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Sensex hits 50,000: Take bottom-up approach to investing

The reopening of the economy led to better than anticipated recovery in consumption led by strong pent-up demand followed by the festive season. Most high-frequency indicators indicated that the economic recovery is well on track

Ajit Mishra | January 23, 2021 | Updated 16:11 IST
Sensex hits 50,000: Take bottom-up approach to investing  

The journey to 50,000 for the Sensex has been a pleasantly surprising one for the participants. It was extremely hard to imagine this rally initially, considering that the world was hit by a pandemic and the governments were forced to impose harsh restrictions. Not only lives were lost but economic activity came to a standstill that led to a sharp contraction in the economies worldwide including India. The whole world was waiting for the COVID cases to peak out and the governments globally started to focus on easing restrictions as soon as they noticed the COVID graph showing a decline. Further, to control the damage, the support provided by governments and central banks has been unprecedented as they announced several measures including the stimulus package, liquidity and credit support. Moreover, interest rates were cut globally to support credit growth. All these factors coupled with easing restrictions led to a resumption of economic activities and thereby revival in the demand. Soon, the global stock markets started pricing in the economic recovery. The commentary of central banks to keep interest rates low, aided sentiments as equity as an asset class tends to do well during low-interest rates scenario. Further, the announcement of vaccine roll-out and decisive US election results were also key positives for the markets.

After witnessing one of the strictest lockdowns, the Indian government worked relentlessly towards reopening the economy to protect livelihood. At the same time, they never compromised on the safety aspects and rolled out strong guidelines to minimise the risk of another wave of infection. The government unveiled a massive package of Rs. 20 lakh crore to get the economy back on track. While very little was done in providing direct cash transfers in the hands of people, the major part of it was focused on providing liquidity and credit support to businesses. The RBI too announced several measures including rate cuts and providing adequate liquidity and ensuring financial stability.

The reopening of the economy led to better than anticipated recovery in consumption led by strong pent-up demand followed by the festive season. Most high-frequency indicators indicated that the economic recovery is well on track. Not only did the better than expected recovery was cheered by the markets, the US election results also favoured emerging markets like India. The Indian equities witnessed massive inflows from Foreign Institutional Investors (FIIs) post the election results.

Amid all, there was uncertainty around the corporate earnings due to strict lockdown across the nation however companies turned out to be far more resilient and agile than they were perceived to be as strong control over costs restricted the decline in profits/ reduced losses. The on-going recovery in the economy has raised hopes of earnings soon picking up the pace and returning to healthy growth momentum.

Lastly, the Budget is just around the corner and investors' expectations are high this time. Though we've started seeing green shoots of the economic recovery, it's still a long way to go, to attain the pre-COVID growth rate. It is widely expected that despite facing fiscal pressures, the government would continue on its expansionary fiscal policy to promote growth. The focus would be to increase spending in priority sectors like infrastructure, rural, healthcare and manufacturing.

To sum it up, the on-going market rally has been stupendously supported by overwhelming liquidity worldwide, low-interest rates, vaccine roll-out and better than expected economic recovery. And, while we may not see a similar momentum in 2021, participants will continue to find investment opportunities. We suggest maintaining a "bottom-up" investing approach in the present scenario and accumulating quality stocks on dips during the corrective phases with a long-term investment horizon.

(The author is VP Research at Religare Broking)

Also read: BT MindRush 2021: FPI inflows, corporate earnings driving up market, says IIFL Chairman Nirmal Jain

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