By Harshvardhan Surana
11th of March, 2020, WHO declares COVID-19 a pandemic. The virus triggered a number of channels including labour markets, global supply chains and consumption behaviour, all of which had detrimental effects on the world economy. What followed next is not unknown to any human - lockdowns across the globe, businesses disrupted, the economy in the mayhem. And the stock markets? They bled as if there was no tomorrow, with Indian indices plunging by as much as 38% from their January highs.
As of today, the markets are almost back to pre-Covid levels. But is the economic environment back to how it was before Covid? Absolutely not. As a matter of fact. India’s GDP contracted by 23.9% in the first quarter of FY21, owing to lockdowns and the economic sluggishness that existed prior to Covid. So why is there a crystal clear disconnect between the stock markets and the economy within which it is functioning?
Picture: Comparison of economic variables with the S&P 500 from 2011 to 2019.
Well, there is always a disconnect. The markets are forward-looking, it behaves as per the expectations of the investors with regard to the future profitability and growth of the companies and hence there is always a lag between the two. Even though organisations like IMF have projected a contraction in the economy in the near future, they have also stressed upon the growth that is likely to follow, with some even projecting growths in double digits. It is this optimism that is driving the markets up, but this isn’t the sole factor that makes up for the gap.
Most of us must’ve seen our elders talk more about the stock markets during the lockdown, but have we ever wondered why? The primary reason for this is that while almost all businesses were shut, it was the stock markets that didn’t sleep throughout the pandemic. Most people didn’t earn by sitting at home and hence decided to try their luck at the markets when the indices were at their lows. People found ample free time to explore new investment territories from the comfort of their home during the lockdown. Moreover, Indian households have found fixed deposit schemes for their safe haven over the years. With FD rates lowering to 5%, which by the way is sometimes not enough to beat inflation, people wanted their savings to earn higher returns and hence shifted to participate in equity markets.
Most discount brokers have reported a sharp surge in the opening of new Demat Accounts. At Zerodha, India's largest discount broker, the number of Demat accounts opened from January to May surpassed the overall client growth figures of last year. India has dismal figures when it comes to the number of retail investors, which is roughly 1% of its population. With this, India witnesses one of the lowest participation of retail investors. According to the Securities and Exchange Board of India (SEBI), the number of new Demat accounts opened in the fiscal year 2020 was the most in at least a decade at 4.9 million, a 22.5% jump from the 4 million accounts opened in the previous year. Stockbroking companies have had a good run this year, with entities such as Angel Broking in India and Robinhood in the USA even filing for IPOs this year. The listed ones are almost at their lifetime highs, thus signalling that this year has indeed witnessed increased retail participation. It is obvious that with a higher number of retail investors entering the markets, more cash is pumped into the overall market, and many feel that it is liquidity which is boosting the market more than over-optimism.
Is that it? Over-optimism and liquidity? There’s definitely more! Overall economic data doesn’t really affect the indices because an economy is a representation of all the entities that operate within it, but an index just has the top 30 or 50 companies of the country. When people received pay cuts, Jio witnessed higher revenues. While the unemployment rate increased, TCS still hired and is hiring new people. When supply chains were disrupted, ITC and HUL still managed to serve every household in the country. Accept it or not, big companies are big because they don’t move with the economy, just like small businesses do; they dance to their own tunes.
But is it the government which is fictitiously pushing the markets higher? We all know about the government’s plan to raise money by selling its stake in various public sector undertakings, BPCL & LIC being the two major ones. So are they driving the markets up so as to get a better valuation while they sell their stake? As bizarre as it sounds, it might still be a strange possibility.
And what about gold? It has been traditionally believed that when equity markets turn red, investors shift to the yellow metal; and we have witnessed a solid gold rally this year too. But even when markets recovered, gold didn’t lose its shine. Is that indicative of another market fall? Only time will tell!
AUTHOR
Harshvardhan is a second year Statistics student and is currently serving as the Research and Editorial Head at FIC. He is deeply interested in the field of finance and is highly intrigued by stock markets and its functioning. To add to his knowledge base in the finance domain, he is pursuing professional courses like FRM and CFA. Hit him up for anything regarding the markets or the economy, he'll be more than happy to debate on the same !
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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