Sensex at 50,000 just a psychological mark, be watchful, say experts

Gush of foreign money chasing equities and valuations well past the earlier high makes a ripe case for profit booking

Twitter was coloured with pictures of BSE’s employees taking to the stock exchange’s terrace and flying balloons. Indeed, for those at India’s oldest stock exchange, the BSE Sensex touching the 50,000 mark was a momentous occasion.

Apart from being a very short rally from 40,000 to the next milestone of 50,000 points, what makes the situation very peculiar is the resounding bullishness coming from all corners of the market and a near marginalisation of those who prefer to stay on the sidelines or opt to be cautious.

“Even people who were extremely watchful of not being swayed either sides earlier have completely shifted to the bull camp now,” said a fund manager not wanting to be named.

Central bank governor, Shaktikanta Das has more than twice flagged off about a brewing bubble in the financial markets since December 2019. The fund manager quoted above says under ordinary circumstances, some of these marque investors would have shifted gears and slowed down. “That’s not the case anymore and this is what worries me,” he adds.

Dhananjay Sinha, head of strategy & chief economist, IDFC Securities, terms it as a consequence of uber-liquidity. “At 37 – 38x price-to-earnings for Sensex, we have long crossed the bubble phase. Liquidity component is far more overwhelming than valuations at this juncture,” he explains.

Some others, however, share a slightly different view.

Saurabh Mukherjea, founder & chief investment officer, Marcellus Investment Managers, calls this rally a mirror image of a coordinated recovery across sectors. “People panicked on Covid and when the 35 per cent market decline was reclaimed quickly, momentum strengthened. It’s a combination of central banks’ fund infusion backed by fundamental demand momentum,” he explains.

Sinha partly agrees with Mukherjea, but yet feels that liquidity is masking over valuations. Earnings growth has become less influential on valuations now, and worse, this mismatch may continue to play out for a while, believes Sinha. He expects the trend to stay for at least 12-18 months and there is no reason to panic just yet.

But, with every high that the market makes hereon, fund managers are likely to book some profit, as seen in recent past. “The kind of profit booking we saw today is expected to happen every time a new high is touched,” said a CIO of a fund house. This is a good cue for investors too, to periodically book profit.

Stocks from the cyclicals and industrials segments such as metals, engineering companies and oil and gas and prominent names such Tata Motors, Vodafone Idea, Sun Pharmaceutical, and real estate companies which didn’t find mention in the previous rally are expected to be the front-line gainers according to experts. “We saw this theme play out post the dot-com bubble and in 2007-08 and its again playing out now,” says Sinha. His advice is to go with the flow, while also keeping an eye on the fundamentals.