Every day the stock markets in India (and other parts of the world also) are cheering the "positive data" and rising towards the previous highs. In my view, it may be a case of total cognitive dissonance. The market participants are selectively choosing the data that gives them hope of better days ahead; completely ignoring plethora of evidence indicating that economy is tottering on a long and winding road entering the dark woods with only scattered sunlight and no end in sight. Many experts have highlighted this case of dissonance between equity markets and economy, questioning optimism of investors and corporate managements. For example—
The incumbent RBI governor Shaktikanta Das recently highlighted that "There is so much liquidity in the system, in the global economy, that's why the stock market is very buoyant and it is definitely disconnected with the real economy. There will definitely be a correction but we can't say when."
The minutes of the Monetary Policy Committee's last meeting also highlighting the regulators' concerns about the specter of stagflation, clouding the visibility of further rate cuts and also bringing on table the probability of change in RBI's accommodative stance over systemic liquidity.
The former RBI governor (2008-2013) who sailed the Indian economy through the rough waters of global financial crisis also reportedly termed the recent positive macroeconomic as mere mechanical rebound, highlighting that India's short- and medium-term growth prospects continue to remain grim and the government should not read too much into the economic activity coming back from the depressed base of lockdown.
He categorically told PTI in an interview that "I don't believe we should read too much into the green shoots that you refer to. What we've been seeing is just a mechanical rebound from the depressed base of the lockdown; it will be misleading to see it as a signal of a durable recovery."
The brokerage firm Kotak Securities highlighted in a recent research note that "certain high-frequency indicators show some level of stagnation—(1) diesel sales declined 19.3% in July 2020 versus 15.4% in June 2020; diesel volumes are a good indicator of freight movement and general economic activity, (2) daily e-way bills in August 2020 are 18% yoy lower versus 10% yoy lower in July 2020) and (3) electricity demand is still marginally lower in August 2020 than previous period level after being higher in the month of July 2020.
As per a recent research note of Edelweiss Securities, "PMIs have moved up from all-time lows. However, this leading indicator is stalling now, showing the effect of state-level lockdowns and absence of demand stimulating fiscal support While market is cheering the denominator managed positive data, a number of experts are questioning the validity of green shoots."
As per the brokerage firm, Nomura Securities, "medium-term outlook of lower inflation and the growth challenge remains largely unchanged – we estimate GDP growth to average -5.0% y-o-y in 2020 – falling to -15.2% y-o-y in Q2 2020 and recovering to a still-subdued -5.6% in Q3, -2.8% in Q4 and -1.4% in Q1 2021."
Numerous other economists and strategists have also highlighted that growth trajectory may remain poor for longer. Surprisingly, the corporate leaders are not echoing this sentiment and are showing agreement with the political view of an imminent recovery! Either they are scared of speaking the truth or the experts are totally out of synch with reality. As Shakespeare said, "There are many events in the womb of time which will be delivered." I do not mind waiting for the labor pains to get over and the child be delivered. Till then, I shall stay cautious and conservative on my asset allocation (see here)
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