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Sensex and the medicine of hope
There is no medicine like hope, no incentive so great, and no tonic so powerful as expectation of something tomorrow - Orison Swett Marden.

Dr. Marden would have seen the most striking real-life manifestation of his belief had he been alive to see the Sensex rally in 2014.

 

Pre - Election Rally (The past)


The rally was driven by a hope of possible change of guard at the Centre, as election fevers started sweeping India from early 2014.  After suffering, arguably one of India’s worst economic phases post-liberalisation during 2011-2013, where average GDP growth plunged to 5.3 per cent (vs. 8 per cent in the preceding 3 years) rupee fell to an all-time low of 60 for 1 USD  (25 per cent devaluation in two years) and threat of sovereign downgrade round the corner, there was finally a ray of hope! The Sensex shrugged off its 5 per cent pa growth over the past 4 years and rallied by around 14 per cent from January to May 16,  2014  (the election result date). The hope of change was at play!

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Post-election Rally (The Present)

Driven primarily by expectation of an easing interest rate scenario....

Despite no major policy announcement or any on-the-ground demonstration by the new government,the Sensex has rallied by 16 per cent post-election till December 12.  This is largely driven by the market’s expectation of a phase of easing monetary scenario (possible reduction in CRR & Repo rate by 25 bps to start with). While the RBI is cautious and has kept the CRR at 4 per cent and Repo Rate at 8 per cent, bond funds have rallied by 10 per cent during May-November 2014, unambiguously highlighting the underlying market sentiment favouring a rate cut.  

 

... And supported by Green-shoots of recovery

The new government went to work from day one. The move to de-regulate diesel prices gave a signal of India’s move towards self-driven market economy. With oil prices at a 4-year low, it was easy to do this.  The decision to open up the coal sector, by allowing foreign investments and e- auctions, was a progressive and transparent move. Corporate India underwent an image transformation when CRISIL announced that the credit ratio of Indian corporates  (ratio of number of rating upgrades to number of rating downgrades) during April-Sep 2014 crossed the 1x mark and improved to 1.64x. The icing was Moody’s announcement that it may consider upgrading India’s sovereign rating if inflation could be consistently contained below 5 per cent levels.  The market has cheered every small development.

 

Does the Story have legs? (The future)

Markets are strongly holding on to the belief that India is at the cusp of the next big wave of growth.  At 27, 350 points the Sensex has already rallied by 32 per cent in 2014 and is currently valued at 19x earnings i.e., knocking at the doors of the 2005-2008 boom period valuation of 22-23x earnings.

But here are words of caution: One, with economic revival factored in the valuation it’s hard to think of any triggers in the short term that will push Sensex beyond the magic mark of 30,000.  Two, there are un-hedged dangers that can dampen the markets. Like: if crude prices take a U-turn (from its 4 year low level currently @ USD 62) and spiral up, it will trigger inflation and could snowball into an economic crisis.  Similarly, a perennially falling rupee (now in the ICU @ Rs 62 per dollar) implies that key imports like fertilizers, energy fuels, etc. would continue to remain costlier, limiting the ability of the government to spend on structural development initiatives.

It’s time to put the brakes and wait for tangible, on-the-ground fundamental shifts to play out before any further run-up in the Sensex can be cheered!

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