OA year ago around Diwali, I noted that the stock market had lost its moorings, if not its senses, soaring 40% the year before, on top of a double-digit increase of the value of shares a year before – in defiance of the various setbacks of the Covid pandemic. New samvat the year 2078, I had sensed, would therefore see a correction in the market or at least be a period where it would digest the excesses of 2077. It turns out that is precisely what happened. The most commonly followed market indices are broadly where they were a year ago.
It didn’t take much prescience to make such a forecast in October 2021 since the market had become expensive. It was also clear that interest rates would rise in the wake of inflation. Even without the war in Ukraine, silver was likely to move out of the market, rather than in the previous year. But it was equally clear that retail investors would have few easy choices, as a period of rising interest rates would be negative for bond prices, and the housing market continued to suffer from oversupply.
As for gold, its price was stabilizing after two years of soaring prices. Even now, it’s where it was two years ago. Like equities, therefore, gold was slow to absorb the strong price surge of the prior period. It is perhaps this lack of options that has forced retail investors to continue pumping money into the stock market via mutual funds, while outside portfolio investors have withdrawn cash.
The reassuring side of recent stock market history is that it is rare for the market to stay down for two consecutive years. The past decade only saw a year before the current one when the market plunged into a samvat year. However, the usual disclaimer applies even more than usual, that the past is no guide to future performance, due to the many uncertainties – chief among them being the likely trajectory of the war in Ukraine, its economic impact and the significant risk of nuclear escalation. If the international currency continues to trend towards the dollar as India’s growing current account deficit weakens the rupee, there will be continued downward pressure on India’s stock prices.
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OOn the domestic corporate front, corporate profits continue to rise but have peaked against sales as margins come under pressure in an inflationary operating environment. Interest rates will soon approach the end of the bull cycle, which should make the debt market relatively attractive (or less attractive) as an option. There are signs that consumer spending has picked up, as has bank lending, but the K-factor that has defined India’s two-speed economy in recent years continues to operate in many markets (the expensive cars sell faster than cheaper ones, to take one example).
Meanwhile, with advanced economies still slowing or even slipping into recession, and oil prices unlikely to provide relief due to production cuts announced by oil exporters, there will be little international support for India’s economic dynamism. The global slowdown has already dampened exports, and the worst may be yet to come.
The government, for its part, is likely to be cautious in its fiscal stance for fear of fueling inflation, although some spending initiatives are inevitable in a pre-election budget.
All things considered, India is likely to maintain a moderately optimistic economic pace, meaning well below heartbreaking growth. As has been the case for some time, reviving private investment is key, but it’s a bit like waiting for Godot. This may well hold the key to the market, which looks forward and not backward.
So while the frothier end of the market, in which the unicorns have struggled, has already seen the effects of the low tide in fresh funding, the more sober end of the market may well provide a positive surprise. .
By special arrangement with Business Standard
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