What is Sensex? Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of the Bombay Stock Exchange (BSE) in India. Sensex is composed of 30 of the largest and most actively-traded stocks on the BSE, providing an accurate gauge of India’s economy. Initially compiled in 1986, the Sensex is the oldest stock index in India. Analysts and investors use the Sensex to observe the overall growth, development of particular industries, and booms and busts of the Indian economy. Both Sensex and Nifty are stock market index used to determine the value and strength of the stock market. Since Nifty is more diversified and has more stocks listed as compared to BSE, more trading is done on it. However, in reality, both target the large-cap stocks and performance over the years have turned out to be similar. Arithmetically Sensex is the weighted market capitalisation of the companies listed in Bombay stock exchange. Here is the example of how a stock index like Sensex is composed.
Let’s say there are two Companies A and B in the stock exchange and their market prices are Rs. 120 and Rs 140 and the number of shares the company has is 1 lakhs and 2 lakhs. So the market cap will be 120*1 + 140*2 = Rs 400 Lakhs which will be equivalent of 100 base points. What are Base Points? The total value of shares in the market at the time of index construction is assumed to be ‘100’ in terms of ‘points’. This is for the purpose of ease of calculation and to logically represent the change in terms of percentage. So, the next day, if the market capitalization moves up 10%, the index also moves 10% to 110. So let’s assume market value of 400 lakhs is today but tomorrow due to any reason if the stocks fluctuate either due to company’s performance or market pull or push (Demand & supply) the stock value changes. So going back to our example suppose tomorrow AB increases by 10% and arithmetically 120 + 10% = 132*1 + 140*2 = 412. So the sensex increases by (412-400)/400 *100 = 3. Tomorrow’s sensex will be 103 points. So as long as you have shares in BSE you might not have a direct impact but adverse pull or push in the Sensex will affect the economy.
BENEFITS FROM INCREASE IN SENSEX
Many in the middle class invest in the stock markets. For those of them, increase in Sensex often corresponds to a direct increase in their wealth. At least they care about Sensex and give that they are 1+ crore stock investors that are a big enough market for media to care about. When the stock investors ‘feel wealthy’ because the Sensex is moving up, they tend to spend more. This can cause multiplier effects in the economy. Wealth tends to spread around. When the companies see a good stock market and are able to raise a lot of money from the investors, they would hire more people and that would mean less unemployment. When the stock markets go good, there would be a lot of foreign money coming in and that would push up the rupee. That means your imported goods [from oil to machinery] will be cheaper. In short, more money, less unemployment and cheaper imported goods. What’s there not to like? Beyond that, there is a signalling benefit. When your body temperature changes drastically there is probably something going on inside you. In the same way, when the Sensex is going down, it is an indication of something deep happening in the economy. In short, the Sensex is a thermometer. Its readings could indicate bigger issues to come.
Sensex and Its Impact on Various Sectors
The next two years is likely to see Indian equity markets cross many peaks as both the global economy and Indian economy are seeing signs of coming out of a long slump post-2008 financial crisis. India’s political climate looks strong with the Modi led BJP government sweeping state polls in key states such as UP. Indian equity markets will start playing for 2019 re-election of the Modi Government at the Centre. The main driver of the benchmark indices the Sensex and the Nifty is the weighted average earnings growth for the companies in the respective indices. The Sensex is expected to reach levels of 40,000 offering an upside of 39% till the year 2019. The new portfolio is designed to capture the potential growth from the sectors that are expected to grow faster as compared to the benchmark indices of Sensex and Nifty. Sectors such as Consumer Durables, Automobiles, Microfinance, Financial Services, Aviation, Infrastructure, Telecom Infrastructure and Retail are expected to witness higher growth than other industries or sectors in terms of revenue and profit.
