Why are equity markets moving up?

Why are equity markets moving up?

3 MIN READ

Equity markets worldwide have regained its footing led by a strong rebound in the US markets. US markets have practically led the charge to recovery as key indices like Dow Jones are trading 11% off its all-time highs. And what’s even better is the tech-heavy index – Nasdaq is within touching distance of its lifetime highs. The European markets have also gained momentum with key indices being 10-17% off its all-time highs. Even India which joined the rally a little late is ~19% off its highs.

Below is the table of major indices and their returns.
IndexCountryPercentage off from All-time highs (or 2020 high in some cases)
BovespaBrazil-22.2
Nifty 50India-19.1
CAC 40France-17.8
FTSE 100UK-17.0
Hang SengHong Kong-16.6
Dow JonesUS-11.2
DAXGermany-9.5
ShanghaiChina-6.5
Nikkei 225Japan-6.2
Nasdaq US-1.6

*Returns as on Wednesday’s closing price

So, the important question is what has led to this up move?

Let’s recap a bit, when the pandemic started across the globe it shook the entire system as countries announced lockdown, uncertainty increased as the duration of lockdown was not determined, and most importantly the economic impact of the virus was huge due to practical shutdown of the economy. All these things led to carnage in global indices. However, clarity started to emerge as infections started to peak in many economies leading to easing of lockdown restrictions and restarting the economy. Meanwhile, the governments and central banks across the globe took charge and announced an unprecedented fiscal response to reduce the economic impact of COVID – 19 supporting businesses and individuals.

Well, if we may quote the IMF, the fiscal response is, in fact, greater than the Global Financial Crisis. These measures led to an influx of liquidity into the system and all it needed was a glimpse of demand recovery to find its way into risky asset class like equity. And it happened, as easing restrictions led to reopening of the economy and high-frequency indicators point towards growth bottoming out. This is not it, as governments across most developed markets are preparing for stimulus package 2.0 to revive the economic growth. So overall, reopening of economy, early signs of recovery and hopes of additional package coupled with liquidity provided by central banks has aided the rally.

Indian markets have also witnessed decent recovery

Coming to Indian markets, the story here is a little mixed with both positives as well as negatives. On the positive side, the government’s recent guidelines towards “Unlock 1.0” shows that India is headed towards the gradual reopening of the economy – Positive 1. The demand recovery as suggested by commentary from some of the consumption-driven companies have been encouraging. Additionally, the tractor sales number announced for May and results of FMCG companies suggest that rural economy (which is most vulnerable to such situations) has been resilient – Positive 2. Thirdly, our dependence on monsoon is not hidden from anyone and a normal monsoon forecast from IMD has increased hopes of good sowing season – Positive 3.

In terms of negatives, the pandemic struck India later than other countries and it is yet to see the peak of infections. The infections continue to rise despite seeing one of the strictest lockdowns in the world. The reopening of the economy would increase the risk of more cases in the coming weeks which could potentially lead to more lockdowns – Negative 1.

Given the fiscal constraints, the stimulus package announced thus far largely addresses supply-side issues (credit support) and very little is done to revive demand, unlike other developed countries. Even if we witness a demand recovery of let’s say 60-70% of pre-COVID levels it is still 30% lower than it used to be – Negative 2. Thirdly, the banks have been put on the forefront to save India from the economic impact of COVID – 19 be it through incentivizing lending by cutting rates or be it through moratorium of loans. This has increased risk of a spike in non-performing loans in banks and NBFCs – Negative 3.

Conclusion

Having said that, we all know that equity markets worldwide are linked to each other and move in tandem with a certain degree of underperformance and outperformance. Remember before COVID – 19, the Indian economy was slowing whereas markets continued to climb to all-time highs. Currently, it is no different as India is having its fair share of problems which is ignored due to the overwhelming liquidity globally and early signs of growth bottoming out.

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