportionately high,” said the HSBC.

Though a few foreign funds pulled out, several foreign investors are still invested in the Indian stock market because of future prospects, both in the medium and the long term. In the medium term, or for the next eight to nine months, there is the hope that the Reserve Bank of India will reduce the benchmark lending rate.

But a bigger attraction to stay invested in the stock markets is the policy continuity. The BJP led by Prime Minister Narendra Modi is widely expected to win the next elections. That would be a big relief for stock market investors, who have been fearful of a ragtag coalition of regional satraps replacing the BJP after the 2024 elections.

The recent state elections have given a further boost to the expectation of the trend of the last two elections of a single-party government to continue.

But the Indian stock market had turned irreversibly bullish in June itself. It became the fourth most valuable after the US, China and Japan as investors from abroad and home wagered their money on what is among the few bright spots in a wobbly, fragile global economy.

From April to June, the Sensex had risen 10 per cent and the Nifty 50 index 11 per cent. Some of the stock markets that traditionally did better were left in the dust. In the same period, from March to June, the UK’s FTSE 100 rose a measly 0.8 per cent and the French CAC 40 2.9 per cent.

The total value of Indian equities was estimated at $3.5 trillion or more than the UK and France, Europe’s two biggest stock markets. In Europe, the sentiment had been impacted by the recessionary tendencies as well as the high inflation due to the self-inflicted damage caused by sanctions on Russia.

2024 should be another year of record highs for the Indian stock market, provided there is socio-economic stability and the government does not succumb to a bout of populism just before the General Election.

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