A tale of two eras when Sensex hit 30K: 10 factors which changed since then
From political stability, demonetisation to an improvement in external situations, a look at what has changed during the two years.
The S&P BSE Sensex created history this week, when the Sensex rallied past mount 30K to hit a fresh record high of 30,184.22. The index closed 1.8 percent higher for the week ended April 28.
This is not the first time when Sensex breached 30,000 mark. The last time it did was back in 2015 in March.
The benchmark index made a record high of 30,024.74 on March 4 after the Reserve Bank of India (RBI), in a surprise move, slashed interest rate by 25 bps, but soon index came under selling pressure and closed the day in the red.
But, a lot has changed since then. “During both ends of the times, the market was trading at peak valuations of 22-23x,” Alok Ranjan, Head of Research at Way2Wealth Brokers told moneycontrol.
“While 2015 was a hope rally on expectations from the newly inducted government, it remains to be seen whether the current rally is same or supported by improving fundamentals,” he said.
Although, the index has just come back to the same level where it was nearly 2 years back, but most stocks have shown potential and have already given multibagger returns. The outlook for the market looks bright and the verdict is we are in much better times compared to the year 2015.
We have collated a list of five factors which we think has changed from the year 2015 to 2017:
Post the historic win by the BJP in 2014, the party has managed to only strengthen its hold in Indian politics, with the recent wins in state elections and victory seen across most municipal polls.
“This is indicative of the likely political stability that could continue through the next General Elections in 2019, which has been taken very positively by the market participants, especially the FIIs,” Jayant Manglik, President - Retail Distribution Religare Securities told moneycontrol.
“Political stability is important for long-term reforms and bold policy actions in an economy, signs of which are already visible in the Indian economy,” he said.
Digital reforms focused on JAM (Jan Dhan-Aadhaar-Mobile), Trinity
Currently, we are in the middle of massive digital reforms; almost all major sectors of the economy are undergoing structural changes – GST led tax reforms, Aadhaar led subsidy reforms, Mobile led consumption reforms are taking shape.
“In the past 2 years, correction in land prices has led to a negative wealth effect in rural areas leading to slower rural growth. This low rural growth may stand corrected through a doubling of farm incomes & 7thPay commission benefits,” Saravana Kumar, CIO, LIC MF told moneycontrol.
“Government’s efforts on infrastructure reforms are taking shape and is leading to the creation of strong public capital assets. These capital assets would drive growth for next decade. I believe, the market is hoping these reforms to deliver resulting into high earnings growth,” he said.
Demonetization (Mobilisation of savings)Demonetisation has been a key in mobilising physical savings to financial savings. The domestic institutional investor flows (DIIs) flow into the market has increased post demonetisation. Equity funds witnessed Rs 38,740 crore inflow from November 16 to
March 17 compared to Rs 14,089 crore in the similar period the previous year, said Ranjan of Way2Wealth Broker.
Initially, many brokerage reports, as well as ground checks, suggested the severe impact of demonetisation on business activities while some noteworthy economists wrote that Modi government took its worst decision.
Even channel checks with distributors indicated 30-50 percent decline in the business momentum, however actual financial numbers indicate robust businesses recovery.
“Though demonetization brought discretionary nature of businesses to the fore, impact seen was not to the extent it was envisaged,” said Kumar of LIC MF.
India has achieved GDP growth of 7 percent sustainably which was refreshing in the wake of the global slowdown and uncertain economic environment as well as demonetisation.
“Pro-business policy framework and detailed action plan has changed India’s image during this timeframe. Many MNCs are embracing “Make in India” initiatives to make India their production hub – further strengthening our economy,” said Kumar of LIC MF.
Reforms to boost economic growth
In the last two years, the ruling government has been able to implement various major reforms which augur well for the Indian economy over the medium-to-long-term.
“Increasing the pace of reforms, attack on black money, implementation of key bills like GST, focus on affordable housing, removal of archaic rules, attempts to remove corruption and bureaucratic style of working which has been the hallmark of the previous governments’ regime,” Jaspreet Singh Arora, Head of Research, Systematix Shares told moneycontrol.
Vaibhav Agrawal, Head of Research & ARQ, Angel Broking Pvt Ltd said that reforms momentum has not slowed down in the last 2 years or so which has helped India to improve FDI flows.
“In the 9M ended of FY17, we received $35.8 bn foreign direct investment (FDI) inflows, 22 percent higher than $29.4bn in 9MFY16,” he said.
Surging MF inflows
Retail investors are no longer in the closet. They have pumped money into equity markets in the last two years even though the index might have given flat returns since then.
“In the last 3 years, we received nearly Rs 2 lakh crore MF inflows, higher than the FII inflows during the same period,” said Agrawal of Angel Broking Pvt Ltd. “With the improving macros and strengthening rupee, FIIs are also seen participating in the domestic growth story,” he said.
In March 2017, India received Rs 56,261 crore FII investment showing this strong confidence.
Inflation & Interest Rates
The Reserve Bank of India’s (RBI’s) efforts at controlling inflation has paid off over the past couple of years. Retail inflation, which stood at 5.3 percent in March 2015, cooled down to 3.8 percent in March 2017.
“Fall in inflation in turn aided interest rates in the economy to come down by 125 bps in the last two financial years,” said Manglik of Religare Securities.
“Lower inflation and falling interest costs are triggers for consumers to increase their spending, which benefits a lot of sectors like automobiles and consumer discretionary, and consequently the economy at large,” he said.
A normal monsoon in 2016, after two consecutive years of drought, was a big positive for the Indian economy, considering that nearly 65-70 percent of the population resides in the rural economy.
IMD said that the June-September monsoon is likely to be 96 percent of the long-period average, a forecast that will be cheered by millions of farmers and the government alike.
Manglik said that a normal monsoon is also helpful in controlling food inflation. This is another favourable commentary for the market in the year 2017.
India is now the growth destination of the world
Indian government managed to arrest steep fall in growth rate despite demonetisation. And, with the implementation of GST, the growth rate will pick up towards the higher end of 8 percent.
IMF believes that India will continue to grow at a fast pace, with a projected 6.8 percent rate for the financial year 2016-17 and 7.2 percent in 2017-18, and with implementation to be applied starting in July, will help raise India’s medium-term growth to above 8 percent.
“India is now the growth destination of the world. The appreciating Rupee has been the both the cause and effect of the FII investments,” VK Sharma, Head - Private Client Group, HDFC Securities told Moneycontrol.com.
External situation improving
The major concern for the markets was the US growth and US interest rates. In the last two years, US economy has shown a strength owing to which, US rates have gone up slightly.“We, however, have not seen the scare in the market as US rates are not likely to go up significantly in the short time, rather it will be a gradual tightening, which is a big breather for the markets globally,” said Manglik of Religare Securities.