Sensex @ 50,000: With Biden in Power, Share Market May Inch Higher

The average return with a Democrat as president has been 46% in the past, according to research.

Image of President Joe Biden used for representational purposes.

(Photo: Shruti Mathur / The Quint

The share price of Tata Motors was ruling at around Rs 185 on 1 January 2021. It is close to Rs 300 now.

In other words, there has been a parabolic rise of close to 60 percent in just 14 trading sessions! The eye-popping rally has been driven by, among others, a rumour (denied by the company last week) and some numbers which seem to suggest that the worst is over for the company.

The rumour of a tie-up with Elon Musk’s Tesla is said to have propelled the stock in excess of 20 percent in a matter of few days.

The share took a breather when the company issued a denial. The gravity defying rally is now back, with the share price rising in excess of 15 percent in the last three trading sessions alone. And this has happened despite major institutional investors paring down its holding in the company in the quarter ending December.

Gravity Defying Rally In Multiple Stocks Sans Logic?

Has the company witnessed a massive turnaround of sorts? At least published numbers do not give such an impression. Take a look:

• Tata Motors’ flagship Jaguar witnessed a drop of 24 percent in sales in 2020. The second half was somewhat better than the first half and expectedly so. The sales are estimated to grow up by 10 percent this year. Even with this growth, actual sales in 2021 will be less than what the company sold in 2019.
• In the domestic market, the company sold fewer commercial vehicles in December 2020 from a year ago period. There has been a turnaround of sorts in the passenger vehicle (PV) segment though in the domestic market. Since the company is a marginal player in the PV segment in the domestic market, its performance does not add much to the company’s top line and bottom line.

Do these numbers suggest a major re-rating of the stock? Tata Motors is just one of many examples of parabolic moves seen in share prices of a number of companies in the last three months. This has happened despite the valuation of Nifty, the index that tracks movement of top 50 companies, seen in the bubble territory.

Ours Is One Of The Most Overvalued Markets In The World

According to reliable estimates, the price to earnings (PE) ratio of Nifty is in excess of 38 which was way more than the average of last 20 years. On this parameter, Nifty is trading at a valuation which is higher than most of the global indices. PE ratio gives an indication of the amount of money investors are willing to pay to own a rupee of earning of a company. High PE means investors have to shell out a lot more to own a piece of a company.

Now that the Sensex has touched the psychologically important 50K mark, does the rally have legs to keep climbing? Will the change of guard in the US spoil the liquidity-driven party?

An interesting research done by CNBC-TV 18 shows that the share market in the US gave 65 percent return during the course of Donald Trump’s four-year term. On this parameter, he performed much better than other Republicans who preceded him at the helm. The average return with a Democrat as president has been 46 percent in the past, according to the research. With Democrat Joe Biden at the helm now, the share market is likely to inch higher. And with Janet Yellen, an advocate of accommodative monetary policy, as treasury secretary, the liquidity tap may continue to pour dollars in near term.

Risk Factors

However, with stocks so richly valued as they are now, there are clearly risks of the unprecedented bull run getting derailed. Analysts see at least the following four risks now:

1. Team Biden has already announced the reversal of Trump’s policy of major corporate tax cuts. If the reversal happens at a fast clip, it will adversely impact the profitability of companies and that will not go down well with the market.
2. The massive liquidity easing has lifted all boats, including commodities which are used as raw materials in manufacturing units. There is a heightened risk of inflation coming back with a vengeance with input cost rising everywhere. Once that happens, there will be monetary tightening, sucking out excess liquidity from the system. And that will be terrible news for the bulls.
3. The Biden administration is ready to administer yet another massive dose of fiscal stimulus. That will result in the US economy growing faster than others. In that case, there will be a reversal of dollar flow and that will hurt stock markets of emerging economies like ours.
4. And if there is any googly-tinkering with capital gains tax, for instance — in the forthcoming budget — investors may use that as an excuse to lighten up the position.

Market participants are aware of these risks. Who has the time to weigh risk and reward — such is the ferocity of dollar inflow. So far, there has been no risk and all reward.

(Disclaimer: I have been trying, not very successfully though, to profit from inflated moves in the share market.)

(The author is an occasional writer and an aspiring entrepreneur. He tweets @Mayankprem. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)