The stock markets are up today (20 October) by a hefty 300-and-odd points, thanks to the positive trigger of the BJP's big wins in Haryana and Maharashtra. Is this another flash in the pan or for real, when the economy has not so far given us any indication of a fundamental turnaround (note the anaemic growth in the Index of Industrial Production for August)?
But here's the point: when the stock markets look for an excuse - any excuse - to push up share prices, it is indicative of a fundamental shift in market expectations about the real economy.
Put another way, it will take a lot of bad news - a global slowdown, a sharp fall in the rupee, a big spike in oil prices, major political setbacks for the BJP, and possible abandonment of reforms - to make the market want to reverse the current bull run.
Sensex movements are early harbingers of a fundamental turn in the economic cycle because the market discounts the future, and does not look at current numbers for cues. This is why one should look at any market setback as temporary, and not something to worry about.
The fact is over the next 12-18 months, the Indian economy is bound to turn around, thanks to several favourable internal and external factors. Among them: a drop in headline inflation, a revival of GDP growth above 5.5 percent after two consecutive years of sub-five percent growth, increasing chances of policy reforms (diesel deregulation is one example), easy global commodity prices, etc. Both monetary and fiscal policy are working in tandem now, and thus 2015-16 will bring a fundamental change in growth prospects without accompanying inflation.
The reasons for this are many.
First, the Indian economy is set to revive just when Europe, Japan and China may be faltering. This creates conditions for global fund managers to move funds towards India and the US. There could be turbulence if US growth revives further and the Fed moves towards positive interest rates, but in the context of the European and Japanese troubles, the Fed may have leeway to keep liquidity easier for longer than anticipated. Either way, India will be positive for fund managers in contrast. Funds flows are determined by relative economic performance - and right now India's prospects look positive on most fronts.
Second, the easing of global commodity prices and Indian inflation is creating the right ambience for further fund flows, both into equity and debt. In this calendar year to date, foreign institutional investors have pumped $13.3 billion into equity and an even bigger $21.3 billion into debt. The money is flowing into debt in the context of the likelihood of a fall in interest rates in 2015; the flows into equity are based on future growth prospects.
Remember, equity and debt are inversely related. When rates fall, equity gets more bullish. And debt prices start moving up, too.
India has thus entered that sweet spot where both debt and equity will attract money - the former because a fall in interest rates will push up the prices of debt instruments, and the latter because equity gets better discounting when rates are expected to fall.
That rates are expected to fall is indicated by recent movements in bond prices, both wholesale and retail. The benchmark 10-year Government of India security is down from yields of over 9 percent in April to 8.37 percent now. The 9.01 coupon tax-free (AAA) 20-year bond issued by the National Housing Bank quotes at a humongous premium of Rs 6,215 - Rs 1,215 over its face value of Rs 5,000. This gives a yield to maturity of around 7.29 percent.
India is thus looking good to foreign and domestic investors, both in equity and debt. And since we are now at that point before sustained economic revival begins, the markets are having a ball.
Little wonder, the professional bulls are bullish like never before.
Rakesh Jhunjhunwala, India's best-known investor, first raised the bull signal around mid-2014 when he said that this was going to be "the mother of all bull markets"- a multi-decade bull market. Jim Walker, Managing Director, Asianomics, told CNBC TV-18 recently, that this bull run is not going to peter out before 2017-18. "I think you might be talking about 2017-18 before this bull run is finished."
Over the last two months, more bullsh voices have been heard. Nilesh Shah, Managing Director and CEO of Axis Capital said recently: "India is on a multi-year bull run supported by fundamentals as well as flows. Investors should not book profit unless they are massively over allocated to equity."
Today, Samir Arora gives a short-term reason for bullishness as well. He told ET in an interview: "Normally, November to February are good months for equity markets, including in India. If global markets stabilise - and they seem to be stabilising - the Indian markets can resume their good performance."
Madhusudan Kela, Chief Investment Strategist at Reliance Capital, told Business Standard today that the current bull run may last for another five years.
The markets are hoisting the bull signal again and again as they see achche din over the next few years.
Updated Date: Oct 20, 2014 14:15:56 IST