The Sensex breached the 50,000 mark for the first time yesterday creating a record of sorts. It has generated a CAGR of over 15% since its launch in 1979. Gold during the same period has given a CAGR return of over 9%.
The Sensex has corrected more than 1,000 points from yesterday’s high and closed today (January 22, 2020) at 48,878.
Strong FII inflows, good corporate earnings, excess liquidity in the system, positive news around vaccines, low interest rates and buzz about the Budget has been driving the markets to record highs.
According to Siddhartha Khemka, Vice President, Head of Research (Retail) at Motilal Oswal Financial Services Ltd says, “Sensex touched the historical levels of 50,000 today for the first time ever. Indian markets have been witnessing strong momentum over the past few months in the hope of a faster economic recovery after the pandemic lockdown.”
He adds, “Positive global cues, sustained FII inflows and strong corporate earnings kept the sentiments high. Buzz around the upcoming Budget has also added strength to the markets. The Budget could potentially lay the foundation for a long term economic growth path.”
Experts have warned of an imminent correction of up to 10% on account of the rich valuations not backed by underlying economic parameters. Our analysis for Yahoo Finance shows that Budget could be the next trigger point for such a decline if it doesn’t meet the expectations of the street.
A question which is doing the rounds in the minds of investors is whether it is the right time to book profits or should one wait as India enters into a super cycle of bull run as pointed out by many analysts.
Globally we are in an era of low interest rates. Till the time interest rates are lower than stock market returns it is better to stay put; else investors could lose on the upside.
Due to availability of / access to money at cheaper rates, investors are buying riskier assets as the outgo in terms of correction will be marginal while the upside can be significant.
Hence, we notice that foreign investors (people who have access to such cheap funds) have been buying all kinds of assets across the globe – equities, commodities, bonds – resulting in all indices rising. Indian equity markets too have been a beneficiary of this.
Interestingly, over the past 18 years starting 2003, 80% of times the Nifty 50 index has followed the trajectory of FII inflows. This means that if FII flows have been positive, Nifty closes higher and if FII flows are negative in a month, Nifty closes lower.
FII (Rs crs)
From the above table it is also evident that despite FII’s selling, Nifty has closed higher in a particular month 8% of the time. 13% of the time despite FII’s buying, Nifty has closed higher in that month.
Hence, what should one do?
Retail investors should tread with caution as there is volatility ahead and markets could cool off by 5%-10% as per consensus estimates. One should buy good quality stocks in dips as the trajectory of the market is overall up.
The decision to book profits is a case by case choice. If one has been saving money in the form of equity instruments for a milestone goal - marriage, child education, foreign trip, purchase of property etc. - then this is a good time to sell.
What should one monitor?
Inflation has been rising in India, however it did cool off in December 2020, after being above RBI’s upper band of 6%. A persistent increase in inflation could reverse the rate cuts announced by the RBI. Any fiscal stimulus announced in the Budget 2021 could also be inflationary.
The pace of corporate earnings growth in Q3 needs to be monitored. Have the corporates been able to maintain the positive trend witnessed this year due to cost savings and festive push?
The extent of FII flows into Indian equity markets also needs to be monitored as there is a strong correlation between them.
Siddharth opines, “While intermittent profit-booking cannot be ruled out, overall we expect the market to continue its upward journey on the back of healthy corporate earnings, strong liquidity, positive developments on the vaccine front, broad based economic recovery and low interest rates.”