May 26, 2020
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The Beast Has Brains

Everyone's got a theory on the zooming Sensex. And if it has a mind of its own....

The Beast Has Brains
There's always a deep-rooted logic to explain the seemingly irrational behaviour of stockmarkets. In the end, it's a volatile mix of sound sentiments and abundant absurdities that drive such states of euphoria. With apologies to Mark Twain, most market movers first get the facts, and then distort some of them to justify the rise or fall in stock prices. This fundamental truth is also applicable to the almost non-stop bull run in India, where the BSE index, the Sensex, has almost trebled to 13000 points since the UPA government assumed power in May '04.

Early this year, the Sensex surprised analysts and experts by crossing the psychological 10000 points barrier. Immediately, the smart operators who had been predicting a "sharp correction" for some time came out with their reasoning. They said that apart from the fundamentals of the economy and encouraging corporate results it was the liquidity surplus, or huge sums available with foreign and domestic investors, which was pushing up prices. That's why, they reasoned, almost every scrip was going up. Abhay Aima, head of equity, HDFC, felt it was a market being "driven by momentum".

A long-awaited correction in May this year halted the run and the Sensex crashed by over 3600 points to nearly 9000 within a month. Yet again, the experts predicted that the Sensex is going to be "range-bound", or move within a certain fixed band, for the rest of the year. They said that liquidity was drying, stock valuations in India and other emerging markets were too high, the US interest rates had gone up, and most central banks were trying to check skyrocketing asset prices. Therefore, there were no immediate factors to prompt another bull run.

Surprise, surprise! The Sensex shot up to 13000 points within months. Lo and behold, there was yet another explanation in the offing. Experts now said that the current market was different from the earlier one in 2005. This time, the main drivers were maturity, rationality and objectivity. Says Rajiv Thakker, head of research, Parag Parikh Financial Advisory Services, "This is a much more normal market. Stocks are going up either due to fundamentals or maybe due to daily news. It is not a sentiments-driven market like before."

While stronger-than-expected corporate results in Q2 did propel stocks to unexpected highs, analysts contend that there's a growing divergence between the Sensex and sectoral indices, movement of the latter, and between individual stocks within the same sector. For instance, while sectoral indices like banking, capital goods and oil & gas have risen higher than the Sensex in the August-October period this year, others such as health and FMCG have shown a slower increase. Similarly, while some large caps have performed well, others haven't. Now that the expectations of witnessing unprecedented Sensex levels have settled down a bit due to higher valuations, cold reasoning seemed to have replaced the earlier ecstatic emotions.

"If you see from bottom up, it is sectors that had performed well and were undervalued that have gone up, including IT, banking, real estate and mid-cap cement stocks. To the extent that these are reflected in sectoral indices, the latter have risen too," explains Prateek Agarwal, head of equities, ABN Amro. He quickly adds that in the current market, "you have to identify sectors, buy and then hold. In this market, the key word is patience". Thakker feels that "as things get heated, the divergence in performance of sectors will show up". In the near future, he thinks retail and real estate stocks will cool down, but mid-cap IT firms may move up.

What's apparently aiding this "mature" trend is that institutional investors have become more cautious as they are unsure and slightly apprehensive about the markets. The current sensibility also stems from the fact that retail investors, who were earlier heavily-leveraged, have run away after the May correction. So the Sensex is being largely influenced by institutional investors, who are constantly looking for value, and the growing imbalances between valuations and performance. Hence, they are choosy and careful.

Now look at the Sensex behaviour from an "irrational" perspective, or through the eyes of those die-hard critics who feel there's little sense to market movements. They say that trading volumes have reduced considerably and, therefore, it's much easier for powerful institutional players to manipulate stock prices. Another factor is that investors now book part-profits on a regular basis and this leads to greater volatility in individual stocks. No one's willing to wait for the medium- or the long-term, as they don't know when the next correction will hit them.

But this is done with an intention to keep the Sensex up on most trading days. So specific stocks go up one day, come down the next, go up again on the third without any material changes in fundamentals or news that could have immediately impacted them. On days when such stocks fall, others prop up the index. Investors also juggle between sectors to ensure profit-taking without breaking the Sensex rise. Thus, two sectors, say banking and IT, pull up the Sensex one day; the next day they are down, but the index is lifted by auto, energy. The third day, banking and auto lead the Sensex rally, but IT and energy are down, and so on and so forth.

For instance, on October 27 this year, Reliance Communications shot up 4.5 per cent to Rs 384.70, and rose by another 2.3 per cent to Rs 393.55 on the next trading session (October 30). It slumped 3.7 per cent to Rs 378.95 on October 31—but nothing drastic had happened in those five days. Similarly, in the four trading days between August 16 and 21 this year, ONGC fell heavily by 4 per cent to Rs 797.30; during the same days, Maruti Udyog gained smartly by 3.4 per cent, negating or minimising the impact of the former on the Sensex. Two-and-a-half months later, between November 2-7, there was a role reversal as ONGC gained 2.1 per cent in four trading sessions, and Maruti fell substantially by 3.9 per cent.

So it's difficult to pinpoint what's powering the Sensex these days. It depends on who you put the question to: bull or bear, an optimist or pessimist. But there are enough reasons to believe that neither of them is completely correct. As one broker says, "There's a third reason to explain the current run. Maybe the Sensex has acquired a mind of its own."

By Saumya Roy and Alam Srinivas
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