InvestorQ : Why are Sensex and Nifty touching new highs at a time when all the growth data is so bad? I find it hard to understand.
Dilmini Mercia made post

Why are Sensex and Nifty touching new highs at a time when all the growth data is so bad? I find it hard to understand.

Anu Biswas answered.
3 years ago

Let me put it this way, the market not only reflect past data but also future expectations. This market is rising to new highs purely on the back of strong expectations for the future. Let us consider some key points.

· You are right that most of the key high frequency indicators are not showing any signs of macro improvement. For example, the IIP, core sector growth and the GDP growth rate are at multi-year lows. So what is really driving the markets higher as the Nifty scales 12,000 and the Sensex gets closer to 41,000?

· One thing we need to look at is the second quarter results. Most of the companies reported tepid sales and revenue growth. However, the growth on the profit front was quite encouraging. This was largely due to a combination of corporate tax rate cut and lower loan-loss provisions for banks. In fact, after the reduction in corporate tax rate corporate, earnings have picked up in Q2-FY20

· Secondly, the foreign portfolio investors (FPIs) have turned positive on India. Sentiment and flows are also driving markets higher. FPIs infused funds into equity and debt in September and October and in November they have infused more than the last two months put together.

· On the global front, there have been some positive developments. For example, there have been positive developments on the US-China trade war. That is likely to be positive for global demand and China could see a revival, which is good for the world economy as a whole.

· Of course, the Indian FM has been quite active in the last two months. Series of intervention by the Finance Ministry in the last two months has changed the mood of the market. From corporate tax rate cuts to giving relief to telecom to announcing a special package for unfinished homes, the FM is really taking the bull by the horns.

· At the end of the day, it is the performance of the top-20 stocks of Nifty-50 that is making all the difference and they are diverging sharply from the the rest of the market. High quality large cap stocks have benefited from the lower tax rate and to that extent their stock performance has been hefty and positive.

· Lastly, let us not forget the base effect. We are coming from a weak base and so the positive base effect should kick in soon. Indian markets are expecting the base effect to start playing out from November onward. Thus consequently, the numbers would look better. In addition, the government’s focus on pumping liquidity in a big way in the interbank markets, has resulted in increased supply of credit and lower interest rates.

There is also a very smart retail story building up. Mutual funds garnered Rs.8,246 crore through SIPs in October; and that has continued despite the vagaries of the market. That is giving a solid support to the market. The sharp increase in retail appetite for equities is proving to be one of the big stories behind the bull market rally.