The chronicles of Sensex: The FIIs and The India Inc's growth story.
Sensex Journey (from 15,000 to 21,000)
Sensex breaches 21,000 on 8th January ‘08 in 49 trading sessions.
Inflation is at around 3% - 3.75%, a level government is happy to deal with.
FII inflows recorded at a tune of Rs. 2,403 cr in 49 trading sessions after Sensex surged the 20,000 mark.
The market sentiments are likely to be driven by FII inflows and coming quarterly result.
As long as Company results are robust and they deliver on Quarterly basis Indian market may not see any substantial correction.
MF Net Investors worth Rs. 6,264.40 cr in 49 trading sessions after Sensex crossed the 20,000 mark.
Energy prices are big concern for global markets as Oil has touched USD 100 mark with great ease.
Investors should focus on quarterly earnings before taking any fresh equity investment call.
Sensex Closing Values and PE
Indian capital market was able to set yet another milestone reflecting the long term growth story with Sensex crossing the 21,000 mark in early trade on 8th January ’08, it touched the day’s high at 21,077.53 before closing at 20,873.33 with a P/E of 28.51. It took 49 trading days for the Sensex to move from 20,000 to 21,000.
The markets reached such heights primarily due expectation of excellent quarterly result, strong forward momentum and market players reflecting their confidence in Indian economy. There is increasing recognition of long-term growth prospects in India.
Indices which performed well during the Sensex journey from 20,000 to 21,000 were Reality, Consumer Durables, Oil & Gas and Metal. Teck and IT sectors were the laggards giving negative returns.
The US subprime crises has played its part in slowing down the pace of this 1,000 point rally as Indian stock markets were seen being influenced by the global cues led by US stocks. The previous 4,000 point rally put together took lesser trading sessions as compared to this 1,000 point rally.
Liberal economic policy initiatives undertaken by the then finance Minister, Dr Manmohan Singh.
February 29, 1992
Market-friendly Budget by the then Finance Minister, Dr Manmohan Singh.
March 30, 1992
Liberal export-import policy.
October 8, 1999
BJP-led coalition won the majority.
February 11, 2000
June 20, 2005
News of the settlement between the Ambani brothers boosted investor sentiments
September 8, 2005
Buying by foreign and domestic funds
November 28, 2005
FIIs on buying Spree.
February 6, 2006
Buying from FIIs, Local operators and retail investors
March 21, 2006
Robust foreign fund inflows and a move by Government towards greater capital account convertibility.
April 20, 2006
Massive buying from mutual funds around Rs.3400 cr. in just 19 trading sessions, favorable credit policy. Expectation of robust fourth quarter earnings by corporate and S&P upgrading India’s sovereign credit rating from stable to positive
October 30, 2006
Fund infusion from market players, falling oil prices and strong second quarter results from Technology and Banking companies. Robust growth in infrastructure sector.
December 5, 2006
Strong FII inflow, healthy corporate earnings and continued strong economic data coupled with slash in petrol and diesel prices have fuelled the latest surge on the bourses.
July 6, 2007
The softening trend in inflation below the five per cent level, indications of interest rates having peaked, strong FII inflows and expectations of good quarterly results.
September 19, 2007
US fed rate cut by 50 basis point, strong foreign fund inflows, softening trend in inflation below the four per cent level and Good Kharif crop.
September 26, 2007
Robust FII inflows and positive sentiments across the boards.
October 09, 2007
Strong FII Inflows and short covering due to easing of political tension between LEFT and UPA over the Nuclear Deal.
October 15, 2007
Strong fund flow and expectation of good quarterly result from companies has fuelled this leg of rally.
October 29, 2007
Strong FII buying coupled with short covering led to sharp up move. Registering of FII and P notes issue clarification has put momentum into Sensex.
January 08, 2008
Expectation of excellent quarterly result and strong forward momentum has played major role.
The Sensex after crossing 20,000 mark on 29thOctober’07 took 49 trading days in reaching the 21,000 mark. During this journey from 20,000 to 21,000 BSE 100, BSE 200 and BSE 500 reaped 11.21%, 12.877% and 14.65% respectively. The Smallcap and Midcap gave a return of 44.00% and 24.99% respectively while Sensex gave a return of 4.18%.
In sectoral indices Reality Index gave the highest return of 32.50% followed by Consumer Durables and Oil & Gas which gave a return of 26.63% & 19.85% respectively. Metal, FMCG and PSU gave 17.17%, 15.86% and 15.12% returns respectively. Bankex gave 14.48%, Health Care gave 10.89% return, Power gave 10.84% and Capital Goods gave return of 1.53%, while Auto followed with 0.16%. Teck and IT gave negative returns of 3.78% and 10.25% respectively.
Amid credit crunch prevailing in the economy Benchmark Rate cut by the Federal Reserve seems inevitable. US subprime market crisis causing sluggish trends in the US market may prompt US based funds to divert more money to India and other emerging markets. For Indian market the year 2007 turned out to be a turn around year with Sensex crossing 6,000 points to 20,000 with sheer ease recording the least ever duration of a 1000 point rally from 18000 to 19000 in record 4 trading days. The New Year came in with another Sensex Journey from 20,000 to 21,000 which was covered in 49 trading sessions.
