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50,000 to 60,000 in 8 months: what is behind the Sensex rally and is it sustainable?

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Indian stock markets are on fire, offering massive returns to investors during a pandemic year. Sensex and Nifty both set records – the former broke the 60,000 mark for the first time on Friday.

It took just over 31 years for the 30-stock index to drop from the 1,000 level to 60,048.47 at the close of trade on Friday.

This year alone, the Sensex has jumped 10,000 in about eight months – it crossed the 50,000 mark on January 21, 2021 and 60,000 on September 24.

“Sensex reaching 60,000 for the first time on September 24, 2021 is an indicator of India’s growth potential, as well as how India is emerging as a global leader during the Covid period, in addition global monetary expansion and relaxed fiscal policies adopted by world powers, “said Ashishkumar Chauhan, MD and CEO of Bombay Stock Exchange (BSE), commonly known as Sensex.

The BSE benchmark has gained 25.75 percent so far this year.

The sectors that pulled the rally

An analysis of sector indices shows that the rally from 50,000 to 60,000 has been widely generalized. Eleven puts on 19 sector indices grew by more than 25% during February 3 and September 24. Only the auto index showed negative growth during this period, as local lockdowns and the global chip shortage hampered production schedules for vehicles and major automotive units. Indexes representing stocks of metals, basic materials and real estate companies gained the most during this period.

Is this rally sustainable?

A look at one of the most basic indicators of stock performance, price versus earnings or multiples of PE, suggests that the stock market may be overvalued. The PE multiple measures the price of a share in relation to earnings per share. Multiple PE for Sensex in the current year at 31.43, the highest since 1998-99. Further recovery might depend on second quarter corporate profits, as these would be compared to the higher profits (due to the big fear cost cutting) they announced last year.

The market capitalization of BSE-listed companies has also skyrocketed and currently stands at 2 61 18 539.92 crores.

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