6 Sensex at Sixty, is there more steam left?

Sensex at Sixty, is there more steam left?

By: Saurav Motiramani (H.R. College of Commerce and Economics, Mumbai)

As the Indian Markets continue to climb new highs, a lot of us keep hearing this statement -

'Market kitna badh gaya hai, Bohot overvalue ho gaya hai. Ab girna chahiye'

which basically means:

The markets have run up too much and have become overvalued, it should now witness a crash or a correction

Well, let's analyze the markets and see if they're right?

Fundamental Factors

● Nifty's earnings per share (or EPS) was ~Rs 430 in Jan 2020 before the COVID crash. In the same month, Nifty's price was approximately Rs 12500 ● As of today, Nifty's EPS has grown to almost Rs 650 - a surge of nearly 51% since Jan 2020 ● Is it any wonder then that Nifty's price over the same period has also grown by nearly 40% from 12500 in Jan 2020 to 17600 today?

But you may argue that the economy is still struggling to stand back. Then how has market risen so sharply?

Now, let us look at some of the major reasons why the market has been doing well and may continue to do well, in my opinion, in the coming times:

● During the pandemic, a lot of small unorganized businesses struggled to stay afloat even as large, organized businesses garnered their market share. In other words, large businesses likely benefited at the cost of small ones, thus boosting their earnings, and becoming even larger ● Another reason is the commodity price inflation, which benefited metal as well as oil and gas sector companies in Nifty 50 and the increasing demand for technology transformation globally, which benefited the Indian IT sector The pharma companies in Nifty, of course, faced tailwinds because of the pandemic. ● Moreover, with the availability of low-cost credit and the anti-China movement becoming bigger, the domestic companies are looking to create more import substitutes and have huge capex plans lined up for the next few years. ● The emerging markets, especially India, is expected to outperform the developed markets in the coming times and it is here when one should invest rather than looking at the global markets and getting worried.

● The availability of low-cost credit and increased capex with import substitution becoming the focus of the domestic companies, the outlook for some of the industries looks extremely positive.

● Deleveraging by mid and small cap companies and strong business prospects are making these companies attractive even at slightly higher valuations. ● Corporate earnings in the coming quarters are expected to surprise on the upside and could be a major trigger in the next few months for the companies that have run up in this rally. ● The Fed Taper discussion is doing the rounds but as per the historical data, the Fed Tapers are always done in a phased manner and has hardly had a major impact on the performance of the indices, although the FDI during those times was not as high and the liquidity infused this time around is a lot higher than that in the previous occasions. ● Lastly, the tech breakdown in China and other Asian Countries has fueled a new leg of investment coming into the Indian IT Companies, which are expected to surprise on the upside as far as their earnings in the coming quarters are concerned.

At the end of the day, prices always follow earnings. The corporate earnings will be a major focus point starting next month. The ones who fulfil the promise being shown and the optimism being priced in, shall continue to flourish, while the ones who disappoint may face some price correction.

My view:

The upward trajectory of the indices may continue for some more time as the rally in the banks has just started. Sector rotation is being witnessed as the rally began with metals, followed by chemical and IT and we may now see the banks leading the market. But rather than looking too much into the indices, our view is to stay more stock specific and follow a more bottom-up approach by identifying fundamentally strong companies with proven business models, strong management, continued tailwinds, and clear positive outlook.

We may soon see some time correction and some price correction as well. Some volatility and consolidation are bound to happen and shall be healthy for the market, but I am personally still quite optimistic about the Indian market and will be closely tracking the corporate earnings from the next month.