What is keeping the stock market high despite the growing pessimism?
Stock market is making new highs every passing day. With every move, there is a rising nervousness about stretched valuations.As the world attempted to recover its economy, central banks opened the floodgates of liquidity which led to the relentless rally into the global stock markets. And India has been a prime beneficiary of it.
However, it is only a matter of time now before the dose of liquidity ends.The Federal Reserve has already announced its tapering program. Back home, RBI has also mirrored similar sentiments, taking first steps towards impending liquidity squeeze in its October MPC meeting.
Apart from liquidity squeeze, persistent commodity inflation, slowdown in China, global energy crisis, and India’s very own issue of coal shortage, has kept the investors on the hook.
Clearly, with every new high that the market is scaling, the risk-reward ratio is turning unfavourable for investors.There is a growing pessimism among investors.However, the stock market has refused to budge from its current elevated levels.
It has left investors wondering- what is keeping the stock market high despite the growing pessimism?
Growing Pace of Recovery
Several indicators are pointing at a strong trend of recovery in the Indian economy post the second Covid-19 wave.With that, international investors are showing confidence in the India story.
The IMF has backed India to reclaim its tag of the fastest growing economy in the world.IMF expects India to clock a growth rate of 9.5% in FY22 and 8.5% in FY23 in its latest report.
Global rating agency Moody’s has also recently upgraded India’s sovereign credit rating outlook to stable from negative. Moody’s has lowered its assessment about the declining downside risks in the financial system as the banks have come out of the pandemic relatively unscathed.
Expectation of Strong Earnings
The pandemic has fastened the trend of consolidation in favour of organised sector.They have managed to gain market share at the expense of MSMEs and unorganised sectors.
Majority of Nifty50 companies are expected to deliver strong earnings despite the inflationary pressure.The expectation of a strong festival season is also keeping the optimism of strong earnings intact.
Push for Privatisation
Air India’s privatization has been a watershed moment for India’s disinvestment drive.It has built a positive narrative around the strong pro-business mind set of the government.
With Air India’s privatization,the market is expecting quicker resolution of impending proposals as well.In a recent interview,Tuhin Kanta Pandey, secretary, DIPAM (department of investment and public asset management) expressed confidence that privatisation of Neelachal Ispat and Central Electronics could be completed during the December quarter.He also expects the sale of BPCL and BEML along with the LIC IPO to be concluded by March’22.
Buoyant Manufacturing, Growing Exports
A part of market buoyancy is also a reflection of stellar performance of the manufacturing sector. India’s industrial production has been impressive since the receding of the second Covid-19 wave. India’s IIP has grown in double digit at 13.6%, 11.5% and 11.9% respectively for June,July and August 2021.
India’s exports are clocking the highest ever growth rates due to the rise in global demand. Exports for the period April-September 2021 grew at 57.50% at $197.89 billion as against $125.62 billion a year ago.
New Listings, Unicorns:A Move Toward New Economy
India has witnessed a flurry of IPOs from fintech and consumer tech space. These new age tech-based IPOs are expected to help India’s market capitalisation to raise exponentially as India is fast moving towards a new economy.
Rising number of unicorns have also given a major boost to India’s rising credentials among the foreign investors. As many as 33 start-ups have attained a unicorn status as of October 2021- the highest ever in a calendar year.
The government has shown a strong intent towards economic recovery with several initiatives like privatisation, formation of a bad bank, launching of PLI scheme reforms in telecom sector and farm laws. The market is expecting the pace of reforms to continue till 2024 which has kept the market resilient despite the stretched valuations and rising risk of correction.
Sources: Trading Economics / Livemint / Indiatoday
Views are personal:The author -Tushar Vaniawala is a Research Analyst at Sunkersett Investment Intermediaries
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