Sensex reaches 20,000 – where is gravity ?

Sensex reached 20000 yesterday (29 October). Only a few weeks ago, we were cheering while being sceptical of the 17000 level ! The following factors seem to have driven the market to this new all time high:

• FII (Foreign Institutional Investors) have 18 months to unwind their participatory note (PN) positions. This has led to many of them staying in the market and not withdrawing in a deluge as was thought
• Domestic Institutional Investors (DII) seem to have got into the buying act this time around
• Corporate earnings continue to be strong
• Sensex PE ratio on a six month forward basis is around 21 times and on a 12 month forward basis is around 19 times. Bulls continue to feel that these are acceptable numbers given runaway valuations in China and expected economic and corporate growth in India. In fact, the famous Indian investor Rakesh Jhunjhunwala who is bullish for the longer term, has expressed little surprise at Sensex reaching this summit.

India market cap is at $ 1.55 trillion while China is at $ 3.6 trillion. This now makes India no. 9 in terms of global market capitalization rankings. This market is now one of the top wealth creators in the world: Sensex has returned 60%+ on a year to date basis. Only China is way ahead at 200% +. While we should rejoice at such wealth creation during the festive Diwali season, some pundits suggest caution. They highlight that:

• 60%+ of the 991 point rise in Sensex between October 15th and 29th has been driven by three stocks: Larsen and Toubro (gained by 25% in this period !), ICICI Bank and Reliance Industries
• If you add the next three top gainers i.e. HDFC, Tata Steel and HDFC Bank, you can account for 80% of the recent rise in Sensex
• Bharti Airtel, Infosys and Reliance Energy, who were the drivers of another recent rally, declined by 213.13 points in this period
• FII may unwind as they get closer to the 18 month deadline. Question remains on who would take up the slack in such a case.

Given the meteoric rise of the Sensex, retail investors seem to be jumping in so as to not miss the action. Do remember though, a retreat of Sensex from 20000 to 19000 would mean a drop in value of 5%, if your portfolio mirrors the index. A 20% drop in value would need the Sensex to be closer to 16,000. This comes back to what you are willing to lose – if 20% is your tolerance, your ability to bet on this rising tide would be that much higher.