Making sense of the BSE Sensex

With the formation of the new Government bulls are back on Dalal Street with vengeance, and the Sensex and Nifty have been scaling new peaks day after day. Fund Managers and Foreign brokerages are busy making new predictions about the Sensex. Some are suggesting Sensex moving towards 30,000, 50,000 and 1,00,000, leaving retail investors amused as well as confused. It would be worthwhile to track the history of the Sensex to help us understand the returns that could be made from equity investment in India.

 

The BSE Sensex was formally launched in 1986, with the base as 100 in 1979. In fact the actual recorded value of the Sensex was 124.15 on April 3, 1979.  History of the Sensex suggests that the Sensex has been doubling itself every 4-5 years in its 35 years of existence. Please view the table below for the Sensex performance till date:

 

Year                 Projected Level                   Actual Level             Corresponding Nifty Level

1979                    125 (base level)                         124.15                                -

1983                    250                                             212                                     -

1987                    500                                             510                                     -

1991                   1000                                           1168                                    -

1995                   2000                                           3261                                 990 (base 1000 on 3.11.95)

2000                   4000                                           5001                                 1528

2005                   8000                                           6493                                 2035

2010                  16000                                         17528                                5249

2012                  20200                                         17404                                5295

2014                  25500                                         22386                                6704

2016                  32000                                             ?                                       ?

2021                  64000                                             ?                                       ?

 

BSE Sensex was launched in 1986 when equity cult was virtually non-existent in India. Dhirubhai Ambani was a pioneer in promoting the equity cult amongst Indian investors with the Public offering of his flagship company Reliance Industries. Equity investment received a big fillip when the Narasimha Rao Govt. unleashed a series of liberalisation measures in 1991 paving the way for huge investments by Foreign investors in India.

 

1. 1979-1995: During the first few years of the Sensex from 1979-1995, Indian economy was in an underdeveloped stage and a catch up rally in the markets was evident as India was trying to catch up with the developing economies. Inflation rate shot up to over 10% in the first few years of the liberalised environment, as administered pricing mechanism crumbled. Inflation averaged a high 10.6% in the period 1992-1996. I have assumed an average compounded growth of around 19% pa during this period, leading to doubling of the Sensex every 4 years.

2. 1995-2010: By the middle of 1990's India had joined the club of emerging markets known as BRICS. Inflation started to moderate and Indian economy was put on a high growth path. Sensex growth which was tepid till 2004-05, gained momentum under UPA I led by Manmohan Singh. Singh started his second term with a bang but growth momentum slipped under UPA II due to policy paralysis. Inflation averaged a moderate 5.4% during the decade 2000-2010. I have assumed an average compounded growth rate of 15-15.5% for this period, leading to doubling of the Sensex every 5 years.
3. 2010-2021: The Sensex virtually went into slumber after recording the highs of 21000 in January 2008, and eager investors had to wait for over 5 years for Sensex to decisively go past the crucial 21000 barrier. This resulted in the Sensex slipping below the long term trend line. As India continues to be an emerging market it would be safe to assume a return of 15% plus for the current decade also, leading to the Sensex doubling in 5 years. However, due to the policy paralysis during the last 2 years of UPA regime I have chopped off one year from the decade, leading to the doubling of Sensex in 6 years between 2010-2016. However, with the growth momentum returning back after installation of a strong Govt. it could again double in the next 5 years to 2021. Based on this simple analogy, I expect the Sensex to be at 32000 by 2016 and 64000 by 2021. The corresponding levels of Nifty would be 9500 and 19000 respectively.

Ironically, the Sensex movement does not give weightage to the dividends declared by companies. Currently, the Sensex companies have a dividend yield of around 1.4%, which is over and above the Sensex/ Nifty absolute numbers. So if equity investment is giving you an annualised return of 17% (including dividend) why look elsewhere. The other competing investment avenues like Real estate and Gold would now take a breather and bank deposit rates would move southwards. As growth returns in Indian economy, equity investment would give better inflation adjusted returns as compared to other asset classes. However, there would be hiccups in the upward journey, which should be used at entry points to invest in equity market for long term. Levels of 21000 on the Sensex and 6350 on Nifty are now going to serve as a solid base in this upward journey.

'Modi Sarkar' heralds a New Bull market

An unprecedented  victory for NDA in the elections cast a  spell of  fresh euphoria in  the equity markets on May 16, which led to BSE Sensex scaling a new high of 25375 and Nifty breaking the 7500 barrier to top out at 7557 levels. Most analysts have heralded this move as the start of a multi year bull market for Indian equities. A large section of the retail investors are feeling left out or 'having missed the bus'. What lies ahead for the equity markets after a path-breaking election result?

