Mint Primer: Sensex surging: Will this be the new normal?

What were the key drivers of the rally?

Investors across the spectrum—retail, institutional, domestic and foreign—have been pouring money into Indian equities. Foreign investors who were on a selling spree in September and October, have begun buying in November and December. Analysts say this is largely fuelled by the BJP’s victory in recent state elections, which is seen as a sign of continued economic reforms. Moreover, an uptick in GST collections, strong corporate earnings—in tandem with the Fed’s decision to hold its key interest rate—and stabilizing crude oil prices have also contributed to the market rally.

Will we see large FPI inflows now?

Foreign portfolio investors (FPIs) kicked off December on a positive note, reversing a selling streak. This was influenced by a drop in US treasury yields, a weakening dollar, and hopes that the US Fed has concluded its interest rate hikes. Fed’s decision on Wednesday night to hold steady on rates and its inclination towards three potential cuts in 2024 should encourage FPI inflows into emerging markets such as India. Additionally, the resilient state of the domestic economy amid global uncertainty, strong corporate earnings growth and a politically stable landscape, should continue to attract FPIs.

Is the market undervalued or overvalued?

The Indian stock markets have been on a roll in the past few years. However, this has pushed the BSE Sensex’s valuations to a lofty price-to-earnings ratio of 24.6 times, above historical averages. According to Bloomberg, company insiders have been selling. They have sold over $12 billion in the first 10 months of the year, hinting at a potential overvaluation.

How are different sectors performing?

The Sensex has moved 15% since the beginning of the year. But sectors paint a different picture. Despite the upswing in cyclical and growth sectors such as industrial, autos, commodities, oil and gas, defensive sectors such as consumer goods and healthcare haven’t performed well since January. Information technology and private banking stocks have also been facing headwinds, underperforming the broad market index massively. Small-caps and mid-caps have surpassed well-established large-caps.

Can we expect the rally to continue?

The substantial amount of money flowing into Indian equity markets could mean the rally will continue. Recent commentary from the Reserve Bank of India has been positive, emphasizing increased private consumption and strengthening manufacturing sector. This, coupled with a sustainable surge in foreign investments, especially in the wake of the Federal Reserve’s decision to cut rates in 2024, further supports the robust outlook for Indian equities amid a favourable macroeconomic environment.