Is Sensex, Nifty Bounce For Real? Wait Two Weeks To Check If It’s All Fools Day In Advance

The official reason given for the marked buoyancy in the stock markets is the likelihood of Narendra Modi’s National Democratic Alliance coalition returning to power in May 2019, as many pre-poll surveys have been indicating.

The Nifty has lifted itself nearly 15 per cent from its October 2018 bottom of around 10,000 (to 11,400-plus now), and the Sensex from around 33,300 (to 38,000 plus now). In the post-Pulwama, post-Balakot period they have risen by half as much. So, half the gain has come from the surge in the Prime Minister’s popularity after the Indian Air Force struck at a Jaish-e-Muhammed terror camp in Balakot.

The problem with such an analysis is not that it is wrong, but it ignores the seasonal and short-term reasons for index movements.

Let’s put in simply: March is the financial year-ending, and most mutual funds would like to book profits and show high net asset values (NAVs) on 31 March. Much like foreign institutional investors (FIIs), who like to report their performance around end-December and then head for their Christmas vacations, Indian fund managers may be doing the same now, though this is difficult to prove before the actual results are out and we know how the market fares in April and May, as the election season proceeds further.

The investment numbers show that the FIIs have put in over Rs 35,000 crore in equity this calendar, with over half the money (Rs 20,517 crore) coming in March till the 15. In contrast, domestic institutional investors have been net sellers, though of a smaller amount, of Rs 5,590 crore in March. Over January-March, they have been net buyers to the tune of only Rs 8,261 crore in equity. And this despite monthly inflows through SIPs (Systematic Investment Plans) of over Rs 8,000 crore December through February. The additional money is probably being held partly in cash or debt equivalents to preserve net asset values in a period of volatility and around the financial year-end. We will know whether this is true when mutual funds publish their balance-sheets after March-end.

Another point to note is that even index movements may be skewed. The bulk of the increase in the index over the last month has been influenced by heavy buying in some big Nifty stocks – Reliance, ITC, UltraTech, Larsen & Toubro, Tata Steel, and Sun Pharma, and banking and finance stocks, including SBI, HDFC Bank, ICICI Bank, IndusInd Bank and Bajaj Finserv – and not vast bulk of the index.

This indicates that buying is focused on stocks that will take the index up, and not broadbased.

In short, the message from the March bounce in the stock markets is simple: wait till April to figure out if this bounce is sustainable. Who knows, maybe the mutual funds people are celebrating All Fools Day in advance in March.