Financial markets surge (and fall) amid coronavirus surge

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  Financial markets surge (and fall) amid coronavirus surge

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

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1. First 2020, then 2021: Just like the markets surged in 2020 when pandemic struck, they have shown a similar trend in 2021 also. People are surprised how this can happen!
2. Real economy versus stock market economy: The basic question is - are the two disconnected? Usually the stock market is positively linked to economic growth in long period cycles of 10-20 years, but that's not the case with short term periods. Over the past year, there has been no linkage between the economy and the market movement, apparently. As on date, there is a huge gap between the ground reality - people focussed on protecting them from coronavirus, corporates diverting their industrial resources towards the manufacture of oxygen, and so on. Despite this, rise in BSE Sensex is an interesting thing.
3. The real FPI risk: If the healthcare situation does not come under control soon now, the foreign portfolio investment (FPI) outflow will gather pace in the coming days.
4. Some reasons for the rise: The fourth quarter for FY 2021 gave a big positive hope for the markets and investors expected a bright scenario two months ahead. The absence of a nationwide lockdown, and rather limited impact of lockdowns announced by the states and vaccination programme created an optimism in the market. The infection and mortality among people vaccinated is low, and expectations are (were) that following vaccination, more than 35-40 crore people will engage in free travel. The vaccination will be an additional security for industries to continue operations and avoid a full-scale lockdown. There is a sense that it is a pain of one to two months and normalisation will be faster.
5. Other indicators: Banks, which are considered a proxy for the economy, did not face asset quality crisis as expected. The fact that most countries with resources are coming to India’s help has boosted sentiment. Over the last few days, US has removed restrictions on export of vaccine raw materials, countries are helping India with oxygen concentrators, ventilators, vaccines and other materials.
6. Who are the buyers: The current strength in the market is being provided by domestic institutional investors (DIIs) — mutual funds and insurance companies among others. For the first time in seven months, DIIs has overtaken the FPIs in net investment in Indian equities. FPIs are concerned over the rise in Covid cases around the world (especially in India) and therefore exercise caution. 
7. Summary: If there is a sharp outflow of FPI money due to worsening healthcare situation, there could be a correction in the markets. But if the situation improves in coming weeks, markets may gain confidence and renewed strength. Investors should not speculate in the market at this time. Profit booking is an option for those who are in need of funds and who want to keep high liquidity with themselves.

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

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