Are markets ‘insensitive’ to people’s suffering? Or are Sensex and Nifty bubbles about to burst?
The smarter answer may be that markets are discounting short-term pains of Covid for long-term gain of higher corporate profits.
Undoubtedly the second wave of Covid-19 has adversely impacted everything from jobs to businesses. For some time, consumers will hesitate to spend money. They are likely to defer big ticket purchases like TVs and cars. The MSME sector which was just recovering from the first wave has been hit hard by lockdowns. Rural India is likely to be adversely affected by the wider spread of Covid compared to the first wave.
The one silver lining of the second wave is the use of regional lockdowns over a national lockdown, resulting in less disruption to businesses.
So, what are markets betting on when they are rising? Here are seven things markets now believe in.
Vax Effect: Accelerated vaccination, rapid expansion in healthcare infrastructure and Covid-appropriate behaviour will normalise economic activities by the second quarter of 2021-22. And that the third wave will be less damaging than the second in terms of deaths, and disruption to economic activities.
India Inc Profits: Bigger (listed) companies will grab market share from smaller (unlisted) companies over the medium term, as the former are in a better financial position. This trend of the big becoming bigger will lead to higher profits for listed companies. Corporate profitability in 2021-22 and beyond will see acceleration similar to that in 2020-21. In 2020-21’s third quarter, corporate profit grew to Rs 2,09,795 crore, surpassing expectations. The fourth quarter of the last financial year is likely to witness another all-time high-profit number.
Few Options Better Than Stocks: There are few good investible options for domestic investors. Lower returns on bank deposits, gold and real estate are likely to result in a higher funds flow towards equities. Investors are willing to take higher risks as they have tasted success on investments made since March 2020.
Foreign Money: Foreign portfolio investors (FPIs) became aggressive buyers of Indian equities in the second half of 2020-21. FPIs are likely to be neutral on India for the next quarter as India’s peers, which have opened their economy, will post better results. However, over a longer term FPIs are likely to be net buyers of Indian equities as our growth recovers. Lower interest rates and high global liquidity supported by non-stop printing of money by central banks around the world is also likely to result in higher FPI flows over the longer term.
Good Work by RBI: RBI has done an excellent job in managing the rupee, interest rates, financial market stability and the large borrowing programme of the government. RBI’s deft management of the economy and financial markets will support faster economic growth and higher corporate profits.
Stimulus is Coming: Markets are expecting a fiscal stimulus as the economy opens up. It can push 2021-22 GDP growth higher than expected.
Manufacturing, Housing Boom: GDP growth will reach high single digits beyond 2022-23 thanks to the production-linked incentive (PLI) scheme and a housing sector revival. The PLI scheme can act as a catalyst for India’s emergence as a manufacturer to the world. The housing sector has come down from a double-digit contribution to India’s GDP to mid-single digits. But now, affordability has increased due to stagnation in house prices, housing loans are available at record low interest rates, and work from home has created demand for new housing. Stamp duty concessions are also helping.
True, valuations are high in Indian markets, but they look reasonable against global averages. India’s market cap/ GDP ratio is 104%, higher than the historical average of 78%, but lower than the global market cap/ GDP ratio of 131 %.
In a fairly valued market, in order to make money investors will have to be disciplined enough to differentiate noise from news, rumours from facts and have the conviction to invest in volatile markets for the longer term.
Time will prove if markets’ current bullishness is wrong. Right now, your assessment will depend on whether you believe the wisdom that markets price every known risk.
(
The writer is Managing Director, Kotak Mahindra Asset Management. Views are personal)
