Indian Equity Markets are on a Rally!

The Coronavirus was first noticed in the Wuhan province of China in December of 2019 and has since spread to almost every country in the world. The situation was then declared a pandemic by World Health Organisation (WHO) in March of 2020. The pandemic resulted in widespread lockdowns and restrictions across the world. Due to the lockdown many firms and local businesses were forced to halt their operations and suffered majorly owing to the lack of revenue.

The halt in business operations was reflected in the stock markets as well and the primary stock indexes like the Dow Jones Industrial Average, Nasdaq Composite, Sensex, Nikkei, FTSE100, etc tanked by more than 20% in March.

This drop ended the longest ever bull market in the US.

The primary Indian equity indices – Nifty50 and S&P BSE Sensex dropped by around 25% each to 8,200 and 28,000 respectively. It was considered as one of the biggest drops since the financial crisis of 2008. This period also recorded the highest ever selling by foreign institutional investors. The extension of the lockdown and the GDP downgrade of the country was expected to cause a bigger drop in the equity markets, but that hasn’t been the case for equity markets in India.

Since the sudden drop in value of the equity markets in March, the Indian equity indices returned back to pre-covid levels in just 4 months. Nifty and Sensex ended the first quarter of 2020 with a gain of around 30% from the previous lows in March.

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The Indian economy is in dire need of a rescue.

Ratings agencies like Moody’s, Standard & Poor have all downgraded the Indian economy along with their treasury bonds.

GDP growth is expected to be negative for the year 2020-2021 and industrial output has also declined as compared to the previous quarter. The IMF expects the Indian economy to contract by around 5%, which would be the lowest ever since 1961.

Firms have reported major losses in the first quarter of 2020 as there was little to no revenue generation during the first few weeks of the lockdown. Many businesses have resorted to salary cuts, ultimately leading to reduction in the purchasing power of the customers and in the end consumption in the economy. This vicious cycle is bound to lead the country into a prolonged period of recession.

India also entered into a few border disputes with the People’s Republic of China, resulting in a trade war and economical tension between the two countries. 

The number of COVID-19 cases in India have been increasing at an alarming rate, which should be a major cause of worry for the leaders of the nation. Despite the government’s efforts to curb the effects of the virus, it has reached almost every state in the country. Some areas have reinstated a lockdown to prevent further spread of the virus.

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Dow Jones vs. S&P BSE Sensex

Despite all of these problems, the Indian equity markets have shown an almost V-shaped recovery.

Most of the securities are now trading at their 52-week high mark while others are trading at prices above their all-time highs. Even small cap and mid cap securities have recorded tremendous gain in the first quarter.

14 of the 30 securities that constitute the Sensex beat the market.

What could be the cause of this rally?

The rally is believed to be fuelled by liquidity in the equity markets.

Experts believe that the Indian securities market is going through a liquidity infused rally. The biggest influence on the market prices can be attributed to demand from foreign portfolio investors. Foreign investors have pumped in $4 billion into Indian equities in the March – June quarter. Reliance Jio raised more than $20 billion through private equity investments from major players like Google, Facebook, Microsoft, etc. 

Hopeful buying from retail investors has been another major reason behind this rally. Individuals are now looking for alternative revenue streams as their traditional sources of revenue have been partially blocked. Analysts are now discounting FY20 earnings to arrive at forecasts for FY22 And FY23. The number of retail investors has increased since May as individuals are looking to bank on the opportunity available in the equity markets. Number of new investors witnessed a record high in the months of March and April. Around 1.2 million demat accounts were opened in the months of March and April itself. Online broker Zerodha alone added 300,000 new customers in these two months.

All of these factors coupled with investor expectations of a stimulus in the future is the only possible explanation for the current situation of the equity markets. The performance of the global markets is another reason for investors to be hopeful of this rally to continue. 

Experts believe that the liquidity in the markets will end soon. As overseas markets begin to foster in the current economic situation, we can expect a correction in the Indian markets as well. Given the current situation in India we can expect an economical imbalance in the country which might prove to be hurtful for the Indian markets. Analysts believe this is a good opportunity to book profits but investors should not chase this rally for too long. The rally is expected to continue until September after which companies would have come out with their second quarter results. Industrial output has already suffered, and companies are expected to report heavy losses due to the continuation of the pandemic in the country.

Government stimulus may lead to an extension in the rally, but investors need to be careful and conservative while picking stocks and focus on companies with strong balance sheets. Institutional investors have started selling their holdings in fear of a correction in the market.

This being said a sharp correction in the market will provide a good buying opportunity from a long-term perspective.