IN GENERAL, THE stock market should reflect the state of the economy. Or it should reflect what is expected to be the state of the economy. It is a simple correlation—if there is growth, businesses will do well and there will be profits which will then lead to stock prices, which is the value of a company, going up. Because of the pandemic, the previous year was a washout. This year, growth is picking up but only relatively speaking. Consider that the just released GDP growth number for the second quarter of this financial year has been 8.4 per cent. This looks impressive when you see that the number for the same quarter of the previous year was (-)7.4 per cent. From an economy that was contracting, it looks like we are expanding at pace. But there is also this: that in the first quarter of 2021, just before the one with 8.4 per cent growth, GDP growth was 20.1 per cent. Is the rate of growth then decreasing drastically? Not really. These numbers don’t mean much because the lockdown last year was a massive distortion. The economic trajectory will find a rational curve once the anomaly gets sorted. But what will be that rational curve?
From an economy that came to a standstill, any movement whatsoever, would be progress. If you want a reasonable comparison, it has to be with what was happening before the pandemic struck. The Indian economy is yet to catch that graph. The stock market should have little to be sanguine about. At the most, it can’t know what will happen. There could be more Covid waves, the pandemic could go on for a long time, the economic toll of the lockdown could lead to long-term recession. Or none of it might come to pass. But there is nothing at the moment that suggests a wild boom is in the offing. But what do you see in the stock market indices? Highs no one had ever seen before or anticipated. The year 2021 has been a monstrous bull market in the middle of the greatest recession that India can remember. It is an unfathomable optimism.
When the first countrywide lockdown was announced last year in March, the markets tanked. The National Stock Exchange’s Nifty, the index made up of the bunch of stocks of the best 50 companies in India, made a low of 7,511. It had been at over 12,000 in the January of that year, two months earlier. This year, on January 1st, it broke 14,000. It was unexpected because what exactly had changed? The pandemic was very much in the air. Travel, whether within states or between countries, was still not without restrictions. Demand was muted. It had only been a couple of months since the peak of the first wave, but no one could be certain it had ended. Globally, many other countries were seeing more waves. But the Indian stock market was sailing along. Few thought it would last. They couldn’t have been more wrong. The Nifty rose and rose, until by mid-October, it had peaked at close to 18,500. At present, it hovers under 17,500, up around 22 per cent from the beginning of the year. Reliance Industries, the biggest company in India, had seen a 20 per cent increase in its stock price. Infosys went up from
₹ 1,260 on January 1st to ₹ 1,759 by December 10th. Shareholders of almost all companies were turning a profit on paper. The biggest companies tend to grow in a stable manner, but those who invested in smaller ones made multiple times the money they put in. When the Nifty crossed 18,000, the website Moneycontrol would state in an article: “In the Nifty500 index, 252 stocks generated multibagger returns, including top two stocks—Tanla Platforms and Balaji Amines which gained more than 1,000 percent in the Nifty’s journey from 10,000 to 18,000. Among others, Adani Total Gas, Indo Count Industries, Adani Enterprises, Adani Transmission, Intellect Design Arena, JSW Energy, Tata Elxsi, Prince Pipes & Fittings, Jindal Stainless (Hisar), Persistent Systems, HFCL, Laurus Labs, Gujarat Fluorochemicals, and KPIT Technologies surged 508-941 percent in last 16 months.”
An aspect of the 2021 bull run is the high participation of retail investors, ordinary folks trying to make a quick buck in the middle of the bubble. That means a lot of burnt fingers when the party ends
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The sectors that over-performed were also a surprise. Last year, in the middle of the lockdown, pharmaceuticals and Information Technology (IT) were the juiciest ones. Now, there was metals—its index saw an over 70 per cent rise. Mint would report in August: “If there’s anything more surprising than the recovery in markets since March 2020, then it’s the performance of metal stocks. Metal stocks have seen a rally by estimates of record growth in domestic demand plus China putting export curbs on metal over green concerns.” Then there was real estate which for years had been beaten down but saw a revival, even though on ground, very little had changed. Its index increased by close to 60 per cent. The IT index rose by 45 per cent.
A TRADEMARK FEATURE ABOUT a bubble in the stock market is the explosion of Initial Public Offerings (IPOs). IPOs are done when a private company goes public by offering its shares in the market. It thus manages to raise funds and also realises its true value from the demand and supply of its shares. This year has seen some extraordinary IPOs raising phenomenal amounts of capital. There was food startup Zomato, which raised more than ₹ 9,000 crore, valuing the company, which was still to make any profit, at ₹ 64,000 crore. And if anyone thought that this was expensive, its stock price shot up as soon as it got listed in the exchanges to take the company’s value to over ₹ 1 lakh crore, where it still remains. Another such IPO was of the beauty product brand Nykaa, which sought to raise ₹ 5,351 crore. Its shares were priced at ₹ 1,125. On listing, it too saw demand and one share is now at over ₹ 2,000. The company’s market capitalisation is around ₹ 1 lakh crore. Paytm listed in what would be the biggest IPO of the year by raising ₹ 18,300 crore, but while it managed to do it successfully, its investors weren’t as lucky because the market thought the stock was overpriced and its share price nosedived by 25 per cent on the day of listing. From its IPO price of ₹ 2,150, it is now around ₹ 1,400. In the RBI bulletin published in August, an article titled ‘State of the Economy’ lauded the IPO boom: “Another growth impulse is igniting financial markets. 2021 could well turn out to be India’s year of the initial public offering (IPO). Debut offerings by Indian unicorns—unlisted start-ups—kicked off by a food delivery app’s stellar IPO that was oversubscribed 38 times, have set domestic stock markets on fire and global investors in a frenzy. Following in its wake, the US$ 2.2 billion proposed listing by a payment and financial services app symbolises investor excitement surrounding India’s digitalisation—digital payment solutions; e-commerce; logistics. The IPO of a specialty chemical manufacturing exporter was subscribed 180 times. These IPOs of new age companies arrive as bullishness about India mounts, especially around Indian tech…These listings coincide with a broader rush by Indian companies to tap the market and the fomo (fear of missing out) factor driving investors, which have taken the benchmark indices to records.”
It’s hard to pinpoint why exactly the stock markets were so buoyant because multiple factors are at play. Because of Covid, governments across the world are infusing a large amount of liquidity into the system. The US, for example, has pumped in trillions of dollars that didn’t exist earlier. As an article on Nasdaq.com said: “Monetizing $5.2 trillion in COVID relief increases our (US) money supply by 27% and comes on top of $4.5 trillion in QE (quantitative easing). Add another $2 trillion in planned infrastructure spending and we have $13 trillion in new money, which is a 35% increase in paper money in circulation and 60% of GDP. It’s a lot of paper. The total cost of our 13 most expensive wars is $10 trillion.” Other rich nations have done likewise. All this money has to go somewhere and a lot of it ends up in stock markets across the world, including in India. But it also means that the traditional correlation of business performance and stock prices takes a backseat. Eventually, the two will have to converge and then there might be trouble. An aspect of the 2021 bull run is the high participation of retail investors, ordinary folks trying to make a quick buck in the middle of the bubble. That means a lot of burnt fingers when the party ends. Towards the end of November, the Economic Times ran an article headlined ‘4 reasons why India may underperform global markets in 2022’ which quoted a cautious note from brokerage firm Goldman Sachs that said: “After gaining nearly 31 per cent YTD and 44 per cent since our upgrade in November last year, and being the best-performing regional market in 2021, we believe the risk-reward for Indian equities is less favorable at current levels.” But it is just an intelligent guess. The only thing the past tells us is that the future is unpredictable.