PARADOX: While the Dalal Street stock market index rose for the fourth day in succession to close at 51,937- about 200 points short of the closing record hit this year, the physical deficit rose to 9.5% which is the highest ever for this Central government.
By Arvind Pinto
Even as the economy crashes with a steep fall in the Gross Domestic Product and unemployment, the stock markets continue to boom. The rich are getting richer with the middle classes going bankrupt.
HOW does one explain the apparent paradox of the stock market hitting new highs, while the underlying economy is decelerating amidst the second wave of the corona virus that hit the country at the beginning of this year?
Last April the lockdown also saw the crash of the stock market. Both NIFTY and SENSEX hit an all-time low. As against last year this April, both the indices continued to rise, hitting an all-time high with NIFTY going over 15,000 in the month of May 2021. To the general public, this is an apparent contradiction. Is the stock market rooted in the economic situation of the day, or has it taken off on a tangent? Is this rally sustainable? Or is this blow up a bubble waiting to burst.
Reasons for the Rise in the Stock Market
ONE of the reasons for the rise in the market is the aggressive buying by Foreign Institutional investors (FII). While these foreign investors sold heavily in the month of April 2021, they have purchased $1 billion worth of shares in the last trading sessions. The foreign buyers believe that with the stabilization of Covid cases, economic activity will pick up and the economy will rise to new heights. Further, the low bond yields in US treasury bonds have seen an inflow into the Indian market
Secondly, there is an excess liquidity in the monetary system. The RBI in order to infuse an economic stimulus, has keep interest rates low while encouraging banks to borrow liberally. With the economic lockdown, both the manufacturing and service sectors have been hit. There is little credit off take in either of these sectors. Thus, the only sector where much of this money can flow is the financial sector. This is one of the reasons for the steady rise of the market.
Many firms with financial liquidity and with a stoppage of production, have thought it prudent to place their idle funds in stocks and bonds to give them income during this period. While companies do engage in playing the stock market to a limited extent, the extensive diversion of funds into the stock market gives rise to a buoyance in the markets at the cost of the growing our manufacturing capacity. This diversion of funds, while helping a firm in the short run, would cause supply chain disruptions in the long term.
At the individual level the lockdown is limiting demand in essentials and food. This allows many individuals to use their excess funds in the stock or mutual fund market. Over the last year, with many who have to work from home, and with little other diversion, they have taken to playing with the funds in the stock market. The rise of the stock market has enthused several to put their funds to use by buying and selling stocks.
It is said that during the last year, there were more than 1.5 crore new investors by opening demat accounts, that have come into the market. Many of these first-time investors, tend to continue in the market, until a crash when many to them lose both their savings and their interest in the market!
IF one were to believe that the rise of the stock market is a good time to jump in; a new investor must tread cautiously. For it is only a few select stocks that are driving the market to scale new heights. Pharmaceutical and IT stocks rule the roost in terms of both gains and market capitalization.
The Reserve Bank of India in its annual report for the financial year 2021 has warned about a possible market bubble. For this rise in the stock market is not based on the rise of either the fundamentals of the individual stocks, neither is there much positivity regarding the economy. Many of the stocks are overvalued, with a correction due. However, the rise of the market continues to puzzle many analysts who track the market.
Be A Wise Investor
THE stock market is due for a correction soon. It would therefore be wise for investors, to look closely at their stocks, to book profits on those stocks that have appreciate substantially. It would also be wise to move away from penny stocks, those stocks that rise like a meteor. Only to fall suddenly, often below their face value. In the past there have been several market crashes – a few long-term investors would be aware of the Harshad Mehta or the Ketan Parekh scams.
It would therefore be wise to play the market carefully, buy wisely for long term gains, rather than for short term greed that often ends in punters losing their entire savings. For the stock market for the wise investor is a means of making money, but for the gambler it is a black hole that can eat up one’s fortune!