The business opportunity for each sector gives the rationale behind selecting these sectors over others for investment purpose in the new portfolio. The growth in terms of revenue and profitability for the selected sectors is explained below. RETAIL The retail industry in India is expected to grow to USD 1.3 trillion by 2020, registering a Compound Annual Growth Rate (CAGR) of 16.7% over 2015-20. The country is among the highest in the world in terms of per capita retail store availability. India’s retail sector is experiencing exponential growth, with retail development taking place not just in major cities and metros, but also in Tier-II and Tier-III cities. Healthy economic growth, changing demographic profile, increasing disposable incomes, urbanization, changing consumer tastes and preferences are the other factors driving growth in the organized retail market in India.
Automobiles and Consumer Durables
The 7th Pay Commission, higher rural income on government’s budget 2017-18 thrust on the rural economy are expected to prop up demand for Automobiles and Consumer Durables. The tax cut of 5% for individuals having income in the range of Rs 2.5 lakh to Rs 5 lakh would directly increase the buying power of middle-class consumers. This move is expected to give additional thrust to buy automobiles in the rural as well as the urban areas.
The allocation for Roads and highways has increased to Rs.649 billion for FY 2017-18 from the earlier FY 2016-17 allocation of Rs.524.47 billion. The increase in allocation for the infrastructure sector would mean that companies in the public-private partnership space would receive more orders from the Government. Companies that build roads and highways would be big beneficiaries as an increase in their order book would eventually translate into higher revenues and profitability for them.
Mobile internet penetration is at 35% and smartphone user’s penetration is at 29% in India and it is estimated to reach 60% by the end of 2019. With the increase in the number of smartphones, data consumption will lead to higher demand for optic fibres across India. The Indian telecom industry has seen incredible growth in terms of expansion of 3G network capacity and rollout of 4G/LTE. Tower capacity in India is around 350000 – 400000 units out of which 10% of them are fiberized. It is expected fiberization will increase to a level of 60% – 70% of total towers as telecom players are likely to set up infrastructure and develop technology in line with R-Jio’s digital set up. Next technological upgrade in telecom industry would be 5G internet services, to enable this services 100% fiberization is required and they are likely to get started by 2020 in India.
India’s civil aviation industry is on a high-growth trajectory and aims to become the third-largest aviation market by 2020 and the largest by 2030. India is the ninth-largest civil aviation market in the world, with a market size of around USD 16 billion. India is expected to become the third largest aviation market by 2020. In FY16, the Indian domestic aviation market grew at 21.6%. The growth is attributed to the large and growing middle-class population, rapid economic growth, increased spending and low aircraft penetration levels in the country. India has only 150 million passenger trips a year as compared to China’s 450 million and the US’ 800 million. According to the latest data from the Directorate General of Civil Aviation (DGCA), passenger traffic during January-November 2016 zoomed by 23.10% to 90.36 million.
Microfinance and Financial Services
The microfinance sector, which is seen as a vehicle of financial inclusion, has seen a boom over the past year as the government has laid more emphasis on financial inclusion. The sector is expected to grow robustly in the next few years as large players would consolidate their position in the market. India is today one of the most vibrant global economies, on the back of robust banking and insurance sectors. The country is projected to become the fifth largest banking sector globally by 2020. The report also expects bank credit to grow at a Compound Annual Growth Rate (CAGR) of 17 per cent in the medium term leading to better credit penetration. Life Insurance Council, the industry body of life insurers in the country also projects a CAGR of 12–15 per cent over the next few years for the financial services segment.
India 2019 Equity Portfolio
The India 2019 equity portfolio consists of ten fundamentally strong companies with some of them being market leaders in the above mentioned high growth sectors. The India 2019 equity portfolio consists of ten stocks which are expected to have earnings growth significantly higher than those in the Sensex and the Nifty. These companies in the new portfolio have good fundamentals in terms of growth in revenues and profitability along with higher than industry average ROE and RoCE. The cash flows for most of the companies are in the positive territory while those with a negative cash flow have a lot of investment going in them to generate value for the stakeholders in the long run. Concerns for Indian equities? Expensive Valuation Rising oil prices that is around $65-70 per barrel Fiscal slippages due to rising oil prices as well as ahead of the election Rising interest rates due to rising in inflation Earnings disappointment