Stock markets soar post-lockdown despite economic challenges| Espresso


Why Are Stock Markets Soaring even as the Economy Limps Back in a Post-Lockdown Scenario?

October 09, 2020
Why Are Stock Markets Soaring even as the Economy Limps Back in a Post-Lockdown Scenario?

On Wednesday, October 7, the Sensex and the Nifty both rallied for the fifth consecutive trading session, reaching seven-month highs. The Nifty ended above the 11,700 mark, while the Sensex came close to 40,000. The economic indicators, post the pandemic and lockdown, have a different story to tell. India’s Gross Domestic Product (GDP) for the first quarter of 2020-21 (April-June quarter) had slipped by 23.9% and was the worst contraction in its history.

Despite this, the market has steadily rallied over the past few months and is trading at close to pre-lockdown levels. While there are no apparent answers to the current rally, here are some plausible explanations for what factors are moving the market.

What is driving the market?

The market, at its core, has certain key drivers that affect its movement through the year.

Impact of FII flows

Foreign Institutional Investors (FII) had become net buyers in May, June, July and August and have been credited for the rally in the markets in those months. In September, however, they had turned net sellers for the first time since April. The FII flows often have a bearing on the market as they are big-ticket investors in Indian equities.

One reason many experts cite for the huge foreign inflows is the printing of cash by the US Fed. Till August, the US Fed had printed almost 3 trillion dollars in a 3-month period between February and June 2020 to drive down interest rates and boost consumer demand. A lot of this money could be flowing into the Indian markets.

The upcoming US elections is being watched by everyone, as it will have a bearing on the decisions FIIs take in the coming months. Interestingly, the US President Donald Trump on October 7 called off talks on a second COVID relief package; the impact of the same will be seen soon.

Expectations of a recovery

Markets inherently look to the future. A rally in price now is usually driven by the hope of better things to come. The market seems to believe that a U- or V-shaped recovery may be on the cards for India as the country resumes normal activity.

The markets are also tracking the development of a COVID-19 vaccine closely, with some reports indicating that a vaccine may be ready soon. World Health Organization (WHO) Director-General Tedros Adhanom Ghebreyesus on October 6 said that there was hope that a vaccine would be ready by the end of 2020. A vaccine would reduce the impact of the pandemic and trigger hopes of a resumption of normal economic activity.

Rise of retail investors

The lockdown-induced crash and the subsequent recovery have seen a whopping rise in the number of first-time investors. Between March and June 2020, brokers had opened over 26 lakh new demat accounts. Lower interest rates are making fixed-income investments such as fixed deposits less desirable, and investors are moving to equity for greater returns. Moreover, the crash in April in the immediate aftermath of the lockdown allowed many first-time investors to invest in blue chip companies at discounted prices.

Short- to mid-term drivers

Let’s look at some factors that are responsible for short- to mid-term upticks.

Good September

The month of September brought some cheer from the Indian economy for the first time in six months. Key indicators of the state of the economy provided some hope:

  • Annual export growth turned positive
  • An uptick in the goods and services tax (GST) collection
  • Robust auto sales across several key categories

The market seems to be viewing these positive pieces of news as a precursor to recovery as the economy reopens.

Upcoming festive season

The third quarter (October-December) is always used as a benchmark to measure the demand and consumer appetite in the market and thus provide a forecast for the future. This is because the period is marked by a series of festivals when demand for consumer goods, personal vehicles and even real estate picks up. A good September and the expectation of a bumper crop thanks to a good monsoon has also been among the factors driving this rally.

Be wise, not everyone is soaring

It is important to note that when stock markets rise, it does not mean that all stocks are rallying. There are many sectors, such as Hospitality, Aviation and Real Estate, that continue to be laggards, while sectors like Pharma and Technology soar.

At the end of the day, markets are driven by sentiment and expectation. Currently, the sentiment is positive. Whether it is irrational exuberance or rooted in reality, only time will tell.

Source and credits:

R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!