After breaching 30,000, what’s next for the Sensex?

In the final week of April, the S&P BSE Sensex crossed the 30,000 mark- a symbolic breakthrough- to close at an all-time high of 30,133 points. Some of the best performing sectors have been consumer durable, banks, and oil and gas.

Although this isn’t the first time the Sensex has hit the 30,000 mark – in March 2015 it hit a then-lifetime high after the RBI unexpectedly cut the repo rate – market watchers question the sustainability of current bullishness.

Now that global markets seem to have adjusted to US President Donald Trump’s unpredictability, analysts are zoning in on how events closer to home have caused the Sensex to skyrocket and what it means for the future.

What factors led to the Sensex hitting 30,000?

There’s widespread agreement that liquidity has been a major driver of the recent stock market rally.

With fewer options available to park excess cash – demonetization knocked the wind out of the wealthy preferred repositories, such as real estate – Indians have grudgingly embraced financial assets such as mutual funds.

The heightened market euphoria also reflects investors’ faith in the longevity of the BJP government. Prime Minister Narendra Modi’s reform-driven policies, though deemed imperfect, are still viewed as earnest attempts to streamline and organize a network of opaque and archaic systems.

The recent BJP success in UP elections and Delhi municipal polls have only solidified the perception of political stability in India.

On the macroeconomic front, indicators such as inflation are in line with expectations and the rupee has strengthened against the dollar. The RBI’s decision to hold interest rates in its last credit policy review served as another confidence-booster.

What’s next for stock market investors?

Experts say a decent March quarter (relative to the expected impact of demonetization) in terms of corporate results buoyed the Sensex, but that a correction is likely if markets keep rising without an earnings recovery.

The latest share market news shows investing gurus are split on how soon that recovery may come. Some, like Ambit Capital CEO Saurabh Mukherjea, don’t see any uptick in corporate earnings in this fiscal year. Others market watchers, such as UBS Securities India’s head of research, Gautam Chhaochharia, predict the growth in earnings to inch up to double digits in FY ‘18 after a lacklustre FY ‘17.

The most recent IIP figures are disheartening: industrial output slipped to a four-month low in February, contracting 1.2% year-over-year, indicating negative growth in the manufacturing sector. But a number of other factors will affect how investor sentiment pans out in the coming months.

While GST is set to be introduced on July 1st, implementation will affect each industry differently. However, as individual sectors will be taxed differently under the new framework, companies’ share prices may see some short-term volatility.

On a positive note, the India Meteorological Department has forecast a mostly normal monsoon – a boon for the FMCG industry, which is particularly at the mercy of rural demand and consumption patterns.

Overall, the key themes that have kept domestic and foreign investors glued to Indian markets of late – a business-friendly, reformist government, controlled inflation and a reduced fiscal deficit – should make equities a steady bet for the mid- to long-term.

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June 2021