 

The election results have thrown a clear mandate in favour of one party after a gap of 30 years, during which the nation experimented with various coalition Governments. With the election results out of the way, markets will now focus on the economic developments: like Fiscal consolidation, GDP growth, Inflation management, Currency movement coupled with signals on the progress of monsoon. The track record of the previous Govt. in the past few months can be considered satisfactory in terms of having controlled the Current account deficit (CAD) and Fiscal deficit to a large extent. However, it failed to curb inflation, much of which is due to global factors. Indian Rupee has started to appreciate and any further appreciation beyond a reasonable level of Rs.58/$ could be detrimental for the economy as it may start hurting our exporters. Inflation management will depend largely on the progress of South-west monsoon with the threat of El Nino looming large at this juncture.

 

How would the markets move in the near term, say next 5-6 months? It seems the markets have fully discounted the formation of a strong Modi-fied Govt. in the next few days. So in the immediate future markets may consolidate in a close range or may go down a little after the initial euphoria. Sporadic bursts of euphoria could be dictated by the choice of key ministers like Finance & Commerce. In my opinion the markets have made an intermediate top at 7557 on the Nifty on Friday. But as a new bull market has started, the top of the previous bull market (at 6357 Nifty) would serve as a strong support on the downside. From an earnings perspective (discounting on the basis on FY 14-15 Corporate numbers) 6600-6800 could be considered as a pivotal fair value for the Nifty. The next trigger for the markets would be the presentation of Union Budget in July 2014, as also the earnings for Q1 which would start flowing from 2nd week of July. Satisfactory progress of monsoon is a necessary pre-condition for a bull run to sustain.

 

The probability of major indices moving up much higher seems capped due to the fact that while Banking, Infrastructure, Oil & Gas sectors would outperform the market, IT, Pharma, Metals would prove to be a drag in the short term due to Rupee appreciation. It is anticipated that Nifty may move in a wide range of 6350-7550 during the next 6 months. Those individual investors who feel that they have missed the bus could wait for some correction before committing fresh funds in the market. Please avoid the temptation to enter the markets at higher end of the range, only to regret later. It may be worthwhile to consider buying stocks from IT space on declines.

 

 

"Sell in May and go away"

There's an old saying in the  stock market: "Sell in May and go away". A  famous study   published in the American Economic Review in 2002 found that this  phenomenon does exist and  that returns on stock markets in 36 out of 37 countries studied from 1970 to 1998 were higher in the November to April period than they were in the May to October period. Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. Will this strategy work this year also, more particularly with respect to Indian stock market? Let us analyse.

 

Let me state at the very outset that the worst is over for the Indian economy. The stock market has discounted this fact, but two critical events: the outcome of Elections 2014 and the progress of monsoon will play an important part in the much awaited economic recovery in India. Let us analyse the prospects in detail.

 

Election outcome: The on-going election campaign has been a bitterly contested affair so far with the 'war of words' reducing it to 'gutter level politics' on several occasions. International agencies like Morgan Stanley, Merril Lynch & others, known for their market analysis skills have jumped in the fray to prepare research reports on 'Poll outcome'. On the basis of these reports one can build 4 different post-poll scenarios:

1. NDA getting a clear majority with 272+ seats, leading to a strong 'Modi Sarkar'

2. BJP getting over 200 and NDA 240+ seats, with Modi leading a loosely held coalition

3. BJP failing to reach the magic figure of 200, and NDA falling short of 240 odd seats, leading to a sacrifice of Modi, and installation of a BJP led Govt. headed by somebody other than Modi

4. Congress on its own getting 125+ seats, and UPA crossing 150 seats, leading to a UPA led rainbow coalition of so called secular parties.

 

While the first and fourth options look most unlikely, we may be looking at option 2 & 3. I would like to throw my weight around option 3, based on Astro-analysis. The chances of scenario 3 unfolding after May 16 is based on following indicators:

• The planetary configuration in India indicates a fractured mandate in Election 2014
• While BJP will emerge as the single largest party, it will end up way behind the magical number of 272.
• The importance of UP in Indian politics is waning, and the next PM could be from Central India (may be Madhya Pradesh)
• Regional satraps from states on South-eastern coastal belt will play an important role in Govt. formation (Jayalalitha from TN, Jaganmohan Reddy from Seemandhra, Navin Patnaik from Orrisa & Mamta Banerjee from WB: one or more of these leaders will play a crucial role in Govt. formation).

Progress of Monsoon: There will be a lot of concern about the occurrence of El Nino, leading to a delay in advancement of monsoon in May-June 2014. There could be a possibility of drought in few states raising alarm bells over decline in kharif output. These fears will propel the continuation of higher inflation levels.

