Why Is The Sensex At Record Highs When The Economy Is Slowing?

On Friday, the Sensex ended with another new record, doing so for the fourth consecutive day. For majority of the days in the trading week, the Sensex ended with a new record.

It's really baffling at a time when the economy is stuttering and the GDP grew at just 4.5 per cent for the quarter ending Sept 2019. The 4.5 per cent GDP was the slowest pace of growth witnessed in the last 6-years.

Why is the Sensex and the Nifty hitting record highs?

One of the prime reasons for the rally is liquidity. When one is flush with funds, they need to invest. Mutual funds are getting a steady stream of inflows through SIPs, while global liquidity has pushed Foreign Portfolio Investors into buying stocks in India.

This month Foreign Portfolio Investors have net bought into Indian stocks to the tune of Rs 1163 crores, while domestic institutions have net bought to the tune of Rs 500 crores. While this is not a big sum, the real reason for the uptrend is buying in heavyweights.

A few stocks like HDFC, HDFC Bank, Reliance and ICICI Bank together have a weightage of 40 per cent in the Sensex. So, if these 4 stocks move higher it tends to move the index. In the last few months this is exactly what has happened. HDFC, HDFC Bank, ICICI Bank and Reliance Industries are at record highs, pushing the Sensex higher.

In fact, the other stocks have barely moved. The broader markets are languishing. Some of the companies that have good dividend yields like ONGC and GAIL are trading at near 52-week lows and way below their historic price to earnings multiples.

Another factor that is driving the Indian markets is the record closings in the US. The S&P 500 saw a rally for four straight weeks and the S&P 500 hit a record high on Friday, following a record closing on Thursday. It is unlikely that the party would end, given the trade tariff agreement between the US and China.

The Sensex is likely to follow global markets higher, despite weak economic data. It seems this global risk-on would continue for sometime at least.