It’s not hard to see why the Indian markets are racing ahead in the past few weeks. The rise of the global markets and the positive assessment of the opening up of the economy has given a push to the markets. The fact that the global markets are awash with liquidity has also been a keen influence in driving the Nifty 50 past the psychological 10,000 mark. In the past week, the Nifty has gained 8%.
Note that for some time now, the Indian market has been slavishly following the US markets. Since the US announced a massive stimulus package in end-March, both the S&P 500 and the Nifty 50 have gained about 32-37%.
And while foreign investors were sellers for the majority of this period, they have begun opening their taps for Indian stocks lately.
For now, it’s only investor sentiment that has changed. “It doesn’t take much time for sentiment to change in the markets. What one has to focus on is whether the economy is out of the woods. I feel the economic decline is the highest cyclically because of covid. The market often runs ahead of itself. I would not say the market is wrong. But it is sentiment now, which can be very good at times, and quite bad during other times,” says Raamdeo Agrawal, joint managing director, Motilal Oswal Group.
Going by the current slowdown in the economy, the global equity markets may have to rely on more stimulus rather than an earnings growth to drive the markets forward. The US Fed continues to aggressively pump liquidity in the US economy which has expanded its balance sheet significantly since March.
The decision to open up the Indian economy is a gradual manner has also improved the expectations from businesses. But with social distancing likely to be the new feature of the day for a while at least, businesses will find it difficult to operate at full capacity. This will also increase operating costs for many businesses. As such, the return to pre-lockdown levels is a distant prospect.
“The economy has to do well for corporates to do well. Covid-19 has dealt a blow that is still unravelling. The market is very optimistic that some remedy will be found. But with social restrictions, the economy cannot get into the same momentum that it was during pre-covid. Growth will be very tough,” says Agrawal.
As such, the markets are seemingly giving the feeling that business recovery is around the corner. But once the June quarter results start to trickle in, some of the ground reality will begin to sink in.
“Our Nifty target of 9,900 for March-end 2021—with upside/downside scenarios of 11,500/6,700—implies unattractive risk-reward after the recent rally,” analysts at UBS Securities India Pvt. Ltd said in a note.