From the above analysis I am tempted to conclude that Indian stock market is likely to enter a temporary bear phase which is likely to last at least 36 days from 17th May 2014, lasting up to 21st June 2014. There is likely to be a delay in Govt. formation and the new Govt. may settle down only after June 21. At the same time the major adverse impact of El Nino will play out in May-June and is likely to subside by end of June. So investors are advised to "Sell in May and go away". But I still continue to maintain that FY 2014-15 promises to be an excellent year for equity investment and the equity markets are likely to resume their secular uptrend from August 2014. Position yourself to take advantage of the opportunity.

Disclaimer: I do not claim to be an Astrologer, the above analysis is based on my limited understanding of the subject, with a view to help investors take informed decisions on their investments.

Markets enter a critical phase: It's 'Namo' Vs 'El Nino'

Markets have closed the April series on lifetime high. The May series promises to be a cliff hanger as market participants eagerly await the outcome of the blockbuster election thriller. While the markets have almost fully discounted the 'Namo' factor and are heavily backing a BJP led NDA Govt. at Delhi after May 16, the 'El Nino' factor is yet to be analysed by the markets. I shall briefly discuss these issues in this post, and its consequent effect on market behaviour during FY 2014-15.

 

While it is given that BJP is going to emerge as the single largest party, but its overall performance needs to be judged through Astro-analysis. It is very difficult to gauge the public mood in a long drawn election spread over 36 days from April 7 - May 12, 2014, and as such opinion polls may not be able to give a clear picture of the poll outcome. In such a scenario Astro-analysis plays an important role. For BJP the election schedule is characterised by three distinct phases: Phase I which lasted up to April 15, was distinctly marred by infighting within the party. Phase II started from April 16 and is currently in operation, is the favourable phase of the Sun for the party and has led to the so-called 'Modi wave' which can last up to May 6. Phase III starting from May 6-7, may bring some unpleasant surprises for the party and may pose some hurdles to its supremacy. Varanasi has become the pivot of this election campaign and will decide the fate of General election 2014. 'Namo' had the option of taking a direct flight from Gandhinagar to New Delhi, but Amit Shah acting as 'ATC' for the BJP has diverted the flight via Varanasi, not-withstanding the turbulence in the skies of Varanasi. The final decision now rests with 'Har Har Mahadev' the Lord of Varanasi.

 

Now coming to the 'El Nino' factor. The most commonly accepted definition of an El Niño is a persistent warming of the so-called “Niño3.4” region of the tropical Pacific Ocean south of Hawaii, lasting for at least five consecutive three-month seasons leading to reversal in the direction of the Pacific trade winds. The brunt of the El Nino effect is faced by Asia due to weakening of the South west monsoon in the region. The chances of an El Nino occurrence during 2014 is predicted to be as high as 70%. Failure of monsoon may lead to a higher inflation rate in India leading to a hike in interest rates by RBI. This is likely to delay the economic recovery by at least 6 months. RBI Governor has already sounded the warning bell when he said:  “There are risks to the central forecast of 8% CPI (consumer price index) inflation by January 2015 stemming from less-than-normal monsoon due to possible El Nino effects.”

What should the investors do in such a scenario? Good times have returned to our markets after a long wait, so investors should make merry while the party lasts, but should be prepared to quit before the 'Hangover'. The markets are likely to peak out before the first week of May, and even if a strong BJP led NDA Govt. is installed after 16th May, the upside potential will be restricted to 3-4%, whereas the El Nino poses at least a 15% downside risk to the markets. In the final analysis it boils down to the fact that around 7000 levels on Nifty is a good inflexion point to book substantial profits: whether you would like to take a call before May 16 or thereafter is your choice!

Legacy of UPA 2: From a post election rally to a pre election rally

It is ironical that the UPA 2 Govt. at the centre came to power in 2009 to kindle a strong post election rally on Indian stock market, and it is bowing out in 2014 with a record breaking pre-election rally. The difference, however, is that in 2009 markets greeted the formation of a strong UPA Govt., this time around they are celebrating the ouster of a weak UPA Govt.: a stark change in the perception of the market pundits in a span of 5 years.

The markets have closed FY 2013-14 on a high with Nifty scaling 6700 and Sensex comfortably placed above 22000. There is some more steam left in the markets as the election euphoria gains momentum. But there is a word of caution for investors who wish to enter the markets at the current levels. There is a consensus among a wide range of analysts about Nifty scaling 6900-7000 levels by March 2015 (Sensex levels of 23000-23500), on the back of a stable BJP led Govt. at the Centre and a good monsoon to bolster the chances of an economic revival. Outgoing UPA 2 has done its bit by reducing the CAD and stabilising the Indian currency with support from RBI.

