Sensex touching 50,000 was not a question of 'whether' but 'when'

The number 50 has a lot of significance. Hitting the age of 50 is an important landmark in everyone’s life. Fifty weeks of run was the dream of every movie producer and actor till OTT platforms took over. A golden wedding anniversary confirms how successful a marriage has been…… and so on. Similarly, Sensex touching 50,000 was not a question of ‘whether’ – but ‘when’? Just about 10 months back on March 23 we were staring at 25,000 and nobody’s wildest projections would have indicated 50,000 so soon as indicated in my earlier article – Expect the Unexpected in stock markets.

However, an analyst always looks for data and logic despite the fact that the markets have a mind of their own. And that’s currently driven by cheap liquidity with FIIs and over-confident Robinhood investors whose numbers have now soared to more than 10 mn. Markets are extremely stretched with market cap exceeding 115% of GDP with an expensive PE Ratio of 40x. Fiscal Deficit could show record divergence from the budgeted figures. RBI governor’s warning that gross NPAs in the banking system can shoot up to 14.8% by September 2021 doesn’t seem to deter investors. Maruti, the auto sector leader having more than 50% market share, has stated that recent buying was more of latent and festive demand which may not continue for too long. Despite this, auto sector continues to boom.

Looking at the macro number, GST seems to be among the few data points which are encouraging. It could be a result of better compliance. The direct tax collections have been lower, divestment has been abysmal despite booming markets and the surging oil prices have put a cork on further milking of the retail petroleum sector. Additionally, the stimulus package and now the vaccination drive will further put pressure on government finances. With the Budget looming around the corner, the finance minister wouldn’t be left with much choice but to increase collection sources. A Covid-surcharge though may be dubbed temporary and seems to be a foregone conclusion. The other possibilities could be estate duty and higher import duty on various products to encourage Atmanirbhar Bharat.

What intrigues me in this market are the Robinhood investors – which have now soared to more than 10mn. What’s going on in their minds? Most of them have made profits they wouldn’t have ever imagined, encouraging them to further invest in search of easy money. And we have a wide range of such investors, right from retirees, housewives, students, unemployed, employed, but part time investors, entrepreneurs, shopkeepers etc. I am sure by now many of them would have breached prudent capital allocation norms with most of the weightage tilted towards equities, mostly speculation. The most common logic for buying stocks is “accha lagtaa hai”, or “looks good”. Although all of them are earning well, it’s an apt state of “disguised unemployment”. So I wonder what is their contribution towards the real growth of India. Las Vegas too contributes to the US Economy, but tourism forms a decent part of that.

Having been in the markets for more than 35 years, and having experienced number of such boom and bust cycles, I sincerely believe we are in a bubble zone and that this euphoria too will end. When can it end is a billion dollar question, since the bubble can grow bigger before bursting.  A prudent investor, is one who has control over this thoughts and expectations. One should decide how much is enough and most importantly not regret moving out. The most difficult task for the investor in the current scenario is to sell his investments and stay in cash as the itch to reinvest is very strong. And it’s important to have a Plan B to keep oneself occupied as good times may not last long….

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Ambareesh Baliga is an independent market analyst. Views are his own.