home Share Market Why are markets up when the economy is down?

Why are markets up when the economy is down?

The Indian economy has definitely taken a severe hit in the last one year owing to slowdown witnessed across sectors. The overall drop in consumption witnessed in sectors like Auto, FMCG, Consumer Durables has dragged the economic growth lower.

This can be mainly attributed to the struggling rural economy due to limited growth in Minimum Support Prices (MSP) and liquidity issues amongst NBFCs which made financing difficult. The consumption weakness has led to companies turning cautious and therefore limiting their capex plans leading to a slowdown in sectors like Cement and Capital Goods.

Further, lower spending by the government, liquidity stress amongst NBFCs and slower transmission of rates from banks further led to a slowdown in the infrastructure, power and real estate space.

The overall slowdown and corporate governance issues in certain companies have also made the banks more cautious as any defaults could dent their asset quality. On the exports front, the trade war between US-China and global economic slowdown has adversely impacted India’s exports as well.

On the contrary, despite such broad-based slowdown, the benchmark indices continue to trade near its highs with minor correction witnessed in the last one year. However, it is to be duly noted that the returns in the benchmark indices are largely skewed towards outperformance of few heavyweight companies (8-10 stocks).

These companies remained least affected by the slowdown and their continuous market share gains while maintaining profitability triggered the outperformance. On the flip side, the broader markets have seen a meaningful correction in last 12-18 months, pricing in the slowdown in their respective sectors.

Further, from a fund flow point of view, despite selling by the FIIs, continued domestic inflows into mutual funds have supported the markets by deploying funds into high performing heavyweight stocks.

Coming to the factors contributing to the rally, the RBI and government have taken several steps in the last six months in order to revive the economy. In 2019, the RBI has cumulatively cut rates by 135 bps due to low inflation and subdued demand.

Lower interest rates are definitely positive for the economy as well as companies as it leads to demand push thereby promoting growth. The government too has announced several measures including corporate tax cut, easing of FDI norms, GST rate cut (in certain segments) and re-capitalisation of PSU banks.

Further, despite rising concerns of global economic slowdown, the global markets too have remained largely stable which also aided to the positivity for emerging markets like India.

The peculiar current situation definitely has its pro and cons. On the plus side, despite a slowdown in the economy, the domestic fund flows continued to remain resilient.

Further, in the current scenario where the government and RBI have announced several measures, the markets are pricing in a recovery in the economy.

On the other hand, such a large deviation between the benchmark and broader markets does not give a true picture of the economy and may continue to result in knee jerk reactions in between which could unsettle the market participants.

In such a scenario, we advise investors continuing with a bottom-up approach and focusing more business for investment potential rather betting on the revival of the economy.

Leave a Reply

Your email address will not be published. Required fields are marked *