Browsing through the newspapers, one sees quite a few articles and editorials talking about the BSE Sensex having touched 75,000. Frankly, I found that a bit surprising.
This reminded me of a client meeting in the Middle East some years back, when the Sensex was at about 35K. As it was reaching all-time highs then, during the discussion, I mentioned that given time, the Sensex will go to 50K. The client’s broad smile expressed his total disbelief in what he thought was an irresponsible statement. However, he remembered the discussion and called me when the Sensex actually reached 50K. An index is just a representative of the markets to give you an idea whether stocks are going up or down and by how much. Various indices that track different segments of the markets and/or differing coverage (30, 50, 100, 200 etc. stocks) perform differently based on the universe they represent.
So the Sensex reaching a certain milestone is good. But what really matters is understanding that the underlying stocks that form the Sensex are going up and even more important is to decipher whether the stocks are going up because of speculative activity, money flow or due to some encouraging signals on fundamental performance. Let us look at money flow and fundamentals separately in an effort to determine the amount of speculative activity, if any.
From what we read, mutual funds have been leading from the front, a once-in-a-lifetime change in risk appetite of retail investors in India. With other asset classes having disappointed over the past few years now, retail investors are left with little choice but to start nibbling at equities. A small change on an individual level has in aggregate become R 20,000 crore per month investment into equities through Systematic Investment Plans.
Foreign investors, who have typically been driving the markets till now, have been undecided on what to do next. We believe that is primarily due to their approach driven by top down asset allocation to various regions/markets rather than a bottom up focus on individual markets. Our sense is that this may change soon, probably after the upcoming Union Elections. So, money flow has been strong into the markets and the expectation is that it may become stronger in the future. Fundamentals, the other building block to stock prices also remain at a strong footing. There have been several positive factors that have come together in what Charlie Munger used to call ‘The Lollapalooza Effect’. We discuss a few below.
On a very basic level, the country is seeing diminishing uncertainty whether it is a matter of peace and harmony. People are getting more time to focus on their lives and be more productive. This sense of confidence is also one of the pivotal factors that is driving unprecedented consumer demand in the country. With increasing wealth and higher confidence about the future, Indians are going out and spending on discretionary products and services as never before. Combined with this is focused spending by the government in key areas and startups is leading to percolating of money through various strata of the population including and particularly the marginal wage earners. While the top end is spending by up-trending to premium products, the lower end is spending on their basic requirements as their incomes rise. Another key positive is the government’s determination to get India into the global supply chains.
Other factors that may influence the trajectory of economic growth going forward include the uncertainty around monsoons. A good monsoon may result in revival of rural demand adding further to the positive landscape. The weak recovery seen in several developed economies and rising geo-political tensions do not bode well for the world as a whole and India within it. India remains a bright spot in an otherwise bleak environment but we hope that the global recovery picks up wind and propels everyone together.
Thus, the indices reaching new highs is neither unexpected nor a negative sign. If the underlying economy is growing and companies are performing robustly, the indices are just an indicator of the same and will keep reflecting the positivity. Investors would do well to devise a well thought out investment plan including long term strategic allocation to various asset classes. They should have the discipline to adhere to the plan rather than get swayed by short term movements and milestones. We are reminded of a saying by Warren Buffet “Games are won by players who focus on the playing field – not those whose eyes are glued to the scoreboard”. Here’s to the Sensex at ‘One Lakh’ and beyond.
(The author is the Founder and CEO of Five Rivers Portfolio Managers and can be reached at pankaj@5riversindia.com)