NIFTY @ 25k: Are We Sitting On A Bubble?

On Thursday (August 1, 2024), the NIFTY and Sensex hit an all-time high of 25,078.30 and 82,129.49, respectively. 

• The journey from 24,000 to 25,000 took just 24 trading sessions - the third-fastest 1,000-point rally on Dalal Street.
• The fastest sprint was in August 2021 (from 16,000 to 17,000) in just 19 trading sessions.
• The second fastest was quite recent (from 23,000 to 24,000) in 23 trading sessions. 

And guess what? Nifty is up by almost 17% this year, making it one of the best-performing emerging markets globally.

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But Why The Sudden Market Rally?

1. Newly Formed Government: Modi 3.0 is ensuring confidence in its continuity. This stability is encouraging investors to trade in the markets.
2. Optimistic Global Signals: Positive hints from the US Fed → potential rate cut in September has boosted investor sentiments.\
3. Retail Participation: Increased retail participation has provided ample liquidity. The steady inflow of capital from individual investors potentially keeps the rally longer than most analysts have expected.

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Will History Repeat Itself?

Maybe not with the same magnitude…here’s why? 

In 2013, the market faced significant turmoil:

• Sensex: Dropped 15% in just three months, indicating a sharp and rapid decline.
• INR vs USD: Rose from 53 to 68, reflecting severe currency depreciation.
• G-Sec Rates: Increased by 2%, leading to negative debt returns, signaling a loss of investor confidence in government securities.
• FII Withdrawals: $5 billion was pulled out due to the US taper tantrum, which significantly impacted market liquidity and stability.

What is a taper tantrum? It was a period of market volatility in 2013 caused by the US Federal Reserve's announcement to reduce its bond-buying program.

‍Times have changed, and FIIs are no longer riding the Indian markets.

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Shifting Ownership In The Indian Equity Market

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Source: NSE Data

What’s changed?

• A gradual reduction in foreign investor dominance: FII ownership declined significantly to 17.9% (from 20.7% in 2021).
• Increased domestic participation: Domestic Institutional Investors (DIIs) and retail investors have increased over the years. 

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Rise In Equity Participation

Despite having only a 9.5% share, retail investors are the most active traders, indicating their significant influence on market movements.

Over 42 lakh new demat accounts were opened in June 2024; currently, totaling more than 16 crore accounts (highest account opening rate since February 2024)

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Source: Moneycontrol

Not just stock trading, mutual funds have also witnessed significant inflows.

In June 2024, 

• Mutual fund systematic investment plan (SIP) contributions hit a record high of Rs 21,262 crore. 
• The total assets under management (AUM) for mutual funds grew by 4%.

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Source: Economictimes

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But Why Is Retail Participation Increasing?

There has been a growing interest and confidence in the equity market among retail investors. As seen before, the rise in demat accounts and increased inflows into mutual funds stand as a testament. Where is this coming from?

Shift in Savings Preferences

• The younger generations no longer prefer traditional investments like bank fixed deposits (FDs).
• They are more risk-takers and seek stock market exposure and diversification.

Digital Proliferation and User-Friendly Platforms

• The app economy facilitates convenient, on-the-go transactions, making investing accessible anytime, anywhere.
• User-friendly and mobile-friendly platforms, like iNRI simplify investing for millennials.

Financial Literacy and Awareness

• Financial literacy, increased awareness, and the importance of early and long-term investments are helping Gen Z make smarter investment choices.

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Bottom Line

The recent surge in NIFTY and SENSEX reflects global optimism and robust retail participation. While history cautions against potential market volatility, the increasing involvement of domestic investors has made the market more resilient against foreign investment fluctuations.

For a deeper understanding of how political events, such as general elections, influence the market, check out our article on the Impact of Election Results on Stock Market Performance here.

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