Last Updated on Jan 20, 2020 by Komal Roy
One of the best times to enter the market ⏱️ can be during an economic slowdown as markets are not on the expensive side. For instance, when you look back at 2002, you will see that India’s GDP and markets were extremely low, but then the equities rallied massively until 2007. However, despite the economy growing at a sluggish rate, investing in the stock market is expensive, given the all-time high records of the benchmark-indices.
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Why you ask? 👀
Experts believe that the benchmark-indices are greatly skewed towards a collective few stocks, which are propelling the market rally. But the fact remains that the broader market is far from being in good shape. So, what then is rallying markets?
1. Investors are expecting and reacting to government reforms
Easy money policies and government reforms bolster the economy. That is what is happening now, stocks are rallying because investor sentiment has boosted mainly riding on an expectation that the government will announce future policy changes.
A good example of this behaviour is that despite equity investors being concerned about last year’s NBFC crisis, the market went through a correction immediately after the government announced recovery steps. In addition, better-than-expected corporate Q3 earnings have also contributed to the spike in markets.
Another example is the change in market sentiment during the announcement of the Union Budget 2019. While the market had begun plunging after the government suggested levying a surcharge on foreign portfolio investors, it recovered immediately after the finance minister withdrew the suggestion in September. The corporate tax cut announcement also drove the market north.
2. Equity market is receiving a steady flow of funds 💸
A steady flow of funds into the equity market, whether via SIPs or a global asset, keeps the market upbeat. This is especially typical when there is no other yielding asset class present in the market. For instance, low interest rates and high liquidity on the global level has forced investors to park their funds in riskier assets such as equities, with a hope of earning higher returns.
India’s 10-year domestic benchmark yield has been moving around 6.5%, near its 5-year lows. This has become an attractive investment opportunity for those looking to assume higher risk and diversify their portfolio by investing in equities of emerging markets.
3. Government’s privatisation and divestment measures
In 2003-04, the government had taken various privatization and divestment measures to help revive the sluggish economy. This time too, the government has taken minor steps in this regard. Investors are therefore hoping that pumping the proceeds from privatization into the economy will bolster growth, which is another reason the markets are doing well.
What to keep in mind?
The current economic slowdown is due to structural factors such as abysmal job creation and low household income. The economy thus can undergo a gradual recovery rather than a quick one. However, the optimistic stance of the Indian equity market is still confusing investors like you.
But, be informed that the market upbeat is mostly skewed towards a few big stocks. For instance, while the Sensex and Nifty showed a growth of 11% to 13% on the whole, only 8 of the 30 Sensex constituents grew at over 20%. Equity investors are only investing in select stocks, which they think don’t respond to a large market correction when the sentiment changes.
Considering the current scenario, the Indian stock market is forward-looking and has turned a blind eye to the fact that it has to sail through a storm before things settle. Therefore, a smart move now would be to act cautiously.