It is interesting that even as the economy is reeling under Covid’s Left hook, the stock markets were soaring, hitting a market capitalisation of $3 trillion on 25 May for the first time ever.
Do the Indian markets know something we don’t?
To be sure, markets are moody, and tend to develop either an overly rosy view of the future or a very gloomy one, depending on three factors: liquidity (the amount of money sloshing about in the economy); the availability of good stocks; and an overall herd belief about whether the worst (or the best) is over.
Right now, the markets believe that our second Covid wave is nearing its end, and that the economy will bounce back just as it did last year after the second quarter.
Last year, in the initial lockdown period, the markets fell so sharply, that most investors lost money. But the quick rebound has now turned into a form of common wisdom that this time it will be different. Since a lot of people believe this, even in the worst weeks of the current second wave, there was not much selling happening unlike 2020.
Last year, between the highs in January and the start of the Covid lockdowns, the Sensex dropped around 40-45 per cent.
This time, between mid-February and the third week of April, it barely fell 5 or 6 per cent. It is back now to where it was before the second wave hit us in the solar-plexus. Around 12 noon on Thursday, 27 May, it had crossed 51,150 and seemed headed towards an all-time high once more.
Punters should keep a few things in mind.
One, the party will last only as long as all major Western governments believe that recession is a greater worry than inflation. Early signs of any change in this consensus belief will come from the US Fed and the European Central Bank, if they show an inclination to raise rates.
Despite increased vaccinations, many parts of Europe and Japan and Asia are far from Covid-resistant, so one can bet that easy money will remain at least till the fourth quarter of this calendar year.
Two, in India, the pace of vaccinations will determine the return to economic health – and resultant market outperformance.
Currently, around 16 per cent of the population has received at least one dose of the vaccine, and if the government’s vaccine availability projects are any guide, it should be possible to vaccinate at least 60-70 per cent of the adult population by December latest with at least one dose if not two.
This implies herd immunity and a reasonable return to normal work life in factories, offices and commercial spaces.
Three, a return to relative immunity from Covid will mean that sectors that currently laid low by it – non-IT services, offline retailing, tourism, hospitality, education, banking and financial services, consumer durables, automobiles, etc – will bounce back first.
IT services and healthcare will, of course, remain strong well into 2022.
Even as Covid abates, healthcare systems will need to remain vigilant, both on the infrastructure front and from vaccines and cures, as the virus has shown a degree of resilience that previous ones have not.
IT services, pharma companies and FMCG will continue to perform reasonably Covid or no Covid in the foreseeable future.
Four, given new uncertainties in the world order, the rise of a belligerent China, and uncertainties about the future of the global trading system and supply chain vulnerabilities, gold may continue to remain attractive. One could hold 5-10 per cent of one’s investments in gold or gold-related assets.
In India, sovereign gold bonds, which pay 2.5 per cent interest and are capital-gains-free, are better investments than holding the metal itself – unless the goal is anonymity. Physical gold is equivalent to holding money in an offshore or anonymous Swiss account, for it can stay hidden wherever you choose to bury it. So, go for gold.
As far as stocks, the big question is whether the markets will reach the $5 trillion milestone before gross domestic product (GDP) does. We won’t hit the $5 trillion GDP number by 2024-25 due to the Covid disasters, but who knows.
The markets have their own logic. Maybe, if the economy goes stronger, a falling dollar may help us get there even without double-digit growth.
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