The Sensex this week hit a record 32,000 points and the Nifty is just shy of a staggering 10,000 points. Investors are asking one simple question: Why are the markets rallying? The answer is simple - "liquidity".
Why markets are going higher?
For years, investment experts have been saying that the investment into Indian stock markets in total household savings is one of the lowest compared to many Asian and developed economies. When this money starts moving away from gold and real estate, we could see a long lasting rally. It seems that is finally happening as interest rates are awful and gold as an investment has performed dismally in the last few years. Money is now finding its way into equity mutual funds and through direct investor participation.
Major drivers behind the rally
Just take a look at the buying from domestic institutions, including mutual funds. You hardly see a single day when they are selling, such is the heavy flow into mutual funds, that they have little choice but pump money into the stock markets. Some estimates put the SIP inflows at a staggering Rs 10,000 crores each month. A fund manager to an extent has to deploy the money into equities, if it is an equity dedicated fund. How long can he sit on cash? Interest rates are falling, real estate still looks messy and gold has given negative returns of 15 per cent in the last one year. Your choices are limited and though stock market valuations look stretched they are going to go even higher.
How long is the rallying going to last?
It is difficult to say, but, for markets to fall sharply, there has to be some serious liquidity pullback. Even if there is any meaningful drop, it could be quickly bought into, thus supporting the markets. At 3,2,000 points, the Sensex p/e is at a heavy premium to long term average. This means stock prices are clearly over stretched. At the moment there are no negative cues for the markets and it is difficult to see why stock prices could fall. However, one has to be cautious and it does not take time for the tide to turn.
What to buy after the rally to 32,000 points?
If one is betting one can still bet on stocks that give decent dividend yields. There is still some value in the government owned company space, where stocks like HPCL, BPCL, Indian Oil and NMDC can still give you decent dividends ranging from 5 to 9 per cent. Dividends upto Rs 10 lakhs is tax free in the hands of investors. So, this is not a bad bet at all. There is hardly any value that can be found elsewhere.