Investors may be lucky if they see the levels of Nifty at 6900-7000 in April 2014 itself in the run-up to the General elections. In such a scenario it would be prudent to book substantial profits rather than wait for March 2015. The post election movement of our markets would be dependent on far too many variables: Strong Rupee, Inflation management, Progress of monsoon and also International developments. Rather than hoping for a favourable result on all these parameters it would be a better bargain to book profits as the opportunity arrives due to pre-election euphoria. There are more than 75% chances of a reasonable correction after elections, even if a BJP led Govt. is installed at the centre. The markets have already factored in the best case scenario. Take your bet on one of the most exciting elections of our times.

2014 promises to be a year of 'Equity Investment'

Indian investors have got a raw deal from equity markets for the past 5 years, except for those who had their portfolios inclined towards Pharma & Technology sectors. These 2 sectors have out- performed on the back of steep erosion in the value of Indian currency. However, broader market has given meagre returns as compared to other asset classes like Bullion and Real estate. Thankfully, this situation is on the verge of a change, and equity markets are poised to out-perform other asset classes during 2014.

 

Due to slowdown in economic growth coupled with a spate of stimulus packages, money has moved from productive to un-productive assets. Industrialists have been facing a resource crunch because surplus funds by savers have been diverted towards accumulation of Bullion and Real estate. Indian households saving rate has been steadily declining. Gross domestic savings as a proportion to GDP fell from a high of 36.8 per cent in FY08 to 30.8 per cent in FY13, according to the Reserve Bank of India. The apex bank has blamed the sharp fall in domestic savings on the steep decline in financial savings of households which dropped from 11.6 per cent of GDP in FY08 to a poor 8 per cent in FY13. This situation is likely to reverse from 2014.

 

As per analyst reports Gold prices have declined by 50% from peak levels and are currently hovering around $1200/ ounce levels, with an expectation that they would remain soft during the rest of 2014. Prices of gold in India have been artificially inflated due to a high 10% custom duty imposed on Gold imports. Real estate prices have also peaked and would at best consolidate around the current levels for the rest of 2014. Certain real estate markets may even seek lower levels due to excess supply. Therefore, the chances of making money by investing in Bullion and Real estate during 2014 seem bleak, which is likely to discourage investors and speculators from putting more money into these asset classes.

 

The world economic cycle is poised to turn around in the second half of 2014, leading to revival of industrial activity. Indian economy would have to wait for the turn around till after the General elections due in April-May 2014. Our equity markets would remain volatile as the election process unfolds. There is a fair chance that you may get a 10% annual return from equity markets even from current levels, but you could get this kind of return from bank deposits without taking risk. So one must aim to get a higher return from equity investment, which you can hope to get if you invest on declines. Investors are advised to enter the markets on declines (5-10% decline from the current levels could be a good investment opportunity), for a decent 20% upside on a balanced equity portfolio.

Why are markets celebrating? Beware of the pitfalls

Stock markets continue to exhibit exuberance despite disappointing signals on the economic and political front. It is argued that FIIs continue to pump money in Indian bourses and will continue to drive the markets upwards. But, Indian economy continues to be in the grip of a severe crises of Governance. Unfortunately, among the contenders of power we have outfits that have contributed to the mis-governance in their role as opposition. Among the leaders in contention to lead the next Govt. we had an 'amateur' and an 'arrogant, and recently we have added an 'anarchist' to the list, adding to the woes of the economy. Whosoever amongst these gets elected to the throne is likely to face stiff resistance from the other two leading to a prolonged period of lack of governance. This is likely to delay the process of economic recovery which the markets are expecting immediately after the General elections.

 

RBI is set to announce its 3rd quarter monetary policy on Tuesday, amidst slowing economic growth and stubborn inflation rate. Those expecting a fall in interest rates may be in for disappointment as RBI at best may hold the existing rates. GDP continues to flounder under the 5% mark continuously (GDP for Sept. quarter was recorded at 4.8%, mainly supported by good Agri. growth, while IIP continues to trade in negative territory), although there has been a marginal decline in inflation rate due to a fall in vegetable prices. FIIs may be looking at the economic data closely, and would reverse their stance on Indian markets at any time, leaving the small investors in a quandary.

 

Small investors are advised to exercise extreme caution, and avoid making fresh entry in the markets at these levels. Markets may correct significantly in the run up to the elections as volatility in the markets shoots up. Keep an eye on the 'Nifty Vix' as it may once again attempt to go past levels of 20 in the coming days. It may not be a bad idea to book substantial profits in the stocks from IT and Pharma (although long term growth prospects remain intact) and other sectors that have run up sharply in the past few sessions. Investors may wait for a 10-12% correction from the current levels to initiate fresh investment (These levels could be around 5500-5700 on the Nifty).