Investors to Bear the Bull and Beware of the Bubble

Prof D Mukherjee
July 3, 2024 is a historic day in the annals of Indian Stock markets when the digital screen at the Bombay Stock Exchange (BSE) in Mumbai displayed a gala moment as the Sensex surpassed the 80,000 marks for the first time, while the Nifty reached a record high of 24,292.15. BSE Sensex hit a new peak of 80,074 during intra-day trades, rising 632.85 points. The broader Nifty 50 added 162.65 points, or 0.67 per cent, to close at an all-time high of 24,286.5. The saying, ‘Sensex Milestones are a journey and not a Destination’ is often used to reflect the essence of stock market indices indicating the flow of ‘tide and ebb’ in the capital markets being the part of a continuous journey of growth and decline, progress and retardation and evolution in the financial markets, rather than a final endpoint. This milestone reflects the dynamic nature of the market, driven by economic factors, investor sentiments, and corporate performance. It is worth keeping in view the reference of the popular saying mentioned above that capital markets journey is both forward as well as backward evidenced by severe decline of NASDAQ which took more than one and a half decade to recover the previous peak. Investors are to design portfolios as per their risk bearing abilities in terms of risk appetite, target a long-term horizon, moderating expectations of return and follow the researched and rationale-based principles of asset allocation. As the Sensex climbs, it highlights the ongoing potential for investors and the economy, underscoring the need for adaptability and forward-thinking strategies in the ever-evolving financial landscape.
Stock market indices serve as crucial indicators of a nation’s economic health, reflecting the combined performance of selected stocks and providing valuable insights into market trends and investor sentiment. Acting as economic barometers, indices such as the Dow Jones, S&P 500, and BSE Sensex offer snapshots of economic stability, growth prospects, and the influence of macroeconomic policies. An upward trend typically indicates economic growth and investor confidence, whereas a downward trend may signal economic slowdowns or crises. Indices play a vital role for investors, policymakers, and economists by offering a thorough view of market dynamics and economic conditions. Established in 1986, the BSE Sensex is the premier index of the Bombay Stock Exchange (BSE) in India. It consists of 30 of the largest and most actively traded stocks on the BSE, representing various sectors of the Indian economy. These stocks are selected based on market capitalization, liquidity, and industry representation, providing a comprehensive reflection of the market. The primary aim of the Sensex is to offer a dependable and broad measure of the Indian stock market’s performance. It acts as a benchmark for mutual funds, investment portfolios, and financial products, aiding investors in making informed decisions and evaluating market trends. The BSE Sensex is crucial for understanding India’s economic health and guiding investments both domestically and internationally. A month after the Lok Sabha election results, the BSE’s 30-share Sensex broke the 80,000 marks for the first time during intraday trading on Wednesday. It took nearly seven months, or 139 sessions, to climb from 70,000, a milestone reached on December 11, 2023. This rise was fuelled by expectations of stable government policies, a higher economic growth forecast, and substantial domestic fund buying, which intensified the bullish sentiment.
Over the past seven months, the Sensex has increased by 14.38%, while the BSE 100, BSE Small-cap, and BSE Midcap have surged by 18.76%, 29.1%, and 31.42%, respectively. This significant growth in small and mid-caps led SEBI to warn about potential market ‘froth’. The bullish trend in Indian equities is observed to have been fuelled by strong economic growth and active retail investor participation, both directly and through mutual funds. As of April 2024, SEBI reported 3.6 crore demat accounts with NSDL and 11.8 crore with CDSL. Mutual fund folios are also steadily on the increasing trend. According to AMFI, net inflows into equity mutual funds reached a record Rs 34,697 crore in May, an 83% increase from April’s Rs 18,917.09 crore. SIP contributions hit an all-time high of Rs 20,904 crore in May. The Sensex reaching the 80,000 mark is a significant milestone for the Indian stock market. Sixteen years ago, it stood at 8,800 on the day Lehman Brothers, a major US bank, collapsed. This reflects a ninefold increase over 16 years. Remarkably, four years ago during the COVID-19 pandemic, the Sensex was at 26,000, a figure that seems implausible but is accurate. This progression instils confidence in the long-term performance of equity markets, emphasizing the need for patience and confidence in investing. Considering the current domestic macroeconomic scenarios, it may be recommended to continue with systematic investments in equities with a long-term outlook.
The investors are recommended to seriously ponder over the reasons for such eye-catching performance of Indian economy indicated by July 4, 2024 continued BSE Sensex registering their record-high run for the second consecutive session. The Sensex climbed 406 points to a new high of 80,392.64, while the broader Nifty increased by 114.5 points to reach a peak of 24,401. It is imperative to note that each additional 10,000 points on the Sensex indicates a smaller percentage increase in its value as such moving from 10,000 to 20,000 signifies a magnitude of a 100% rise whereas climbing from say 80,000 to 90,000 indicates just a 12.5 % rise Additionally, it is to examine whether the Indian equity market influenced by overconfidence of the investors and regulators. Price-Earnings Ratio is the indicator of performance which essentially compares between the price of a share and earnings per share. The other global economies present bullish trend may significantly be influenced by relative advantage of India compared to indicates that the current bull market may be fuelled by India’s relative advantages compared to other global economies. Further, may be macroeconomic variables including fiscal policy of India are more conducive and favourable to the investors. Moreover, in the US, bond yields have declined, strengthening the Federal Reserve’s case for potential rate cuts this year in response to weaker economic indicators. The lower bond yields and anticipated interest rate cuts in the US are motivating Foreign Portfolio Investors (FPIs) to remain active buyers in the market. Despite the record highs and high valuations of the Indian market, experts anticipate that the current bull run will persist. In just the first four sessions of July, the indices have increased by nearly 1.5 percent, following an over 6.5 percent rise in June.
India’s financial markets are poised for further growth, contingent upon stable governance and pro-development policies. Investors are advised to adopt a resilient and cautious approach, diversifying portfolios and focusing on strong fundamentals amidst potential volatility. Sector-wise performance, government policies, and geopolitical trends should guide asset allocation decisions, favouring sectors like investment banking, electronics, pharmaceuticals, FMCG, chemicals, IT, and infrastructure. A well-balanced equity allocation via SIP routes is recommended, aligning with long-term economic growth and individual risk tolerance, while avoiding speculative investments. The recent milestone of Sensex reaching 80,000 underscores the strategic approach needed from investors. Staying informed on fiscal policies, corporate earnings, and global trends is crucial, alongside maintaining a diversified portfolio to manage risks and capture growth opportunities. Market analysts attribute the current rally to factors such as election outcomes, inclusion of Indian bonds in the JP Morgan index, and positive economic indicators like CAD, PMI, and GST numbers. Foreign Institutional Investors (FIIs) have bolstered investor confidence with significant inflows, complementing Domestic Institutional Investors (DIIs). Anticipated higher weightage for Indian stocks in the MSCI index is expected to attract more FIIs, reinforcing positive market sentiment. Investors are optimistic about policy continuity under the coalition government, enhancing market stability ahead of the budget. Summarily, implementing stop-loss orders and periodically rebalancing your portfolio can help manage risks during volatile periods. Overall, a cautious and well-researched investment strategy is key to avoiding bubbles and preserving long-term wealth in fluctuating market conditions.
(The author is a Bangalore based Educationist and Management Scientist).