Since the stock markets began their ascend in June 2020, everyone has been surprised. While some had predicted a V shape recovery, no one had imagined it to be quite this soon, including all your market veterans. But as the stimulus announced by Governments across the world found its way into the stock markets, they have been relentless.
After the meltdown in March 2020, the S&P Sensex has jumped by nearly 50%. So, now the question is, can this bull run sustain while the economy continues to lag with the virus running through the population?
1. Expected policy reforms in India
The previous stimulus package announced by the Government was around 1.2lakh crore, approximately 10% of the GDP. This liquidity-driven stimulus package provided much-needed relief to the MSME sector along with tax breaks for all.
Even now, Indian policymakers maintain that they will undertake more policy reforms to revive the economy. So, if these measures are implemented in the near-term, there is a good chance the markets will remain in the bull phase.
2. Governments world over will continue to pump in money, and that money will find its way into India
As the Covid-19 crisis culminated from healthcare into an economic one, policymakers across the world announced massive stimulus packages to support their economies. With Japan leading the pack, implementing a package amounting to a whopping 21% of its GDP, USA Germany Australia weren't behind. Announcing what is perhaps the biggest liquidity injection ever witnessed, each of these countries fully supported their economies by pumping in money.
Stimulus as a % of GDP announced by countries.
Japn - 21%
Canda - 15%
USA - 13.2%
Germany - 8.9%
Australia - 10.6%
Even now, policymakers are likely to continue with their liberal policies. In its recent meeting, the Fed was pretty emphatic about the fact that their interest rates will persist at these low levels.
So, as governments world over continue to support their struggling economies, the surplus international (FII) money will flow into the stock markets, keeping them buoyant.
3. Returns from other assets are relatively low, further fuelling demand for stocks.
As we are all well aware, the basic economic principle of supply and demand applies to the stock markets as well. So if stocks, as an investment avenue is in demand, the markets will no doubt rise.
Generally speaking, investors have two investment options (barring gold and real estate), the Government or bank-issued bonds (fixed deposits) and the stock markets.
With the Fed recently announcing that it will continue to keep its interest rates near zero, the bonds are unlikely to generate decent returns. In such circumstances, international money seeking better returns will have to turn to the stock markets.
Now, this is what transpired a few months back when the Fed cut its interest rates, in the wake of the Covid-19 crisis. Stock markets across the world shot up.
We are witnessing something similar in India, where the fixed deposit rates offered by the banks have also dropped, turning investors to stocks for superior returns.
4. Re-opening of the economy continues.
The re-opening of the economy continues
After the unlocking, the government hasn't put any fresh restrictions in place. Nothing big enough to hamper economic growth, signalling a road to recovery is in motion.
Stock markets rarely reflect current economic reality. They are only a leading indicator of the economy, moving in anticipation of where the economy will be. In India, its a combination of both, this and the movement of international money.
Indian stock markets have been rallying regardless of what the economic numbers indicate, partly because of the global infusion and partly in the hopes that things will get back to normal shortly.
So unless there is another series of bad news to follow, the stock markets will continue to ascend.
5. Outlook on the vaccine seemingly positive
Even though far-fetched, the outlook on the development of a Covid-19 vaccine is positive. There are several vaccines in the works, along with the one recently launched by Russia. And while most of this positive sentiment is factored into the markets, once a vaccine is released, the stock markets will see an uptick.