On the domestic front things are not that easy for UPA and its allies as they have lost elections in key states of Gujarat and Himachal Pradesh. This can make the central government more populist which in turn can be seen as weakness by local players in the market. Due to tightening monetary policy RBI has tried to achieve control over Inflation but this has resulted into slowdown in Auto and Real Estate sector. SEBI has smoothened the registration process and has promised further speeding up of FII registration and cleared that the issue was not about FII inflows but was about the suspicious inflows suspected to be terror money.
Inflation and Interest Rates:
The inflation in India is under control and this may create favorable outlook for interest rates coming down. Interest rates sensitive sector like Auto and Real estate banking may do well going forward. Only fear to inflationary pressure is fund flow and curb on capital account inflow (ECB, P notes etc.) which is not going to work as Fed may lower the interest rates further thus creating robust platform for inflows into India and other emerging markets across Asia and Latin America.
The reason for Inflation coming down is primarily due to high base effect. Low inflation would persuade RBI to ease liquidity flow but reducing CRR at this juncture was not possible due to strong fund flow to India and resultant appreciation of rupee vis-à-vis dollar. Exchange rate is hurting IT stocks & exporters hence lot of job losses which centre can not afford therefore government will do arrangements for making exports cheaper. The market expects the inflation to remain largely steady.
US is slowing down and there is fear that this may escalate into full blown recession which can affect the money flowing into emerging market equity. Subprime mortgages, bad U.S. home loans that have made their way into the portfolios of financial institutions worldwide, will likely result in more losses at these firms. With 70% of U.S. growth driven by consumption, economists worry especially about the drying-up of the easy money that has fueled the economy over the past few years. At the root of the credit crisis remain U.S. households unable to meet mortgage and possibly other payments. This will have very bad effect on kind of flow we may see into emerging markets.
Federal Reserve and other major central banks have intervened through a combination of rate cuts and money injection into the financial system. The U.S. government has also frozen some adjustable rate mortgages and announced measures to help distressed homeowners. Adding to the pressure on consumers are high energy prices, with a barrel of crude oil still flirting with the USD100 level, and gasoline prices on average 90 cents a gallon higher than a year ago.
In 1000 points rally from 20,000 to 21,000 FIIs infused Rs. 2403 cr in the equity markets in duration of 49 trading days. The Foreign institutional investors were Net Investors during the 1,000 point rally except for November 2007 where in they were net sellers to the tune of Rs. 5849.90 cr on account of weak global sentiments and crude prices touching new highs. Foreign institutional investors had pumped Rs. 1929.70 cr into Indian stocks this calendar year till 07thJanurary ’08. According to the Securities and Exchange Board of India FIIs hold total investments to the tune of Rs. 285398.10 cr in Indian equity market. The number of Registered FII's as on 07th January’08 was recorded at 1235. We are likely to see more of FII investments in the days to come.
The Mutual Funds in this 1000 point rally have turned to be net investors for a second time to the extent of Rs. 6264.40 cr in 49 trading sessions after the Sensex breached 20,000 unlike the previous trends where in the Mutual Funds had been net sellers to the tune of Rs. 965.90 cr after the Sensex had breached 18,000 mark on 9thOctober’07 continuing the trend of being Net Sellers from the last 1000 point rally where they sold equity worth Rs. 2102.60 cr.
The MF’s were net investors in the 1,000 point rally where in they invested Rs.2169.50 cr in November ’07, Rs.3024.40 cr in December ’07 and Rs. 1615.30 cr till 07th January ’08 where as were net sellers for 30th & 31st October ‘07 to the tune of Rs. 544.80 cr. The calendar year 2008 has seen Mutual Funds as net buyers to the tune of Rs. 1615.30 cr by the time Sensex surged 21,000..
The valuations in the market are high and liquidity in the market is driving the markets. Many stocks have seen a run up due to this liquidity and now they look over bought. Financial services sector is expected to do better and the growth in this sector will continue.As we do comparative analysis of Indian market we may see strong momentum in banking and auto due to softening of rates in 2008. This can improve credit off take which was slowing down due to high interest rate. Pharma, IT and Teck may not perform well in 2008 due to strong rupee and generic drug prices are at all time low. There is fear of US going to recession which again will have strong impact on FII inflow and equity as an asset class can see some correction.
Indian economy is growing fast but there are signs of slowdown in sector like Auto and Real Estate which are interest rate sensitive sectors. In 2008 we may see significant growth in retailing in India which will create new opportunity for investors both domestic as well as foreign. FIIs are expected to continue pumping in funds in Indian Financial System bestowing confidence in returns from long-term investments.
One should remain invested in undervalued sectors. On PE basis Real Estate looks very expensive and one may stay clear of Real Estate sector going forward. As an investor one must get cautious of the market and avoid playing impatient short-term bets, instead a more patient and long-term view is advisable. Since secular growth trend in the market is not sustainable, one must balance their fear and greed and adopt a bottom up approach for stocks. Markets are expected to reflect volatile movement due to quarterly results. With the robust growth in the Indian equity market continuing at the same pace it won’t be long when the Sensex would cross another landmark of 22,000.