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7 reasons why Sensex, Nifty are at record highs
In January 2015, all those who follow the stock markets waited with bated breath. “Would the Sensex cross 30,000?” was the question on everybody’s mind. But it never did. People started booking profits and the index soon fell. In fact, the index ended in red in 2015. Since then, though, the Sensex rose 17% to cross the key 30,000 level on May 10, 2017.
Here are 7 reasons behind the rally:
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Monsoon forecast:
The tipping point was the positive rainfall forecast by the India Meteorological Department. Earlier there were concerns of an El Nino. Such a weather phenomenon causes lower-than-average rainfall and drought-like conditions in India. The department now expects a better monsoon. This is good news for companies that depend on income from rural India. A good monsoon often leads to higher income in the rural areas. This, thus, leads to higher spending.
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FII flows:
Foreign institutional investors (FIIs) sold a lot of Indian assets in the Equity market over the last one year. However, FIIs have staged a return. They invested Rs 39,516.20 crore in Indian equities so far this year. FIIs are major players in the Indian markets. Their activities have the potential to push the markets.
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MF investments:
It’s not just the FIIs. Domestic investors too invested in droves in the last many months. One key reason is the rise of the Mutual Fund (MF) investor. Systematic Investment Plans (SIPs) gained popularity. More people are investing in Equity through MFs. In April 2017, people invested Rs 9,429 crore in Equity funds, 61% more than the 12-month average, as per a Financial Express report. This is also double the investments in Equity MFs in April 2016.
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Corporate profits:
The stock market’s performance is directly related to the profitability of companies. April-May is when companies report the financial results for the January-March quarter. Results so far have been promising. Of the 16 Nifty companies that reported results, 11 outperformed expectations, according to a Livemint report. Only 4 failed to meet expectations. The same trend can be seen with the companies that form the BSE100 and BSE200 indices.
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GST-fuelled optimism:
Investors seem optimistic about the future too. One reason for is the implementation of the Goods and Service Tax (GST) from July 2017. This is expected to make it easier for companies to function—good for the overall economy and corporate profits.
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Consumer demand:
For companies to make profits, consumers have to spend money on goods and services. Demand is, thus, a key indicator of profitability and economic wellbeing. High inflation and demonetization affected consumer demand. However, there are indications that demand is back to normal now. Companies witnessed a 7.5% increase in the volume of sales, as per a survey of executives by Nielsen, a marketing research firm. Many consumer goods companies too said demand has improved.
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Fall in crude oil price:
ndia imports 80% of its oil needs. So, any changes in the international price of oil can affect India’s inflation. The price of oil fell to the lowest since November 2016. This is good news for Indian companies. A fall in oil price can cut costs for many companies. Automotive manufacturers also see an increase in demand due to petrol price cuts.
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17.76%
When the market rises, it’s time to question whether it will sustain this rally. Analysts usually look company profitability to answer this question. One of the measures is the Price-to-Equity (PE) ratio. This helps understand how many rupees an investor pays for each rupee of profit the company earned. The higher the PE ratio, the costlier are the shares. The BSE Sensex trades at a PE multiple of 17.76, according to an Economic Times report. This is higher than its 10-year average of 15.01. This means the market expects Sensex companies to grow by at least 17.76%. Anything lower could cause prices to fall.
