Markets and Economy went separate ways - Pandemic Effect

The world's financial markets have raced ahead, even as millions have lost work.

 Markets and Economy went separate ways - Pandemic Effect

---

Read more on - Polity | Economy | Schemes | S&T | Environment

---

• The story: No one expected in 2019 for such a pandemic to strike. But it did strike, and in the process, changed the fundamental relationship between the economy and the financial markets. While they did diverge earlier too, now it's too glaring.
• K shaped: By May 2020, the International Monetary Fund (IMF) had started warning that the recovery that follows would be K-shaped. Now well into 2021, the world is learning that global equity markets and economic growth are the two divergent forks in this ‘K’.
• Clear in the mind: The stock market and economic growth hardly moved in tandem even in the pre-pandemic era, but the wedge has widened in a counter-intuitive move. Major funds now accept that there's a K-shape recovery, and invest accordingly!

1. Fund managers have turned bearish on the global economy. Expectations of global economic growth are now very low, and the delta variant of the virus was behind this pessimism.
2. In sharp contrast, the broader equity market positioning remained firmly optimistic among fund managers!
3. The net global equity allocations stood at 50%, which is much above a 20-year average of 29%. Investors haven’t adjusted their portfolios with cash levels up slightly to 4.3% in September from 4.2% August.
4. Despite sluggish earnings growth and weak fundamentals, global equity market capitalization has shot up 75% to $119 trillion from the lows of March 2020.

• What is happening: At a micro level, the benchmark indices are ultimated made up of the prominent listed companies, and that is just a subset of the growth/GDP representation. So some rationalise that these variables may not necessarily move in sync.

1. This time, there are a host of other reasons behind this yawning gap.
2. The low cost of borrowings and flush liquidity chasing returns, valuations underpinned by cheaper discounting of future profits, sector-specific outperformance are all adding up to the bull market momentum.
3. The extraordinary fiscal and monetary support by central banks (mostly Western) was aimed at preventing an economic recession, but the unorganized sectors in emerging economies such as India have suffered a lot. Employment stands crushed.
4. This is exactly what the IMF had warned earlier - that major epidemics in this century have raised income inequality and hurt the job prospects of those with only a basic education, while scarcely affecting the employment of people with advanced degrees.

• Diverging, diverging: There is rising divergence not only among sector indices, but there is also evidence of rising inequality at the social level. On the one hand, massive high hiring by Indian tech companies is resulting in a jump in income levels for their employees and on the other hand, blue-collar workers employed in smaller and regional firms who cannot operate remotely have lost jobs with the shutdown of many smaller companies.
• Divergence won't end anytime soon: This total disconnect may not narrow even after surplus liquidity is withdrawn by global central banks. Since the equity market has already discounted the gradual tapering to a large extent, the actual event (the Federal Reserve cutting down on loose policy) may not elicit a steep correction.
• Summary: The rich have gotten richer, and the poor poorer. And there's nothing anyone seems to be able to do about it anymore.
• EXAM QUESTIONS: (1) Explain what can governments do to bridge the huge income/wealth chasm that has opened up due to the pandemic, across the world economies. (2) Why have financial markets totally diverged from the real economy? Explain in three points. (3) If you were the policymaker, what steps would you take to align the broader economy with the financial market's direction? Explain.

Read more on - Polity | Economy | Schemes | S&T | Environment

#Economy #Stocks #markets #Indices #Inequality #IMF #Divergence

Join UPSC Self Prep course | Online Course (PT Gurukul)  | Covid Special Course | Join PT courses

* Content sourced from free internet sources (publications, PIB site, international sites, etc.). Take your own subscriptions. Copyrights acknowledged.