To be fair, the markets have note really rallied in the month of June. For example, the Nifty has given return so just about 4% since the beginning of June. However, from the low of Mar 24, the Nifty is up over 30% and that is really appreciable as it has happened despite the lockdown across the whole of India. At an economic level there are the following concerns.
- GDP for the fourth quarter was just about 3.2% and the full year GDP came in at just 4.1% for FY20. However, estimates for FY21 are scarier as the estimates for full year GDP range from -2% to -6%.
- There have been a slew of downgrades. Moody’s has lowered India’s sovereign rating to the lowest investment grade and also downgraded the outlook. Even Fitch has lowered the outlook to negative.
- High frequency data points like IIP, core sector growth and PMI have shown deep cuts in the first quarter so far. The first two quarters could be lost to negative growth due to the lag effect of the lockdown.
- The Coronavirus cases don’t appear to be abating. In fact, the average run of cases on a daily basis in India has crossed 13,000 and India is already the fourth most afflicted nation after the US, Brazil and Russia.
- Most companies that have commenced operations post the lockdown are struggling to come to terms with the new order. Labour is still in short supply, most areas are still confinement zones and supply chains have been badly disrupted.
It is in this light that the Nifty appears to be holding above the 10,200 mark. What explains this anomaly?
If the economy is under stress, why are the markets buoyant?
That is the million dollar question. What is driving the markets to remain stable even though there are clear economic challenges?
- One factor that can explain the buoyancy in the market is the expectation of a sharp bounce once the short term hitches are overcome. Even the sceptical agencies like Fitch and Moody’s are betting on a smart growth recovery in the third and fourth quarter this fiscal. They are also expecting GDP to grow at 9.2% in the fiscal year 2022.
- FPI buying has been quite robust in the current market conditions. If you look at FPI buying in equities in the month of June, it has been in excess of Rs.22,000 crore in the first half of the month. This is a major positive after heavy selling in the months of March, April and May. You can ascribe it to block deals but flows are real.
- Quality paper is coming into the market. A lot of promoters have been putting their stake in the market to raise cash. This includes an increase in the float of stocks like Kotak Bank, HDFC AMC, HDFC Life, Hindustan Unilever etc. This surge in quality paper is keeping the markets optimistic.
- The government is adopting a big bang approach to revive the economy. It has gone for aggressive pump priming and allowed the fiscal deficit to cross the 5% mark. That may raise some concerns over the long term but in the short term that is inevitable. Focus on Make in India is also opening up a world of opportunities for Indian companies.
- The macros have been kept favorable to business. Tax rates for individuals and corporates have been kept at attractive levels. Interest rates have been allowed to dip to multi-decade lows and that is conducive to growth. In addition, transmission has been ensured by allowing banks to drop deposit rates and cutting small savings rates.
- Don’t forget the Reliance Factor. Here is one stock that has stood for everything that India can do. The company has monetized Rs.116,000 crore in just 8 weeks and will meet its commitment of zero-net debt by early next year. No doubt, the stock is up 100% in the last 3 months and represents what Indian market potential is all about.
- Finally, the base effect is expected to play out from the third quarter onwards. Pump priming liquidity in the interbank markets, will led to increased supply of credit and lower interest rates. This will be instrumental in creating demand and growth. Don’t forget that despite the vagaries of the market, SIP flows stay robust.
Yes, there are worries on the border and the rising spectre of geopolitical risk vis-à-vis China. However, nobody expects a full-fledged war. At the end diplomacy will prevail and both economics will get back to business. That will be the icing on the cake.