India is passing through a major health crisis. News regarding daily Covid-19 infections, death, non-availability of beds and oxygen, travel bans from India being imposed by many countries… all indicate a gloomy scenario. Increasing localized lockdowns, curfews and severe restrictions on movements mean that the market’s pre-second wave assumptions of around 11 percent GDP growth and above 30 percent earnings growth for FY21 are unlikely to be achieved. Under normal circumstances, this gloom and doom scenario would have led to a market crash. But the market is exhibiting remarkable resilience. Why?
This bull run is global
Let’s get the issue in perspective. This bull run, which began after the 2020 March crash is global. There is a high degree of correlation between global markets and this correlation is unlikely to be broken anytime soon. The prime mover of this global market rally is the unprecedented humungous liquidity that has been created by the world’s leading central banks and the consequent historically low-interest rates. Globally, stocks have attracted a flood of liquidity during the last 6 months. In the developed world, inflation is no longer a ‘monetary phenomenon’. A sizeable part of the liquidity created by the central banks has gone into risky assets like stocks pushing their prices higher and higher. In other words, in the absence of consumer price inflation, liquidity is creating asset price inflation. This global financial market construct is assisted by the recovery in the global economy led by the US and China.
In India too, data indicates that we are at the beginning of an expansion cycle in growth and corporate earnings, even though there are short-term headwinds unleashed by the second wave of the pandemic.
The market is looking ahead
Since this bull run is global, a sharp correction too is likely to be global. Even though the health crisis is terrible, the market is looking, say, two months into the future at the post-second wave scenario. Therefore, the temporary gloomy Indian scenario is unlikely to tank the market, unless the health care system completely collapses with terrible consequences, impacting market sentiments hugely.
Sharp correction likely to be global too
The most important factor, which might trigger a potential correction, would be the re-emergence of inflation in the developed world. If the huge fiscal and monetary stimulus triggers inflation, it would force the Fed to taper its bond-buying program, which would impact financial markets globally. Investors should remember the ‘2013 taper tantrum’ and its impact on financial markets. Of course, any tapering would be better communicated this time; but it remains the principal threat to the ongoing bull market.
What should investors do?
Market trend, going forward, would depend on the Covid curve. If the curve flattens and shows signs of declining, the market can scale higher. Already there are signs of the second wave flattening. But, there is huge uncertainty regarding the course of the pandemic and its fallout. Therefore, investors can think about booking some profits from equity and investing the proceeds in fixed income even though fixed income returns are low. But, remain invested in this bull market. IT, pharma, metals, chemicals, consumer goods, and leading names in financials are on a strong wicket.