Sensex Scales 12 K Mark

After registering a low at 8,160 on March 9, 2009, the Bombay Stock Exchange (BSE) Sensex touched 12,000 on May 4, 2009. It has gained 4,000 points in less than two months. The sharp rally has taken small investors by surprise. The present may appear cloudy, but the future has started looking bright. The general belief is the worst is over.

The Sensex has already undergone a 61 per cent correction since the bear phase started around January 2008. The earlier bear markets in India — in 1992, 1994, 1997 and 2000 — saw corrections of approximately 52 per cent, 49 per cent, 38 per cent, and 59 per cent respectively, so there is a perception that since the correction has been so ferocious this time at 61 per cent, this could be the end of the bear phase.

However, other market watchers feel that it is still too premature to say who will be proved right because the Indian markets are purely Foreign Institutional Investor (FII)-driven. When they pump in money, the market is up, and vice-versa. For instance, in January and February 2009 the FIIs were net sellers to the tune of Rs 3,200 crores and Rs 4,300 crores respectively, while in March and till April 23, 2009 they were net buyers of Rs 5,700 crores and Rs 6,200 crores respectively. During this time the Sensex saw a spectacular rally from March 2009.

What is Sensex ?
Developed in 1986 by R.R. Nair, a former General Manager, BSE, Sensex tracks the share price movements of 30 of India’s top companies. Although it was launched in Jan. 1986, its base year is 1978-79—Sensex is assumed to be 100 in April 1978. Since then, and particular after 1991, when the economic liberalisation began, the Sensex is considered as one of the most popular barometers of the economy’s health.

So, when the Sensex rises, there is a ‘feel-good’ mood that 20-million investors, primarily the wealthier citizens of India and a few beyond the borders, experience. But this euphoric feeling may or may not be backed by fundamental factors. For instance, in Feb. 2000, when the Sensex first pierced the 6,000 mark riding the tech boom it was more hype than reality—it crashed to less than half its value in just 19 months. In other words, the Sensex is a broad indicator that signifies the relative position of the stock market sectors at a given point.

Drivers of the Bull Run
The all round euphoria and current bull phase of the Sensex can be attributed to many factors working together. Important among them are:

(1) Strong Performance by Indian Companies: Solid financial performance by Indian Companies over the years and their overflowing order books brought back investors, especially FIIs, in droves. The turnover and the profits of most companies have increased substantially. The first 45 results announced for the quarter ended Sept. 2006 showed an increase of 41 per cent in sales and 56 per cent in profit after tax. Many companies are having order books which run to more than three years’ of their production which means that the companies are already having orders worth their production for next three years. This has promoted companies to go on for capital expansion and set up new capacities for production.
(2) Sustained GDP Growth: After China, India is the only country which has shown consistent higher Gross
Do­mestic Product (GDP) growth. All the doubts regarding slowing down of GDP growth from eight per cent have been settled. Now, the Indian economy is eyeing for a healthy growth with the Prime Minister Manmohan Singh setting the target of higher GDP growth.
(3) FII Inflows: It is the FIIs that have driven up the market rally in the last two months. In April alone FIIs bought shares worth $1.3 billion. Foreign investors are returning to India as they see this country along with China as growing despite recession. Dark clouds have started dispersing, it seems, beyond India and China too. Other Asian, European and US markets too have soared. Investors now see signs of a global recovery and ignore bad news. Manufacturing has expanded in China for the first time in nine months. A better-than-expected report on the US housing market, which started the global meltdown, has lifted the mood.
(4) Government Commitment to Reform: Despite the pressures from its Left allies, the UPA Government at the Centre has shown its commitment towards reforms. Steps taken to stick to fiscal targets, opening up of the retails sector and aviation sectors to foreign investment, etc. have boosted the confidence of foreign investors in the Indian economy and sustained growth of the economy. The Government has also stepped up its efforts in the direction of divestment and privatisation.

Significance of the Rally
The significance of the rally can be understood from the importance of the stock markets. Stock market is considered as the ‘Barometer of the Economy’, i.e., they reflect the state of the economy of the country.

A boom in the stock market means following:

* It will lead to renewed interest of the investors in the stock market leading to sharp increase in the funds raised by the companies through the public issues.

* Increase in the rate of investment will lead to capital formation by the companies. Higher demand in capital goods sector will, in turn, lead to higher demand for all the industries.

* It will result in higher employment opportunities as growing companies recruit more and more people.

Sensex Moves and Shakers
Generally, it is the health of the economy that affects stock prices, and not vice versa. Sensex reflects the health of the economy as well as affects the economy to some extent. Any good news about the economy does have bearing on the Sensex. The following events or factors along with other factors affect the value of Sensex:

* Growth in GDP and Index of Industrial Prodution

* Export performance

* Credit Policy of RBI

* Annual Budget of the Government

* Foreign Direct Investment

* Agricultural Prices

How Long will it Sustain?
In the current year alone, the Sensex has passed one thousand mark five times, i.e. the Sensex has grown form 8,000 to 13,000. This growth is astonishing and unbelievable. The question is whether this rally is sustainable. There is no readymade answer to this question. There are views for as well as against.

There are those who believe that the current rally, although led by the FIIs, is likely to be sustained. They say that this a broad-based rally, unlike other previous episodes of upswings in the Indian bourses. The optimists suggest that the happy tidings as explained above lay the basis for the “feel good” factor that is lifting the markets to new heights. These people also cite strong corporate performance and say the fundamentals justify it. The prevailing low level of interest rates will also drive people to invest in the stock market for better earnings.

Political uncertainty in India is a deterrent, but it all depends on how FIIs see it and whether they bring in more capital. But they do not have much choice either.

Conclusion
To sum up, we can say that if the growth of the economy is sustained over next few years and the government is able to keep inflation under control, the current rally of Sensex can go further and we can see higher levels again and again.