Sensex @50,000 : Know the reasons behind Sensex Bubble!
World economies are shrinking.
India is expecting a disastrous GDP fall of 7.7%.
Yet the stock market is rallying to give 100% returns with a P/E of 39.
Is this a bubble going to burst so soon or last some time?
Watch the video to know everything about the Sensex Bubble!!
Recently Sensex hit the 50000 mark. Surprised?? But it's a shock for the RBI. Why?
While the entire world is going on recession, including India. Indian stock markets are pacing its face to the sky. What are the probable reasons behind the sensex bubble? Which sectors took part in this Bubble? Does the US Federal government have anything to do with this?
Let’s know everything behind this Sensex Bubble.
Generally Countries GDP and Stock markets go hand in hand, but the scenario is changing from FY 2019 to FY 2020.
If we talk about the GDP growth, For FY2010, it was 10.26% and it fell to 6% for the FY 2012-2013, It again raised to 8% for the FY 2015-2016 and then fell to 4.2% in the FY 2020. If we look at the estimations for FY 2021, it is -7.7%.
See, how Indian GDP is struggling to keep up the pace to be stable and on the other side, BSE 500 companies have already recovered the 2 year profits and if we talk about the Net sales or Revenue, the companies still unable to recover.
Some Companies were already struggling and facing slowdown from FY 2019, but Covid 19 pandemic, added fuel to those and made the companies unable to make good revenues.
If you look at this graph, companies still did not recover the revenues but the share prices are facing the sky.
If we look at the different sectors, the Automobile, Health and IT sectors are already recovered but Realty, Capital Goods, Oil and Gas sectors are at the worst conditions. And In Fact, most of the sectors are still facing problems.
See the economy and the companies are not performing well but why is the share prices on rise then?
The first reason is due to Covid 19 pandemic, all the businesses in the US are facing a slowdown and to recover this, the US govt decided to reduce the interest rates nearly to 0%, so that companies can borrow the money for low interest rates that helps to expand the businesses.
So, when interest rates are reduced, interest rates of the bonds are also going to reduce, and as bond rates and interest rates are reduced, institutional investors turn to the stock market to invest.
FIIs in Indian stock market
In march 2020, FII withdrawal touched 62000 Crore while from March FIIs started to invest in Indian Stock Market and the reason is reduced interest rates by the US government.
And the second reason is the participation of retail investors, people being out of jobs due to covid and the recent popular web series ‘Scam 1992 made them take a look at the stock market and grabbed all their attention.
The other important reason is RBI infused so much money into the financial system through various measures and ensured the reducing interest rates on bank deposits.
And it also reduces the burden of interest cost of corporates on their loans to borrow and expand their business.
Reducing interest rates also ensures that people are going to borrow the money from the banks and spend on economic activities.
While drop in interest rates gave a boost to few categories it literally hurts some people who depended most on deposits and made them to search for the sources that give more returns and the other best alternative is definitely ‘The Stock Market’, thus gearing up stock prices to the sky.
Apart from these reasons, this year so many IPOs came to the market that brought so many retail investors to the stock market.
Growth of Demat accounts
In the FY 2015, the no. of demat accounts opened are 15 Lakh and in FY 2018 and FY 2020, it came to 40 Lakh and 49 Lakh respectively.
In April to September of FY 2020 alone, 63 Lakh demat accounts were opened and in the same period of FY 2019, the number was 27 Lakh.
And this situation is the same with the world markets, you can call it a global bubble.
You can observe the PE ratios of world stock markets index from the following table
The PE ratio of Brazil index - BOVESPA, was at 10 which is now at 35.
For S&P 500, it was at 18, 2 years ago and now it is 35.
It is the same with the Nasdaq, it came to 40 which is at 19, 2 years ago.
Negative effects of the Sensex Bubble :
If we take a look at the previous stock market bubble i.e 2007 stock market bubble, it took 7 years to reach the top value of Sensex that is in 2007.
And to reach the value that was achieved at the dot.com bubble, it took 15 years for the Nasdaq composite, US IT Index.
And Chinese stock market index, SSE is still unable to catch up the value that was achieved in the 2007 bubble.
The point is, if anyone invests in this scenario of Sensex Bubble, it is very difficult to recover the investment and also takes a huge amount of time. It does not mean that Indian stock markets do not go to the highest value that it has now, but it is not possible to touch this value in the near time.
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