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Indian equities log most gains in a decade despite economic slump

Last Updated 09 September 2020, 07:04 IST

The stock markets have been witnessing a bull run since the beginning of the current financial year despite the fact that the economy has seen an unprecedented contraction during the first quarter.

A DH analysis of a cross-section of data points for the past 11 years shows that various parameters of equities are at their multi-year peak even as the economy and markets have been moving in the opposite direction.

The foreign fund inflow worth Rs 32,439 crore in the first five months of FY21 has been the highest since FY15, which according to analysts is due to the surplus liquidity induced in the market after governments announced $6 trillion worth of stimulus globally.

Most of the foreign funds have been garnered by the blue-chip companies as markets have become more and more polarised. As a result, the 30-share BSE Sensex is witnessing its best rally (surging by 31.08% between April and August) in 11 years, after it has seen a 61.4% rally in April-August, 2009.

This rally has benefitted may shareholders, as the growth in investor wealth has been the highest (of 35.5%) in the documented history of the past eight years. The BSE has recorded daily investor wealth only since FY14.

However, the DH analysis reveals that markets have mostly moved in the opposite direction of economic growth in the past 11 years. In the past decade, the benchmark indices in the April-August period and GDP growth in the Q1 have seen a correlation coefficient of negative (-) 0.36 (moderate negative correlation).

The sign of the correlation coefficient represents the direction of the relationship. Positive coefficients indicate that when the value of one variable increases, the value of the other variable also tends to increase, and vice versa.

"GDP growth is a lag indicator whereas the market tends to look at earnings growth visibility in the future and discounts that before it happens," says Hemang Jani, Head - Equity strategy, Motilal Oswal Financial Services.

However, this assertion of markets is only partly true, as the 6-month forward GDP growth numbers and BSE Sensex movement only show a low positive correlation of 0.25 for the past 11 years. Also, even as Sensex has been roaring, the economic recovery looks like a black-hole, which no one is able to estimate right now and depends on the revival of domestic demand.

“Economic recovery would be gradual and contingent on the easing of the lockdown and the resumption of commercial and business activity. This, in turn, would depend on containing the spread of the pandemic. There is uncertainty on all these counts,” says Kavita Chacko, Senior Economist, CARE Ratings.

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(Published 08 September 2020, 16:05 IST)

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