The economy may be under pressure but the Sensex continues to make new highs and get closer to 42,000 levels. If you are wondering about the logic behind this rally, here it is.
Reforms on right track
Markets are convinced that the growth slowdown is purely temporary. Reforms like GST, IBC etc are on track despite the teething problems faced along the way. IBC has helped banks to recover Rs.1.60 trillion and GST has been put through without impacting inflation. The intent is certainly in the right track.
Fiscal measures lag effect
The government initiated a slew of fiscal reforms in the last few months. The cut in corporate taxes to 22%, the 15% concessional tax for manufacturing and the personal tax benefits are all likely to have a positive effect. In addition, the big thrust on infrastructure and rural spending will have a salutary impact on growth in the coming months.
Market leader effect
The market leadership has been limited to a handful of stocks like RIL, TCS, HDFC, HDFC Bank, Infosys, ICICI Bank, Kotak Bank etc. The combination of size and quality continues to attract funds to these stocks even at rich valuations. This has kept the stock markets buoyant even as the economy has lagged.
The MSCI revamp came as a blessing in disguise for the Indian stock markets. The new weightage for India would mean an additional 100 bps weightage in the emerging market sweepstakes. That would imply another $2.5 billion in inflows into India from ETFs, index funds and other passive players. If you add the anticipatory buying by the FPIs, the impact is likely to be magnified.
Something has changed in the last few weeks and sectors that were long ignored have suddenly taken center stage. For example, telecom stocks are back in action with the AGR issue sorted out. Secondly, metals have seen a lot of buying interest due to the trade deal and the expected stimulus by China. Lastly, buoyant oil prices have led to revival of interest in stocks in the oil upstream and refining sectors.
Global cues turning risk-on
Two things have changed in the last two weeks. The US and China have made a good start to the trade deal. Global investors and traders are likely to heave a sigh of relief as event risk comes down. The UK election outcome also means greater certainty in its journey towards BREXIT. The net result is a boost for risk-on emerging markets like India. That is a major market driver! ©