In many ways, it is as indelible an icon of Mumbai as the Gateway of India. For decades, it has mirrored not only the fortunes of the nation but the dreams and aspirations of millions of ordinary Indians toiling away today, in the hope of a better tomorrow. On Thursday, when the bellwether BSE Sensitive Index – or the Sensex as it is universally known – breached the dizzying mark of 50,000 points, it marked yet another important milestone in the nation’s history, as well as the hope for a better future, not just for India, but for the world as well.
The milestone was the national rollout of the Covid-19 vaccination programme, signifying light at the end of the long, dark pandemic tunnel. The global rollout of various vaccines, as well as the inauguration of Joe Biden as the 46th President of the United States, with the promise of a quick return to sanity after the rollercoaster ride of the Trump era, also signalled hope for a world battered by the pandemic and the economic collapse that followed. As it did every time when the nation has been threatened or Mumbai faced peril, the Sensex has offered a reason to hope. It has rallied after war, after natural disaster and after terror attacks. This rally is as much a symbolic thumbing of one’s nose at the coronavirus, as it is about future expectations.
The celebrations in Dalal Street and elsewhere are justified. It has been an incredible comeback for what is arguably still the most watched index of economic sentiment in the country. From the confidence-sapping lows touched immediately after India announced one of the world’s toughest lockdowns in March last year, the Sensex has logged an astonishing 90 per cent gain in under 10 months. On January 1, 1991, a few months before Dr Manmohan Singh presented his first, historic liberalisation Budget, the bellwether index stood at 999. In 30 years, it has increased a staggering 50 times, making the Indian stock markets one of the best performing ones in the long term, not just among emerging markets, but the entire world.
There is, however, both a qualitative and quantitative difference in the Sensex’s rise in the post-reform years and the post-Covid pole vault. While the climb from 2,000 to 20,000 was driven by reforms and the unshackling of India’s entrepreneurial spirit and the resulting rerating of Indian stocks, there are more complex factors at play behind this rebound from 25,000 to 50,000 during a period when India actually underwent the sharpest recession since Independence.
This rally is driven more by the vast sums of money sloshing around the global financial markets, looking for profitable avenues to be deployed. Central banks around the world have pumped in more $12 lakh crore into their economies in a bid to prop up economic activity, that too at record-low interest rates. Foreign portfolio investors invested a net $23billlion in India last year. Along with record sums of money entering the markets from domestic investors as well – a million new investors are entering the markets every month as bank interest rates plunge and real estate nosedives – this has meant way too much money chasing way too little stock, leading to unrealistic valuations. Currently, the Sensex is operating at a PE multiple in excess of 34 – which means investors are already paying Rs 34 for every rupee earned by a share. The price to book value too is worryingly high, with the market valuing companies at nearly three-and-a-half times their book value.
While many analysts and market commentators are painting a rosy picture for the future, retail investors need to be wary entering the markets at these stratospheric heights. While the soon to be presented Budget for 2021-22 may offer some relief, it must be noted that the economy, while returning to ‘growth’ on a year-on-year basis, may take up to three years to return to the size it was before Covid, that is, return to growth in real terms. If the Central banks turn off the liquidity tap and foreign money exits, we could see an equally sharp rerating of stocks.
Already, there are worrying signs of uninformed investors rushing in where even professionals fear to tread, lured by the promise of quick gains. The SEBI, as both market regulator and primary protector of investor interests, needs to ensure that uninformed and gullible investors are not deprived of their savings in risky punts. Both the SEBI and the stock exchanges, as first-level regulators, need to be alert to manipulations, particularly in the so-called ‘penny’ stocks, since blue chips are priced out of reach. A rising stock market is a tide which lifts many boats. IPOs, for instance, are at triple digit multiples and investors need to be vigilant about fly-by-night operators. Nevertheless, a rise in equity culture, driven by a soaring Sensex, is a welcome fallout of this particular bull run.
