Quick Take

Sensex all-time high at odds with macro-reality

| Updated on October 31, 2019

Sensex, Nifty 50 gains do not reflect the indifferent performance of corporates. Optimism over recent policy moves too does not explain the high valuations

The extended Diwali celebrations in the stock market with the Sensex moving past its previous life-time high of 40,308.9, once again raises the question, does the stock market really mirror the economy? Even as growth hit a multi-year low in the June quarter this year, led by a crash in consumption, the market barometer seems to imply that things have never been better.

What is more, the Sensex and the Nifty 50, have also been unable to reflect the true state of affairs in the entire universe of listed stocks. A BusinessLine analysis shows that even as more than 80 per cent of the listed stock has recorded losses over the last one year period, the top 10 companies recorded 17 per cent gain between January 2018 and September 2019. These narrow set of stocks have skewed the performance of the frontline indices.

The stock price returns of these larger stocks are also largely led by greater demand from the EPFO, that is mandated to invest in only the largest stocks, and systematic investment in large-cap mutual funds. It is therefore not surprising that performance of the market benchmarks is far removed from the economic reality.

The fundamentals of the stocks, however, do reflect the stress in the economy. The Q2 earnings season so far has not been too good. There is pressure on revenue growth as falling demand and lower inflation has been deflating realisations. September quarter results declared by 480 companies shows that revenue growth was just 2 per cent compared to the similar period in 2018. Operating profit has declined 8 per cent due to higher input costs and lack of pricing power. The reduction in corporate profit has however helped boost the bottomline of many companies; tax payment has declined 10 per cent for companies that have declared results so far.

Few behemoths in the Sensex -- such as Tata Motors, which has managed to turnaround its overseas operations in the September quarter; SBI which reported significant improvement in core net income; and Reliance Industries -- have managed to buoy the sentiment and lift the Sensex and the Nifty 50.

There could be a few silver linings that the market participants are clinging to. The Centre’s measures to boost credit availability have helped sales in some consumer-facing industries. Few banks have also reported improved asset quality. The Centre is trying to boost capital expenditure, which can have a cascading impact on demand. But with the Nifty 50 currently trading at a price-earning multiple of 27 times, much of the good news could be already be built into valuations. It would therefore be more prudent to watch further data points before buying into such optimism.

Published on October 31, 2019

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