How high will the Sensex go?

July 28, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

A bronze bull sculpture is seen as an employee walks out of the Bombay Stock Exchange building in MumbaiSince April, the stock market has been in a frenzy after a long period of utter gloom. In quick succession, the Sensex jumped month after month to cross 26,000 on July 7. This was not mere euphoria created by the election of the Narendra Modi government, with a single-party majority in the Lok Sabha after a long time.

The market had to make up a lot for lost time. In the last three years of the Congress-led government, the Sensex lost 6 percent. Even if the Sensex had risen at the same pace as the rate of interest, it would have crossed 26,000 last year. The build-up of investor confidence by Modi during the campaign, and subsequently after the election, was instrumental in reversing and accelerating the lethargic pace of the Sensex.

In four months, the Sensex climbed 16 percent. What is amazing is a fifth of that jump was accomplished in a single day on May 13.

A majority government itself generates confidence among investors. It ensures the stability of the government and continuity of policy. With the Modi government, it was more than that. His government is also expected to adopt policies that will facilitate and encourage business. Investment will revive and regenerate GDP. The rate of growth had halved in three years and has to be restored in a shorter timeframe.

It is no wonder then that FIIs rushed in to take advantage of the new opportunities. The total inflow of FII investment was $25 billion, nearly half of it in equity. Foreign direct investment will take a little longer.

The 16 percent rise in Sensex over four months may seem too much too soon, which may create the impression that the Indian market is now over-priced. Going by the price/earnings ratio (P/E) it appears to be so. On July 24, the P/E (MDCI index) for India was 19, possibly the highest among emerging market economies. P/E in China was nine and 13 in Asia-Pacific countries. It is likely that the pace of the Sensex will slow down in the future unless unforeseen developments take place.A broker monitors share prices while trading at a brokerage firm in Mumbai

It is the fundamentals that finally matter. Indications are that growth will pick up. Industrial recovery may have started from June this year. There are other signals as well that indicate a reversal of the degeneration of the economy. These will give strength to a market that, for the present, is living on euphoria.

Chances are that stock prices will rise in the future but not at the breezy pace experienced in the past four months. There will be corrections, though the underlying trend will be upside. Through the rest of the year, the Sensex may go up, with its inherent volatility, by about 1,500-2,000 points. It is the next budget that will really be a strong trigger to take the Sensex to much higher levels.


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