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How stock markets correlate with the economy as of present

Uploaded Date 22-Nov-19
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At the present hour, performance of the Indian stock markets indicates a deviation from its performance, as stipulated by the economic indicators. The core sector has come across a sharp decline. In spite of that, BSE Sensex, fiscal slippage and GDP forecast have all stayed at their all time highs, in excess of 40,000 points.


Let us consider a study by Kotak Institutional Equities. This exemplifies that even while the economic conditions have continually been weak, Indian market is still trading at rich valuations.


Over the prior few months, there has been a further deterioration in the economy. This is as per a number of top high frequency monthly indicators. This downturn is in part due to structural factors. Fiscal and monetary stimuli hence stand to be insufficient to revive the economy at this point of time.


SBI, which is also the largest public sector bank in India, predicts that the GDP growth for the second quarter will stand at 4.2%. The Kotak Mahindra bank, on the contrary expects it to stand at 4.7%.


This is a time wherein the Sensex is close to reaching 41,000 and Nifty has gone past the 12,000 mark. This goes to show that the stock market is not deeply influenced by the state of the economy at this point of time. It is important to know why equity indices are not in line with the on ground economic situations.


 The macroeconomic environment and the markets show a disconnection to a certain degree. The situation is likely to stay the same for some time to come. When we take into consideration the rich evaluation of Nifty-50, we recognize that it currently thrives in the recovery of the economy.


Still, there is an uncertainty as to when the markets will converge with the economy.


In September 2019, output of core infrastructure industries declined by 5.2%. This was because seven of the nine core industries came across negative growth.


For the last year, the same figure stood at 4.3%.


We do not come across signs of macro improvement, as indicated by the high frequency indicators. The broader indices are still close to near highs. The underlying reasons for the same include a faster recovery of earnings, as enabled by rate cuts in corporate tax. Similarly, loan loss provisions for banks, is lower as well.


Following the reduction of corporate tax rates, corporate earnings have been higher for Q2-FY20. FPIs are hence positive, from an Indian perspective.


In the same way, the US-China trade war has came across some positive developments. Over the past two months, the Finance Ministry of India has intervened on numerous occasions. This has worked towards keeping the flows high in the market by changing the moods.


It is however noteworthy that Nifty-50 and top 20 stocks have performed higher in the markets. The remainder of the market has not been able to match pace.


Similarly, a majority of the high quality large cap stocks have been benefited from the lower tax rates. Their stock performance is one of the factors that have resulted in the Nifty-50 up move.


Overall, the current stock market data may be best defined as bearish. Nevertheless, this base effect is likely to start playing out starting from November. Consequentially, the numbers will improve.


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