Sensex journey from 21k to 21k

Sensex, the so called barometer of Indian economy, touched 21000 again on 24th Oct 2013 after almost 3 years gap but why the street doesn't seems to be cheering at all? The reason is that Sensex is not the true barometer of Indian economy as it comprises only 30 large Indian companies. 

SMEs are a major part of our economy and they are in terrible state today due to high inflation, low demand and policy uncertainties  Indian economy is in far terrible state than it was during Nov 2010 when sensex was last seen at 21000. INR is at 61.50 today while it was 44.50 three years ago. Fiscal deficit and current account deficit was in far better shape than it is today. 

Sensex 2013 PE valuation near historical bottom

Historically India's benchmark Index, SENSEX, has bottomed out at a PE valuation of 10 to 12 times. At the current index level of around 16,500 and an estimated EPS of 1250 for the financial year 2013, the index is trading at a PE multiple of around 13 times FY 13 earnings. Above that considering the appreciation of dollar against rupee, the valuation in dollar terms is already around 11 times if we assume an average dollar rate of 48 against INR.

Sensex, Nifty gained for seventh straight week

Key benchmark indices gained for the seventh straight week to scale highest closing level in 28 weeks as latest government data showed that inflation in January eased to a 26-month low. Nifty continues to form higher highs throughout the week and finally closed above 5550 levels. 

Foreign institutional investors (FIIs) pumped in another 3500 crores during last week taking total for 2012 to 24,100 crores (till February), as per provisional data from the stock exchanges. The BSE benchmark Sensex was up by 540.70 points or 3.05% for the week to settle at 18289.35 levels. The NSE flagship Nifty ended at 5564.30 levels, up by 182.70 points or 3.40%. 

GAIL enters SENSEX, replaces Jaiprakash Associate

Gas Authority of India Limited (GAIL), India largest gas distribution company, will replace Jaiprakash Associate in SENSEX, the 30 stock benchmark index of BSE, from 9th Dec 2011.

JP Associate has been a significant under performer since past 1 year and has lost significant market capitalization, which has compelled it to be moved out of the India's most tracked index.

At the current market price of Rs.60 the market value of JP Associate stands at Rs. 12,900 crores.

GAIL on the other hand has the current market capitalization of Rs. 48,700 crores, almost four times the size of JP Associate. 

Indian Stock Markets: Weekly Review

Both SENSEX and NIFTY witnessed seesaw movement during last week trade. It started the week on a positive note but the global equities tumbled during the second half of the week after US Federal Reserve gloomy outlook on the US economy. A sharp fall in rupee (which signaled huge outflow of money) resulted in a bloodbath on Indian equities on Thursday, as Global sell-off triggered the biggest percentage fall since August 2009.  

What is BSE SENSEX and How it is calculated?

What is SENSEX?

The SENSEX is an index / portfolio of 30 stocks of large, well-established and financially sound companies listed on Bombay Stock Exchange in India. It is the short form of SENsitive INdex. It is the oldest index in India and is widely used to measure the performance of the Indian stock markets.  

Indian Stock Markets Weekly Review

SENSEX and NIFTY traded choppy with high volatility during last week (16th Sep 2011) trade and has closed the week on a flat note on weekly basis.

Nifty started the week with a gap down action below 5000 levels but has managed to hold on to the 4900 support despite all the volatility. Nifty bounced back during the mid of the week and tested the short term resistance area of 5150 on Friday's trade. 

Indian Stock Markets staged smart recovery

The stock markets in India closed with handsome gains in today's session after trading with deep losses in the morning. Sensex recovered more than 300 points from the low point of the day. Positive opening of Europe provided triggers to the markets and the rally was mostly driven by interest rate sensitive sectors like realty, banking and auto.

IT also closed with significant gains and oil & gas and consumer durables, too, provided support to the indices. Capital goods and FMCG were the only two sectors that closed negative.  

SENSEX up 1000 points in 3 days

Indian Stock market showing initial signs of weakness

Indian stock markets have started showing some weaknesses on the back drop of FII outflow. Both SENSEX and NIFTY are down close to 2% in early trades today. The reason seems to be obvious. The rupee has depriciated by 2% in last 3 days and the SENSEX and NIFTY are down almost 4 % from the recent peak. So all in all there is a loss of 6% for FIIs in dollar terms. Since in short to medium term the direction of rupee seems to be downward, they might be worrying about further losses on currency side and that is why taking some money of the table before the majority of the gains get wiped out.

But this correction is healty as Mutual funds and Retail Investors have been out from the market and were waiting for corrections to get in. One should not panic by the volatile movement of the SENSEX and NIFTY and stay calm. A 5% correction from the current levels of 20000 SENSEX should provide good entry point for investors. However one should still follow bottom up approach of stock selection and buy where the business outlook is good and valuation is reasonable.

SENSEX in 2007 vs SENSEX in 2010

There is lot of skepticism and fear among the people on the street. The crash of 2008 has left an impression on investors which is horrific and tough to forget. But where would people invest if not equities. People who remain hibernated till today have the leftover feeling now and trying to renter the market, but market this time is not obliging them. Most of the falls that are happenning are very shallow and tough to time it. This time the market is diametrically opposite to what it was in 2008.

The biggest difference is that the valuation that the sensex was trading at 20000 in 2008 was close to 25 times, whereas this time when sensex is at 20000 it is trading at a comfortable valuation of less than 20 times its estimated earnings.

The other noticable difference is the fear and skepticism prevailing in the market today. In 2008 there were wide spread optimism and everyone who was in the market was making money without any effort. I myself know many people who left their job as they were making much more money in the markets then their job, and they were new investors. I was myself making lot of money and started thinking that all the investing principles I have learnt are so easy to apply and forgot the basic principle that success without effort & experience is a house build of cards and would collapse even with a slight headwind. And that is what exactly happened. Subprime crisis came in just when we were at bubble kind of valuation and when no body was expecting such blowout news. People panicked and pressed the exit button. Then the situation was similar to the situation of a stampede in a temple full of crowd. There was blood bath every where. But things are different this time around. People are well prepared for any catastrophic news, hedged and under invested.
99% of the people have not been able to participate in the rally from 8000 to 20000. they are now waiting for a chance to get in and that is why every dip is being bought immediately.

Third is the the small & midc cap stocks valuation. In 2007 there were hardly any good quality midcaps available at less than 10 times PE multiples. But today even when SENSEX is at 20000 there are many good quality midcaps available at less than 10 times PE multiple. This also signifies that retail participation is not there which is usually responsible for creating panic like situation in 10-20% fall.

All these factors would prevent a major correction in the markets and every dip would be bought by the new investors. 10 to 20% fall is possible in any kind of market but a crash seems to be not happening in near future. It seems from the market movement that it will spend sometime near 20000 and would slowly move up. The mid caps and small caps would eventually catch up and would outperform the large caps over the next 1 year.

So the best approach now would be to selectively look for quality stock available at cheap valuations and avoid investing in hot stocks available at rediculous valuations.