A recent article expressing the puzzled state of mind of the Former Indian Chief Economic Advisor Mr. Arvind Subramanian about why stock market is buoyant while economy is sinking. This phenomenon is so much intriguing even for an expert like Mr. Arvind that his statement also said that he would personally fly down all the way from US to understand it to the IIM Ahmedabad students.
Now, I am not an ivy league pass-out or any economy expert but yes, I am a budding businessperson in the internet age who has read & applying economics as a subject. So, took this as a challenge and have done research to the best of my capacity from the leading resources available in the country to do justice for the solution of the mysterious way Indian economy is going. Please read it until the end and share your valuable feedback . Also, share it in business circles whom you think must be wondering about the same phenomenon.
“The way to make money is to buy when blood is running in the streets.”
John D Rockefeller
“Trends test the point of last support/resistance. Enter here even if it hurts.”
It is widely believed that the best time to enter or invest in markets is when GDP growth is low.
It happened in America in 1987.
It happened in India in 2002, when GDP growth was low, and markets were also low.
It is happening for us again in 2019, but while GDP growth is low, markets are at a high.
Why is the stock market shooting up while the economy is predicted to be heading south? Experts say that the rally is driven by a narrow band of stocks, and not the entire range. Only 8 of 30 Sensex constituents have gained more than 20% in the year to date.
This dependence indicates a risk, yet investor sentiment remains high.
ROLE OF PERCEPTION
Is it true that markets run on perception and sentiment, rather than a realistic assessment of balance sheets? There are diverse opinions on future outlook for the country’s economy, but as Mark Twain said,
“It is the difference of opinion that makes horse races.”
The opposition is weak, so the present Government is likely to continue, ensuring continuation of policies.
The worst is behind us. Things can only go up from here.
High spending in certain pockets is interpreted as economic wellness. As some leaders expressed in a controversial statements, “where is the recession, if malls and multiplexes are full, movies enter the 100 crore club fast and money is being splurged on weddings?”
All the above beliefs and mind-sets have led to discussions and debates which has primarily forming two school of thoughts across the nation. One being a thought which strictly condemns such controversial statements and highlights the high rate of unemployment, decreasing GDP rates etc. The other school of thought claims positive effects of such statements which help the consumers influence purchase decisions.
OPERATION TWIST OF RBI
Reserve Bank of India has resorted to an unconventional method to boost economic growth. – a bond swap titled Operation Twist. RBI bought long-term bonds worth Rs.10000 crores, and sold short-term bonds of an equal amount on the same day.
The action is expected to flatten the yield curve.
A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturities. The slope of the yield curve gives an idea of future interest rate changes and economic activity.
A normal or upward yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds, as risk increases with time. A downward curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of an upcoming recession.
The intention is to flatten the curve. Expert opinion differs, as they say that the action is not without its perils.
Kotak economists say,
“While the far end of the curve may ease amid open market operation purchases, the short end of the curve may witness a sharp increase in yields amid already muted demand. This could further translate into higher money market rates and, hence, risks being counter-productive.”
LANDMARK JUDGEMENT OF ESSAR STEEL
The Supreme Court ruling is strongly in favour of banks. It says that banks have a right to every business asset created by bank finance, in case of dissolution of the business.
It strengthens the position of banks in the era of bankruptcies and insolvencies. Stocks of banks and financial institutions stocks are among the major contributors to the gains.
The judgement has reaffirmed faith in the banking system, which was seen to be on the verge of collapse two years ago.
Foreign direct investment has been high in 2019. Policies have been revamped in a bid to attract global vendors looking for diversification, in the aftermath of US-China issues.
Image source: Economic Times
There is hope that gains from privatisation will help boost the economy.
Quarter-end results for September, 2019 of most companies have shown a better picture than expected. Moreover, with the advent of the much awaited BS VI version launch of the vehicles by April 01, 2020 is set to bring a tide of positive sales numbers for the major hit Automobile & Logistics industry.
LACK OF INVESTMENT AVENUES
Liquidity is high, but low interest rates have not trickled down to the borrowers. New projects are therefore not being kicked off.
Corporates are waiting for lowering of interest rates by banks to launch new ventures.
Idle funds lying with high-end investors find a place in the stock market, expected to yield some returns in absence of real business.
QUEST FOR PASSIVE INCOME
The economic slowdown, and fears of an impending recession have led people to develop sources of passive income. Real estate does not present a rosy picture. Business or areas of professional core competence appear risky.
So, a professional or businessperson invests in stocks, expecting money to multiply while they sleep. It has a negative impact on growth or employment that could have been generated, but boosts retail investment in the stock market.
The country’s business ecosystem has not been feeling much confident about investment related decisions and have shown very low risk appetite in FY19 in lieu of the economy slowdown news & the overall series of government policies released in the last 7 years. We at Valuescale, look forward to compiling and analysing such scenarios and the latest trends of technology in 2020. Please feel free to add any points which we might have missed or a different perspective that we could discuss about.