“The market does not trade upon what everybody knows, but upon what those with the best information can foresee” – William Hamilton
For most of the investors there seems no breakthrough happening in the economy but markets are continuously scaling new highs. Second wave of corona caused havoc in people’s lives. We lost many precious lives, many times than the people we lost during its first wave. It forced lock down all across the country though degree varied. But stock markets this time, don’t seems to be worried at all for corona messes.
From economy side also, most of the news aren’t encouraging. All major agencies have downgraded forecasts of GDP growth for current financial year from their earlier estimates. But stock markets are still riding higher and higher.
Equity Market & Economy – Stock markets are deemed to be the barometer of an economy. But they do not necessarily present the true picture of the current state of economy. They either lead or lag in showing the state of economy. So current stock market rally, either should be because market participants are highly optimistic about economy or they are totally unaware of the imminent danger.
Lower Interest Burden – Price of any stock reflects the profit earning potential of the company in future. It increases with the reported higher profits than expected and probability of earning higher profits in future. Corona has fastened the reduction in interest rates and many corporates took advantage of this by replacing old loans of higher interest rates with cheaper loans. Thus they reduced their interest outgo which added to their profits.
Lower Office Expenses – Also unlike the first lock down last year when all economic activities almost came to a halt and nobody knew how to deal with the situation. This year despite health chaos, good level of economic activities both in manufacturing and service industries were taking place. That gave lot of confidence to investors in Indian economy and its growth potential. And all this they achieved while administering good part of their work with their employees working from home. This way they were able to save a lot expenditure which otherwise these companies were incurring on maintaining office infrastructure and conveyance etc. This also added to their profits.
Large Scale Vaccination – Despite all internal criticism India has administered highest number of vaccine on its citizens in the world surpassing the numbers of mighty US and European countries. And all this was done using vaccines developed and manufactured by Indian companies. This is leap toward “Atmanirbhara Bharat”.
Expected Third Wave of Corona – With second wave now almost under control, forecasts for third wave have started emerging in plenty. In fact in some of the countries the third wave has already started. But, we are sure that with experiences of the two waves, India as a country is much better prepared to face and satisfactorily navigate through the third wave.
High Doses of Liquidity – And above all to support the economy the central banks across the world have infused lot of liquidity into the system. Since there is no immediate scope of high capital expenditure by the industries and with meagre returns provided by the debt markets, most of this money has been channeled into stock markets. So large money chasing few stocks distorting the demand supply algorithms has caused very high valuations.
To Summarize – All above contributed to the markets trading higher and higher with no respite. With the time the chances of correction in the equity markets is coming down. With revised formula for P/E and higher profits reported despite covid impacts by the companies, market P/E levels have come down significantly, though still are way higher than the long term averages. Market cap to GDP and Debt to GDP ratios of India has also been much lower than most of the leading & emerging world economies.
With so much of liquidity available with DIIs and lot of retail money coming into Indian markets post covid fall, we now don’t foresee very high correction coming in. Often in past we have talked about Indian’s ability to adapt to the situations. We expect companies to report higher profits than expected and GDP numbers will also be much higher than what are being forecasted.
What Should You Do – For all those who still wish to tread cautiously, balance advantage funds offers good option. Most of such schemes are having only 32-40% equity in their portfolio which they can increase upto 80% depending upon the fund manager’s views on the markets. Ongoing NFOs also offers good option to take a plunge into the equity markets at current levels. We will discuss more on this in our next article.
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