Shedding Light on SENSEX Reaching 50,000 Landmark During Covid Slowdown
Q. What has happened?
Sensex has leaped from 40,000 to 50,000 in only 415 trading sessions, making it the fastest rally by the index to cover 10,000 points. It reached the historic landmark of 50,000 for the first time on 21 January 2021.
Q. What is the SENSEX?
BSE SENSEX (Bombay Stock Exchange SENSitive IndEX) or SENSEX represents the basket of 30 largest and most traded stocks on the BSE. It was launched in 1986 and is the oldest index in the country. It provides the time series data from 1979 onwards. It is calculated by the “Free-float Market Capitalization” methodology. It is widely used by investors and analysts to gauge the state of the Indian economy and is thus known as the Pulse of the Indian Stock Market.
Q. What is the difference between SENSEX and NIFTY?
NIFTY of NSE (National Stock Exchange) and Sensex of BSE are the flagship and most popular indices of the stock market in India.
- It is a basket of 30 most traded stocks of the largest companies of over 20 different sectors on the Bombay Stock Exchange. It was launched by BSE in 1986, located in Mumbai.
- The index is calculated on the basis of free-float market capitalization, which is calculated by multiplying the weighted average of some shares held by the government and the promoters of the company with the weighted average price. The base year is 1978-79, and the index value is 100. Free float market capitalization refers to the proportion of shares issued by a public company, which are actively traded in the stock market.
- National Fifty abbreviated as NIFTY is a basket of the 50 largest companies in more than 20 sectors that are traded by the public on the National Stock Exchange. It was launched by NSE in 1995, located in New Delhi, and is owned by India Index Services and Products (IISL) – a joint venture between CRISIL (Credit Rating and Information Services of India Limited) and NSE.
- It is calculated by taking the weighted average market capitalization of 50 companies on the basis of which the weights are assigned to each company. The base year is 1995 for which the index value is 1000. Market Capitalization means the aggregate market value of the company calculated by multiplying the total number of outstanding shares with the current market price per share.
Q. Are SENSEX and NIFTY Barometers of the Indian Economy?
Movement of SENSEX or NIFTY indicates if the prices of shares listed on the stock exchange are going up or down as a whole. Hence, a Barometer in this context means an instrument that measures the performance of the economy.
As globalisation of India’s largest companies is a continuing process, SENSEX or NIFTY can no longer be taken as the barometer of the Indian economy. This is because SENSEX captures the performance of just 30 companies and NIFTY captures for 50. While the Indian economy has more than 48 million Small and Medium Enterprises, which are not directly represented by these indices.
SENSEX (or any other index reflecting stock market performance) is a good indicator of the performance of the economy. However, it can never be, or at least should never be taken as a barometer of the Indian economy. The movement in share prices reflects “market sentiments” of investors. It is what the investors think that is reflected in the share price movements. In a way that is an opinion of the market on the expectations about the future performance of companies listed on the stock exchange.
Movements in share prices can always indicate economic health but never measure it. Measurement of the health of an economy should always be left to key macro-economic indicators like GDP, Employment Indicators, Inflation, etc.
Barometers that measure consumer behaviour include housing sales, consumer spending and durable goods sales. These barometers can be followed closely because consumer spending represents approximately 70% of the nation’s GDP and the earliest signals of the shift in the economic landscape are often indicated first by changes in consumer behaviour.
Q. What was the impact of COVID on the market and economy?
From witnessing gigantic losses to record gains, investors went on a roller coaster amid the Coronavirus pandemic and massive stimulus measures in 2020.
- The coronavirus pandemic forced the government to announce a nationwide lockdown to curb its spread. As the number of cases rose, massive global sell-off led to a steep decline in the stock market.
- However, markets staged a massive comeback and jumped nearly 91 per cent in just over 10 months to breach the 50000 mark.
- Ironically, the stock market has seen more gains than losses in the post covid lockdown phase.
- Since recovering from its record slump, SENSEX has been reaching new highs, thereby making investors richer with every peak and deepening their market participation.
Q. How was this feat achieved even during the COVID slowdown?
The rally in Indian and global stock markets has been triggered by the massive liquidity injection by the central banks. This ultra-loose monetary policy of massive cash and credit inflow and historically low-interest rates is the response to the severe recession caused by the pandemic.
- An ‘investment trends monitor’ issued by the United Nations Conference on Trade and Development (UNCTAD) finds that global Foreign Direct Investment (FDI) collapsed by 42% in 2020 to an estimated $859 billion from $1.5 trillion in 2019. Such a low level was last seen in the 1990s and is more than 30% below the investment low witnessed after the 2008-2009 global financial crisis. India attracted record numbers of deals in information consulting and digital sectors, including e-commerce platforms, data processing services and digital payments in 2020.
- Positive global cues: After Joe Biden took charge as the US president, he laid out a $1.9 trillion stimulus package proposal to boost the US economy and speed up distribution of coronavirus vaccines in the US.
- Reliance-Future deal: Reliance shares are trading almost 3% higher after the market regulator SEBI gave approval to its deal with Future Group to acquire retail assets worth Rs 24,713 crore.
- Positive Corporate earnings: Indian shares have got a fresh boost during the third-quarter earnings season. Many companies including major IT firms have posted positive earnings and their valuations have also increased significantly.
- Budget 2021 optimism: The fact that stock markets have touched a record high ahead of the Union Budget 2021 could be due to over-optimistic expectations.
SENSEX has soared record highs riding on positive global and domestic cues like:
- IMF’s upward growth projection for Indian GDP from 8.8% to 11.5% in FY22 and faster recovery of global economic growth at 5.5% in 2021 after contracting 3.5% in 2020
- Successful rollout of Coronavirus vaccine around the world
- Peaceful transition of Presidency in US
- Splendid stock market run of Indian IT firms
However, India and the world will take more time to recover from the shock induced by the Coronavirus. Thousands of jobs have been lost and businesses disrupted due to lockdown restrictions. So, this record milestone should be tempered with cautious optimism so that a more realistic situation of the economy can be deciphered. Solid macro-economic indicators consumer behaviour indicators are better representative of the current state of the economy.
Researched and written by Shyam Agrawal and Subhav Duggal, Team ulaunch