Markets riding high even as economy slumps

Govt moves, including corporate tax cuts, privatisation push, driving investors
For representation purposes (File Photo | PTI)
For representation purposes (File Photo | PTI)

HYDERABAD: The typical December Santa rally seems to have come early with markets touching historic highs on Tuesday.The Sensex crossed an all-time high of 41,000, and so did Nifty, which hit an intra-day high of 12,132 riding on global cues. However, both indices closed lower, at 40,821 and 12,037, respectively. Given that statistics are showing deteriorating economic health, it’s as if markets are engineering their own boom. The key question is why are the markets not reflecting the slowdown sentiment? And is the rally here to stay?

“Markets don’t go by past numbers, but react to expected data. Even though the Q2 GDP numbers will be out this week, that pertains to what happened as on September, which is already two months ago. I think markets anticipate that things are stabilizing,.. And though markets aren’t always right, they are discounting 6-9 months from now will be better than what they are today,” Prasanna Tantri, Assistant Professor, and Senior Associate Director, Center for Analytical Finance, ISB.

He, however, added that there was significant dichotomy between smaller and larger companies, with the former still not trading at high valuations. “You cannot have just 30-40 companies getting 90 per cent of the investments. If this rally has to sustain, even mid and small caps have to participate. If only big firms record high gains, the rally may not sustain for long,” he explained.

What’s driving investors is the series of government measures, including corporate tax cuts and the privatisation drive. The recent Supreme Court ruling on Essar Steel bankruptcy proceedings too lifted sentiment, not just of domestic investors, but also of FIIs, whose investments will likely touch a record Rs 88,000 crore.

“FIIs have largely been bullish, investing Rs 18,200 crore so far this month. Local investors have been investing largely through SIP, but have not withdrawn money in a big way despite a polarised market...Though the macros haven’t turned positive and corporate earnings growth on a broader scale remains sluggish, we are enthused by ample liquidity,” said Dhiraj Relli, MD & CEO, HDFC Securities.

Though the last two months saw initial signs of recovery, he believes real recovery may start from January.
“Most of the drivers of the current slowdown appear to be temporary and related to channel financing/GST credit issues...We expect earnings to recover faster with FY20 and FY21 earnings growth being driven by lower corporate tax rates and lower loan-loss provisions,” he added.

“If there were structural issues, we should have seen markets collapse. That said, the margin of error is small. Because all good things have been factored in and if you don’t see them turning out as expected, we may see a big crash as well.”

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