Over the past few months, the stock markets in India seem to be on a meteoric rise despite the economy not doing well on other parameters. One popular view is that they have improved from their impoverished condition back in March 2020. However, is this one celebration too early? Mr Shaktikanta Das, the Governor of the Reserve Bank of India, made it big in the news headlines when he said we might be experiencing a stock market bubble, one which may burst anytime soon!
What made the head of India’s most important financial institution say this? Why so much attention to some red and green numbers marqueeing over huge LED displays?
Well, the stock market is popularly regarded as a significant metric in assessing the economic traction of a country.
The novel coronavirus has plagued the world since the last 6-8 months, right after being reported from Wuhan, China back in late December 2019. The widespread havoc caused has almost flipped the global socio-economic landscape on its head. A pandemic of such scale has never been seen in over a hundred years of world history. Employees being laid off in huge numbers, major industries such as tourism & history, transportation and several factions of the FMCG industry have been deeply affected. A state of panic and tightening political tension is being seen around the world. All these are unmistakable symptoms of a weak economic state. The tension doesn’t even spare the experts from making big statements. Ray Dalio, the Co-Chairman of Bridgewater Associates (the largest hedge fund firm in the world), went as far as saying that the world economy is facing a depression, similar in impact to the infamous Great Depression of 1929. The Indian economy too has taken a heavy blow from the virus, plunging to -23.9% from its value in the last quarter (growth rate per quarter), in alignment to what happened in many big economies around the world.
Mr. Dalio’s statement might seem like an off-hand exaggeration, given that the situation today is different in many aspects. One big difference is the internet-powered society and the rise of digital media. One doesn’t need to go far to understand this: take your smartphone, for instance. As soon as you play that YouTube video from your favourite creator, you find them endorsing an app like Binomo, Groww or Zerodha. These apps aim to earn a commission from the trades done on their platform, the exact structure varying slightly between platforms. The overall numbers add up to some very big figures when aggregated. Very recently, these apps have seen faces of some of India’s favourite YouTube creators in sponsored ads, giving promises to make a quick buck staying back at home! For the average Indian citizen sitting around at home after being laid off from their organisation at worst or facing a pay cut at best, could anything sound more lucrative?
Another interesting observation would be the success these new players have had, early on. This is probably because there has been an increasing amount of money being invested in the stock markets, a sizable chunk of which comes from people trying to figure out things themselves, through the copious amount of information and advice, now at their fingertips.
The basic laws of supply and demand from economics tell us that if more people are willing to buy a product than what is the current supply, the prices will go up. With the sudden increase in the volume of traders in the stock exchange, the prices of these stocks have also gone up. This has brought home laurels for the people who have invested early on in the dip of March 2020. A behavioural economics angle shows that these traders show clear evidence for anchoring & survivorship biases; hence, a positive feedback loop created early on. This helps them carry on with their practice – an attempt to recreate the beginner’s luck they’ve had with the market.
An aggressive push by the Association of Mutual Funds of India (AMFI) through their campaigns titled “Mutual Funds Sahi Hai” (Mutual Funds are good) could also be a big reason why people are losing their inhibitions. If cricket heroes (often equated to Gods) such as Sachin Tendulkar and MS Dhoni are nudging you towards investing in these schemes in various ad campaigns, one would feel dumb to ignore their ‘advice’.
Let’s now look at the bigger picture.
India’s GDP growth had gone down from a high of 9.2% in the 3rd Quarter of the year 2016 to 5.7% in the 4th quarter of 2017. Some experts point as far back as the end of 2016 when the demonetisation scheme was put in place. They believe that the Indian economy is yet to recover from the detrimental effects of the scheme. The lack of robust financial budgets, poor implementation of GST and the recent shutdown caused due to the pandemic didn’t help either.
The rise among major stock indices such as BSE and NSE in India, NYSE and NASDAQ in the US and SSE in China over the last 6 months, serves as a counter-example, though. It shows that even though some economic happenings do reflect on the red or green numbers, they more often reflect the shareholders’ confidence in the situation and the ongoing sentiments around the financial state. They run on what shareholders expect the market to behave like in the future, instead of what they are today. This is often regarded as the futuristic nature of stock markets.
On the other hand, some experts outright rejected that the market is going to crash anytime soon.
Fig-1: The stock market trends over the last 6 months
As one can see in the above chart, the market had a big fall in the period between 5 and 23 March. There is no denying the fact that there has been a lot of new money in the market, thanks to the increased awareness of people and the efforts of the concerned authorities. This new money could well account for the rising prices, that too all by itself. Note that the performance of markets is disregarded for a moment. On an optimistic note, this could mean a lot more for the Indian market.
People are being relieved of their old maxims of ‘investing’ only in Fixed Deposits or government bonds, which barely beat the inflation rates. They are starting to understand the risk to reward equations associated with investing in these schemes. Mutual Funds as investment vehicles offer a good option to invest in high reward schemes with a relatively low-risk factor in the long-term. The sudden change in surroundings caused due to the lockdown has played its part well and has only sped up the process.
The optimism one might feel after hearing this news does come with some caveats. The first is that the sizable 2.27 trillion USD invested in the National Stock Exchange (NSE) of India (as of April 2018) comes from barely 2% of the country’s population. Not only does this signify the wealth gap in our country, but it also signifies how little people are aware of the power of investing. Financial awareness is often stigmatised in Indian households, with parents concealing their incomes from their children, or the general public viewing everyone in the stock market as mere “gamblers.”
The pandemic situation and the associated turmoil with businesses has led people to explore other ways of generating income, which seems like the most probable cause of the ever-increasing share prices. Even if the stock market is an indicator of how the economy’s performing, it may as well be the case that the index has been underestimating the Indian wealth for the last odd 140 years since the Bombay Stock Exchange first came into existence. It might just mean newer data points are being added in the system, and we might see better representation of the economic performance of the nation if more money is pooled in. This will also help organisations generate income in these challenging times and will also play its part in improving the flow of money, which is highly needed right now (see a list of latest IPOs here). The biotechnology sector seems to perform better than most of the sectors listed, which shows not only the optimism in the industry but also the futuristic nature of the market.
Even if we’re merely experiencing a bubble, the intensity of the ensuing market crash shouldn’t be as intense, as history shows. Subsequent market crashes are much less severe as their predecessors as the net money invested gradually increases. Moreover, the state of panic caused in the financial markets moderates with every subsequent market crash, as the trend of panic selling tends to go away with passing time, a trend which has only quickened with the advent of free-flowing information through the internet.
While it is too early to say if the pandemic has been a blessing in disguise that could reinvigorate the Indian economy, it does have a silver lining. Over the past few months, people have started realizing the importance of financial literacy and with more people being involved in the economy and understanding it better, one can be optimistic about the future.
NOTE: All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Please do your own research before making such financial decisions.