This market bull run is no hot air balloon - Hindustan Times
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This market bull run is no hot air balloon

ByMonika Halan
Jul 17, 2023 09:29 PM IST

The Indian stock market rose 16% between March 24 and July 17, powered by a clutch of reforms, and fuelled by retail and foreign institutional investor money

Stock markets make headlines when they either throw a tantrum and crash dramatically or reach lifetime highs. Gaining a breathless 16% from March 24 to July 17, with Sensex hitting a new high at 66,589.9 points on Monday, the Indian stock markets are on a bull run. While there is one set of very smug systematic investment plan (SIP) investors nodding importantly in their social networks, there is another set of index watchers — who predict doom when the markets crash – who feel happy about letting their money sit in a 3% savings deposit (“at least it is safe”) but fear missing out when markets get into a bull run. How far will it go and is this for real are questions they ask. I will speak to the latter group of people.

The stock market index on a display screen at the Bombay Stock Exchange (BSE) building in Mumbai.(PTI) PREMIUM
The stock market index on a display screen at the Bombay Stock Exchange (BSE) building in Mumbai.(PTI)

Stock markets make headlines when they either throw a tantrum and crash dramatically or reach lifetime highs. Gaining a breathless 16% from March 24 to July 17, with Sensex hitting a new high at 66,589.9 points on Monday, the Indian stock markets are on a bull run. While there is one set of very smug systematic investment plan (SIP) investors nodding importantly in their social networks, there is another set of index watchers — who predict doom when the markets crash – who feel happy about letting their money sit in a 3% savings deposit (“at least it is safe”) but fear missing out when markets get into a bull run. How far will it go and is this for real are questions they ask. I will speak to the latter group of people.

There are two main reasons why a stock market rally can have legs of sand. One, there is a giant wave of global, or local, liquidity that creates an asset bubble. This happens when the central bank (typically the US Federal Reserve) keeps the interest rates too low for too long. The 2021 cryptocurrency bull run was a hot air balloon filled with the gas of money borrowed cheaply (in addition to the spending stimulus carried out during Covid-19) as the Fed kept the interest rates at 0.25% over a two-year period. The liquidity argument is untrue this time around as the Fed rate is currently at an almost two-decade high of 5.25%. As is the Indian policy rate at 6.5%, off the low of 4% seen during the Covid easy money policy. This means that money is tight in the system – there is no easy money available to be borrowed and bet on the stock market.

The second reason is the possibility of a very large scam that has the power to inflate the entire market. India has seen two such large scams – in 1992 and 2001. In 1992, the market cap of the Indian market was 10,000 crore, and in 2001, 5.7 lakh crore. The market cap today is 304 lakh crore. Earlier, a single operator or stock had the power to cause a systemic risk to the entire market. That story is largely over.

It is the demand for Indian stocks that is driving prices, and this demand has two legs. One, the base is being provided by growing domestic retail investment through SIPs that, in June 2023, reached a monthly value of 14,734 crore. Over 1.6 lakh crore a year (and growing) is funnelled into the Indian stock market by retail investors through this route. Two, on this base, add the flush pipeline of foreign institutional investors (FIIs) –pension funds, hedge funds, investment banks and foreign mutual funds – that have put in $ 1.3 trillion in just the first three-and-a-half months of the financial year 2023-24.

The same institutions were conservative over the last two years and took out a net $ 1.7 trillion over FY 2021-22 and FY 2022-23. Indian retail money is now giving a floor of the market, without which our markets would tank when FIIs withdrew. This makes for a far more stable market than earlier.

Why is the money coming? There are both push and pull factors. On the push side, FIIs seem to have priced in the next two Fed hikes left in 2023 and built their models on a soft landing of the US economy. The US, remember, has been teetering on the brink of a recession with problems such as bank failures, debt ceiling and internal political conflict muddying waters. Early indications are that the giant $25 trillion behemoth will not crash, but gently land on soft sand before it swims again. It is now looking for riskier assets than the sure-shot 5.3% returns of a one-year US treasury bond.

On the pull side, the India story is finally looking strong. Stock markets reflect the profits of listed companies and the potential for growth. The stock price becomes an indicator that builds into it all the available information about the company, its competitors, the economy, the world, the headwinds, and tailwinds, as much as it can. When indices rise, it can be said that the overall stock market is up, in the hopes of growth and hence more profits.

It seems the stock market is connecting many dots to see the big picture of the Indian economy. Several years of hard reform have finally rid India of its twin balance sheet problem that froze corporate borrowing and bank lending due to unpaid loans on both sides of the balance sheet.

The double shocks of GST and demonetisation have worked their way out. Growing digitisation of payments and rising GST collections point to a new normal for the formal economy. A growth stimulus can come both from the government and the private sector. While the capital expenditure (on ports, roads, bridges, highways, and metros) of the government continues, the green shoots of private investment are finally visible from earlier this year, after being stagnant for over a decade.

A virtuous cycle of growth is fragile in its initial years and we are at that stage right now.

A big possible headwind is a fractured mandate in the 2024 general elections that has the power to undo this momentum. What investors need to remember is that markets go up and down. And unless there is a story of a sustained recession, the rising Indian economy will lift all boats – people, companies and the stock market. You decide if you want to ride or watch from the sidelines again.

Monika Halan is the author of the best-selling book Let’s Talk Money. The views expressed are personal

Unveiling 'Elections 2024: The Big Picture', a fresh segment in HT's talk show 'The Interview with Kumkum Chadha', where leaders across the political spectrum discuss the upcoming general elections. Watch Now!

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