FY21 was a dismal year from the economic standpoint, and while the right noises are being made about the so-called recovery, none of these are convincing. A full year had gone by and the state response to virus infection has been the same: Announce a lockdown. It gives a sense of doing something as it stops everything from happening. But there has been one blazing factor in this year of gloom and doom, and that is the stock market.
The new highs that have been reached can be hard to explain, but it is there for everyone to see and from a level of 29,468 in March 2020, a gain of 70% has been achieved. 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 amazing. And what is surprising is that there have been justifications for the same by the market movers, which include India Inc and the stock market experts who talk to us on a daily 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 severe, and the migrant issue was at the fore. Once the unlock was announced even as the infection cases rose, the market was impervious to these numbers and marched past 38,000 in August, as the seven-day moving average of infections were as high as 74,000 that month. There was a nervous kind of stagnation in September when cases peaked at above 80,000. Since then, the number of cases came down and the Sensex averaged 50,000 in March as the moving average in the last week came back to a new peak of more than 60,000.
Quite clearly, the number of infections had little to do with the stock market movements. The coefficient of correlation between the two variables was +0.24, and while the level was low, the positive sign is what upsets rationality. It is clear that the market does not really bother about the level of infections, and while there are a couple of sessions that witness a decline in the Sensex, it is back to business; it is forward-looking.
When the lockdown was announced and the market went down, one never knew how things would shape up. The quick indicator that was available before corporate results came out and the GDP estimates came in related to tax collections, which were abysmal as no activity meant no income for the government. Corporate results came out by August and these pointed towards the downward direction. Yet the markets were positive. The sharp fall in GDP also did not lead to any correction, and while September was more or less unchanged, the spirits were still undaunted. Since then, there has been an upward move culminating in the 50,000 level in March.
If one were to try and rationalise these movements, it has to be put in the context of forward-looking perspectives. This is where the language spoken by India Inc during the announcement of their results and the relentless advice given in the media on various sectors and stocks make a difference. In fact, the experts in the markets are really market-makers as they keep the spirits up and are always positive. This is rationalised by the earnings growth which is compared with the price and the gap provides scope for the increase in prices. This is not just an Indian phenomenon, but also a global one, as all stock markets have worked the same way. A lot of drivel involving the shape of the recovery is discussed the stock markets move on comfortably, and by the end of the day the two reinforce one another. Just as there is the explanation that the K-shaped or V-shaped recovery is driving the market, the experts on the other side use market movements to justify the view that the recovery is imminent.
In India, at least a part of the rise in the indices could be attributed to the infection cases going down. But in the US the markets did well notwithstanding the infection levels going up, as two other factors played a role. The first was the outcome of the US elections, and the second was the growth prospects of the economy that were revised upwards. This was contemporaneous with the creation of the vaccine, which brought a lot of hope and gains in the market, and this thought still is driving markets everywhere. The second wave in Europe was quite severe with the responses being similar with lockdowns being announced. But the markets moved on.
Where will the market go? The Q1 results of corporates were downbeat with sales and profits falling. Q2 saw sales fall but profits rise, as companies cut on costs, especially labour costs. Q3 saw a marginal growth in sales but profits continued to zoom, which gave a sense of sharp recovery. Q4 will probably be a repetition of Q4 with a better sales growth due to the low base effect of Q4FY20. The announcements of localised lockdowns shake the market but do not really change direction for more than a few sessions. The market is driven more by the vaccination numbers and the high frequency indicators such as GST collections, PMI, e-way bills, etc. Therefore, it looks unlikely that the Sensex will slip too much for a prolonged period of time.
In fact, corporate results will be more than positive in the first two quarters of FY22, which is good news for the market. 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 through the year, the markets were not too much enthused by the government policies as the series of announcements made under Atmanirbhar Bharat campaign drew an indifferent response. The same was with the Union Budget. Therefore, there seems to be more faith put 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 market has been one of surprises for sure!
The author is Chief economist, CARE Ratings, and the author of ‘Hits & Misses: The Indian Banking Story’. Views are personal