Continuing from yesterday’s post, let me share my thoughts on the issues raised therein.
If the condition of the economy is so bad, why are the equity markets booming?
In my view, there is nothing unusual or unprecedented in the current equity market behavior. We have witnessed markets scaling new highs during 1989-1994 (Sensex up 482%) when the global economy was struggling in the aftermath of the severe global economic slowdown; NATO forces attacking Iraq and a sharp rise in energy prices; India facing a severe balance of payment crisis, needing an IMF bailout; fall of National Front government in two and a half years and subsequently Chandrashekhar government within six months, and a minority government led by P. V Narasimha Rao at the helm in Delhi; first major financial market (Harshad Mehta) scam in India; belligerent BJP taking out Rath Yatra from Somnath to Ayodhya, Mosque demolition in Ayodhya and subsequent acts of terrorism that killed thousands; a slew of economic reforms causing the decimation of numerous MSME businesses. Commodities producers led the charge in this rally.
During 1999-2000, markets scaled new highs (Nifty up 42%) despite massive political uncertainties (3 general elections in 3 years); severe global economic sanctions post-1998 nuclear tests leading to sharp growth deceleration and capital outflows; LTCM default; sharp currency devaluation by Brazil, an Asian economic crisis; etc. The market rally was however very narrow, mostly led by IT services and the Internet.
The 2003-2007 market move was perhaps the most phenomenal (Nifty up 461%). Markets scaled new highs without any earnings growth. Corporate and lenders’ balance sheets worsened at an unprecedented pace – both in India and globally. The up move was much broader with consumers, financials, and capex all contributing in some measure.
The 2017-2024 market rally is remarkable in more than one sense (Nifty up 170% so far). First, it is perhaps the longest bull market in India. It survived the worst pandemic in over 100 years, rather easily. It has also survived, perhaps what could be termed the worst geopolitical crisis since the end of the Cold War. The leadership of the rally has rotated remarkably between a variety of sectors like consumers, financials, small and midcaps, capital goods, infra builders, realty, commodities, energy, healthcare, IT services, telecom & digital, etc.
My take on the current equity up move is:
1. Equity markets have always looked for opportunities in the crisis. The markets are looking much beyond whatever is happening today. Of course, there will be intermittent corrections and crashes, but Indian equities are geared for much longer bull markets this time, regardless of the global conditions. We have seen similar secular bull markets in the US, Europe, Japan, etc. in the post-WWII era.
2. The Indian equity market may be inching towards reality, i.e., rising income inequalities, stressed household finances, geopolitical uncertainties, and near-shoring and friend-shoring. The market is rewarding premium consumption, workforce rationalization (cost cutting), geopolitics (defense), local capex, manufacturing, and logistic infra, etc., and punishing staple consumption, savings, etc.
3. The market is not expecting any significant disruption due to civil unrest or political changes.
…to continue tomorrow
