The year 2021 has brought some respite to the Bears after an unimaginable rally witnessed in the frontline indices during the latter half of 2020, succored by buoyant FII flows and stupendous liquidity infusion into the financial system. Nifty ended almost 5 per cent lower in the week gone by ahead of the Union Budget.
But, for this article let’s move backward in time to revisit the rally of Sensex. There’s something interesting coming up. Hold on!!!
Corporate earnings are the driving force behind stock prices – This STOCK MARKET LEGACY holds true even today and probably will, for years to come. Even for indices, it is the cumulative earnings of all the companies that drives the index higher over time.
Unfortunately, this time it’s different. With Sensex touching the golden mark of 50,000, let’s break down this journey into intervals of 10,000 and see why is it so.
The journey from 10K to 30K was backed by solid fundamentals in terms of sales and profit growth of the index constituents, helping the index gain 100 per cent and 50 per cent, respectively during both the periods. However, from 30K onwards (beginning mid-2017) things changed dramatically. The correlation between underlying earnings and price gains weakened considerably. A gain of 33 per cent and 25 per cent in the index was backed by a growth of (2) per cent and 3 per cent respectively.
So, what changed? Why such a disconnect between the two?
Well, a couple of factors came in play during this period: –
Firstly, India’s economy had already started to weaken when markets hit 30K, dampening earnings growth by a great deal.
Secondly, the last leg of the journey was witnessed at a time when the Covid pandemic brought economic activity to a complete standstill owing to nationwide lockdowns. Indian businesses faced the brunt of this, with bottom line of majority of companies getting wiped off and some even posting record losses.
To conclude, Indian markets have been rallying on hopes of revival in corporate earnings and quick economic recovery, shades of which are visible going by the current earnings season that has been strong, with a clear revival in demand across sectors. Having said that, the Union Budget will also have a role to play in sustenance of this demand as a lot hinges on the same.