FY21 was a dismal year from the financial standpoint, and although the ideal noises are getting produced about the so-known as recovery, none of these are convincing. A complete year had gone by and the state response to virus infection has been the very same: Announce a lockdown. It provides a sense of undertaking some thing as it stops every thing from taking place. But there has been one blazing element in this year of gloom and doom, and that is the stock marketplace.
The new highs that have been reached can be challenging to clarify, but it is there for absolutely everyone to see and from a level of 29,468 in March 2020, a achieve of 70% has been accomplished. Hence, as the economy collapsed and the virus spread, if one sat back and invested in the Sensex in March, the gains would have been awesome. And what is surprising is that there have been justifications for the very same by the marketplace movers, which contain India Inc and the stock marketplace authorities who speak to us on a each day basis.
Arguably, the March 2020 level was low on account of the announcement of the lockdown at the national level. But the Sensex recovered and reached the 32,400 level by May, which was when the lockdown was extreme, and the migrant concern was at the fore. Once the unlock was announced even as the infection instances rose, the marketplace was impervious to these numbers and marched previous 38,000 in August, as the seven-day moving typical of infections have been as higher as 74,000 that month. There was a nervous type of stagnation in September when instances peaked at above 80,000. Since then, the quantity of instances came down and the Sensex averaged 50,000 in March as the moving typical in the final week came back to a new peak of more than 60,000.
Quite clearly, the quantity of infections had small to do with the stock marketplace movements. The coefficient of correlation among the two variables was +.24, and although the level was low, the positive sign is what upsets rationality. It is clear that the marketplace does not actually bother about the level of infections, and although there are a couple of sessions that witness a decline in the Sensex, it is back to business enterprise it is forward-seeking.
When the lockdown was announced and the marketplace went down, one in no way knew how items would shape up. The speedy indicator that was offered prior to corporate outcomes came out and the GDP estimates came in associated to tax collections, which have been abysmal as no activity meant no earnings for the government. Corporate outcomes came out by August and these pointed towards the downward path. Yet the markets have been positive. The sharp fall in GDP also did not lead to any correction, and although September was more or much less unchanged, the spirits have been nevertheless undaunted. Since then, there has been an upward move culminating in the 50,000 level in March.
If one have been to attempt and rationalise these movements, it has to be place in the context of forward-seeking perspectives. This is exactly where the language spoken by India Inc throughout the announcement of their outcomes and the relentless tips offered in the media on several sectors and stocks make a distinction. In truth, the authorities in the markets are actually marketplace-makers as they maintain the spirits up and are often positive. This is rationalised by the earnings development which is compared with the cost and the gap offers scope for the improve in costs. This is not just an Indian phenomenon, but also a worldwide one, as all stock markets have worked the very same way. A lot of drivel involving the shape of the recovery is discussed the stock markets move on comfortably, and by the finish of the day the two reinforce one a different. Just as there is the explanation that the K-shaped or V-shaped recovery is driving the marketplace, the authorities on the other side use marketplace movements to justify the view that the recovery is imminent.
In India, at least a element of the rise in the indices could be attributed to the infection instances going down. But in the US the markets did nicely notwithstanding the infection levels going up, as two other components played a function. The 1st was the outcome of the US elections, and the second was the development prospects of the economy that have been revised upwards. This was contemporaneous with the creation of the vaccine, which brought a lot of hope and gains in the marketplace, and this believed nevertheless is driving markets everywhere. The second wave in Europe was fairly extreme with the responses getting related with lockdowns getting announced. But the markets moved on.
Where will the marketplace go? The Q1 outcomes of corporates have been downbeat with sales and income falling. Q2 saw sales fall but income rise, as firms reduce on expenses, in particular labour expenses. Q3 saw a marginal development in sales but income continued to zoom, which gave a sense of sharp recovery. Q4 will likely be a repetition of Q4 with a superior sales development due to the low base impact of Q4FY20. The announcements of localised lockdowns shake the marketplace but do not actually alter path for more than a handful of sessions. The marketplace is driven more by the vaccination numbers and the higher frequency indicators such as GST collections, PMI, e-way bills, and so forth. Therefore, it appears unlikely that the Sensex will slip as well a great deal for a prolonged period of time.
In truth, corporate outcomes will be more than positive in the 1st two quarters of FY22, which is fantastic news for the marketplace. There would be sectoral imbalances as the services segments will continue to be hit adversely. But the Sensex is dominated by the blue-chip stocks in the manufacturing and IT sectors.
Interestingly, all by way of the year, the markets have been not as well a great deal enthused by the government policies as the series of announcements produced below Atmanirbhar Bharat campaign drew an indifferent response. The very same was with the Union Budget. Therefore, there appears to be more faith place in the private sector and animal spirits than the policies of the government, which is a surprise. But then the history this year of the stock marketplace has been one of surprises for certain!
The author is Chief economist, CARE Ratings, and the author of ‘Hits & Misses: The Indian Banking Story’. Views are private