Pandemic-ravaged Year 2020 has put the world’s real economy in the dumps. Many countries are in a declared recession for at least two quarters running. And those that claim slight growth including India and China, are probably indulging in accounting lag and sleight-of-hand. Stimulus and note-printing to stay afloat, never mind inflation, because you can’t properly inflate prices in a recession when there is minimal or no demand, is the order of the day. Governments are pump-priming the economy to survive. The rush of cheap, practically interest-free money has gone partly into basic consumption and the rest has gone to the bourses. In America with the biggest stock markets in the world, running into over $ 20 trillion, this is evident. Likewise, it is fuelling the European indices, which are individually slightly bigger than ours in some cases, by a trillion or so but collectively add up to a tidy sum. A proportion of this gush of money has also come to the emerging markets (EMs), such as India.
Liquidity fuelled booms are not new. The Clinton years, in not-so-distant memory, saw the borrow-and-spend economies of the world roar on, and this carried on till the crash of 2008. But since then, the progress of the international bourses has presented a much choppier graph. Have people made money? Some have, obviously, but not many. Too many theories and fear of Black Swans. Both bitten and shy.
Since it is never much of a strategy to look a gift horse in the mouth, it’s best to admit that its hallelujah time at Dalal Street right now, whatever be the reason. Nobody is holding back because of fundamentals. Everyone knows they will take a year or two to look decent after the companies revive in reality.
But as the market rises amongst all the bleakness and money shortages in everyone’s lives, ordinary punters and investors are cashing out from equity. They are not putting in more money. Instead, they are taking it out as soon as they break-even or realise a small profit. Many have been trapped in equity for some years — without a bean to show for it. Equity, whether it is in the purchase of individual stocks or via the many professionally managed mutual funds, has not been delivering of late, not even for some years before the pandemic. Real earnings from stocks are barely better than debt instruments, fixed deposits and debt funds over the last decade. The old norm that equity always pays 15% pro-rata over time is just not true any longer. Bull and bear markets have spread themselves out and the expected upswings have been reluctant to show up.
However, the stock market is going up today, and so there must be more buyers than sellers. These are the foreign institutional investors (FIIs), swashbuckling types despite their suits, ties and short haircuts, who tend to buy in millions of dollars to the Rs-80-to-US-dollar exchange rate.
The FIIs are calculating that a 4% or 5% gain in India, with zero interest funds from America, invested between June and November 2020, is not a bad gain. There are really not that many places that this kind of quick buck can be made. The starved Indian bourses respond very fast to gushes of FII money. They always have, right from the 1990s, when this started to happen.
It is, even now, a small, under $2 trillion market, and a few billion in aggregate over the year, goes a very long way to influence its movements. It even affords a measure of control that is not possible without vast sums to invest in America.
The FIIs can buy into the sure-fire high liquidity blue-chips on the Sensex such as Reliance Industries, that are easy to buy in bulk because of large pools of floating stock. And such Sensex stocks can be sold just as readily. Some of the more adventurous FIIs have begun to invest in a few good Midcaps. The midcap-smallcap boom, with its low entry points, with stocks priced in the two and three digits, is being pushed by the domestic investors.
The foreign fund managers can earn their Christmas bonuses like this, and come back to milk the EMs again in late January 2021. After all, it is just a small proportion of the total pie going to market in the developed world. But, nobody in the Indian investment fraternity can possibly be complaining.
Does the rally have legs? Will it be a sustained bull market? It is possible, for all the extenuating circumstances. India will certainly bounce back eventually because of its economic vitality and large domestic market. So, a stock market rally fuelled by easy money or liquidity is only anticipating a good future.
In India, there are a new set of features that have opened up in 2020. One is the benefit accruing from firms diversifying their manufacturing away from China into India, as well as other countries. Another is the big push towards self-reliance and a domestic armaments industry. The third is emerging sets of foreign collaborations in high-technology areas, because of India’s English speaking and qualified workforce, prowess in Information Technology (IT), and yes, domestic demand.
In addition, the relentless continuance of infrastructure development under the BJP, inspires confidence for the future. The ability of this country to stand up to military threats from both China and Pakistan simultaneously, is likely to engineer a paradigm shift in terms of how India is perceived internationally.
The likelihood of long-term political stability with the BJP and its allies and outside supporters holding sway is always a good thing in an uncertain world. India’s increasing proximity to the Western powers, notably the US, France, and Israel, as well as cordial relations with Putin’s Russia, is a very reassuring thing for investors. The Gulf Arabs, worried about dwindling oil revenues, are also increasingly taking an interest in India and the economic opportunities it offers. The Indian stock market may be out to deliver a quick buck in the short term by way of some relief. But its logic of putting in money now will probably hold good for the medium to long term as well.