India is passing through a major health crisis. News regarding daily COVID-19 infections, death, non-availability of beds and oxygen, travel bans from India being imposed by many countries – all indicate a gloomy scenario.
Increasing localised lockdowns, curfews and severe restrictions on movements mean that the market’s pre-second wave assumptions of around 11 percent GDP growth and above 30 percent earnings growth for FY21 are unlikely to be achieved.
Under normal circumstances, this gloom and doom scenario would have led to a market crash. But the market is exhibiting remarkable resilience. Nifty ended the week ended April 23 at 13,341 with a loss of 1.89 percent.
But the BSE Midcap Index outperformed with loss of only 1 percent and BSE Smallcap index ended flat. Among sectors, while pharma gained, IT, FMCG, cement and telecom were losers. Among Nifty stocks, Dr Reddy’s was the top gainer followed by the Bajaj Twins. HUL and Nestle were the big FMCG losers. UltraTech Cement lost 9.6 percent.
During the last trading week, gap-down openings were bought into. Even though FIIs were consistent sellers, DIIs were consistent buyers. HNIs are buying into high-quality stocks on declines. In spite of this crisis, Nifty is up by 2.57 percent year-to-date .
What explains this apparent ‘irrational resilience’?
Let’s get the issue in perspective. The bull run, which began after the 2020 March crash, is global. There is high degree of correlation between global markets and this correlation is unlikely to be broken anytime soon. The prime mover of this global market rally is the unprecedented humungous liquidity that has been created by the world’s leading central banks and the consequent historically low interest rates.
Globally, stocks have attracted a flood of liquidity during the last 6 months. In the developed world, inflation is no longer a ‘monetary phenomenon’. A sizeable part of the liquidity created by the central banks has gone into risky assets like stocks, pushing their prices higher and higher.
In other words, in the absence of consumer price inflation, liquidity is creating asset price inflation. This global financial market construct is being facilitated by the recovery in the global economy led by US and China. A sharp market correction, whenever it happens, is likely to be global. In brief, the gloomy Indian scenario is unlikely to tank the market, unless the healthcare system collapses with terrible consequences, impacting market sentiment hugely.
What should investors do?
Market trend, going forward, would depend on the COVID curve. If the curve flattens and shows signs of declining, market can scale higher. But, there is huge uncertainty regarding the course of the pandemic and its fallout. Therefore, investors can think about booking some profits from equity and investing the proceeds into fixed income even though fixed income returns are low.
Since globally stock markets are bullish, it makes sense to remain partially invested in stocks, particularly in IT, pharma, metals, chemicals and leading names in financials.
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