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Sensex sizzles to dazzle past 2015


The mood on the dalal street is very upbeat and is carry forward from the last year is a good sign for the investor’s sentiments to start a new year as there was a sharp rally in mid and small cap shares as retail investors renew their interest in such stocks just on the news flows but in the absence of FIIs inflow contrary to the fact that the mid and the small caps had lost steam as the valuations were stretched. This year the investors are carrying the euphoria of the best Bull Run among the three bull runs we have had in this decade, although there was some correction in December last year.

 Now the investors will have to do the reality check and do not expect miraculous marathon to be repeated because the macro indicators are still a bit weak, and it is just a matter of time when the business friendly reforms like land, labour and power sector are imposed pretty soon and it is just a matter of two years when the sailing will be very smooth and India will be sitting pretty at the saddle to gallop far ahead and thereby have no competition.

The Indian economy will surge past the 6% mark and all drivers like private and public investments as well as the consumer and exports spending will be properly aligned. Neither the GDP growth nor the earnings growth has any meaningful correlation with the investment returns generated by the Sensex, on the contrary the investment returns are dependent on three different sets of dynamics:- the political and economical cycle in India, the reversion to the mean and then of course US monetary policy cycle and by all means the financial year end of 2016 the Sensex is headed for 50,000 mark as all drivers will be aligned by then.

To reiterate the point the Sensex seems to move in proportion to the Indian political cycle, as par the past experience the Indian economy seems to tread in a 8-10 year’s economical cycle coinciding with the decisive general elections in India eg- 1984,1991 and 2004, so when the Sensex’s three decades CAGR is mere 16% its CAGR in the first three years of each cycle is over 33% For example when the  reversion works well as well as a predictor of sensex bounces back over the period of five year cycle, and the last dynamic driver happens to be the US interest rate cycle like when the US government bond yield starts to rise owing to the Federal Reserve signaling tightening of the noose of the US rate cycle triggering the money to flow out of the US bond markets and into the global equities and need not to say here that the emerging markets and of course the Sensex benefits the most. So a rising US bonds initiates a rally in the Sensex.