Why markets boomed as economy faced stress

That alone does not make markets so buoyant.

Optimism was just one reason for this near-vertical rise of markets to new life-time highs. News of the successful development of multiple Covid-19 vaccines and the election of Joe Biden as the next President of the US was the starting point for the current rally.

Better-than-expected profit growth at 45.2% in the July-September quarter for 4,244 listed companies – tracked by the Centre for Monitoring of Indian Economy (CMIE), a leading business information company – has also cheered investors.

Avalanche of money

Liquidity has been a significant factor. Expansionary monetary policies adopted by central banks, and particularly the US Federal Reserve, created excess liquidity around the world and some of that is chasing Indian stocks. Foreign portfolio investors bought shares worth a net Rs 1,22,374 crore ($16.55 billion) in November and December 2020, after buying equities worth Rs 1,02,802 crore ($13.74 billion) between May and October, data published by National Securities Depository Ltd (NSDL) showed. They have already bought equities worth Rs 4,362 crore ($0.6 billion) in the first week of January.

The sharp recovery of markets after the crash of March 23 and negative real returns on fixed deposits brought retail investors in droves to the stock market. This is evident from the sharp jump in the number of dematerialised accounts opened in the first eight months of 2020-21.

Individual investors, including Hindu Undivided Families (HUF), opened over 7.8 million new dematerialised accounts between April and November, compared to an average of about 4 million new accounts opened by this class of investors in the previous four years. They lapped up some of the new share offerings brought to the market enthusiastically. The retail investor portion in the initial public offering (IPO) of Burger King was subscribed over 60 times and that of Mrs Bectors Food Specialities over 26 times.

It so happened that richer households had surplus savings despite taking an earnings cut, as the lockdown and the work-from-home norm shrunk their monthly expenditure. With interest rates on 1-2 year term deposits falling to 5% and lower, there was little incentive to accumulate money in fixed deposits of banks -- but stocks were a good draw. Nonetheless, savings of individuals and institutions in time deposits held with banks swelled by Rs 9,72,969 crore between April and 18 December 2020.

Uneven recovery

The extraordinary rise of key stock indices was mostly at divergence with the slow and painful recovery in the real economy.

Though V-shaped, the economic recovery has been uneven. Let’s illustrate this with the recovery in the automobile sector. Data from the Society of Indian Automobile Manufacturers reveals that production and sales have mostly recovered, aided by demand for cars and two-wheelers, as people preferred personal vehicles to shared transportation. But April-November 2020 sales of three-wheeled passenger and goods vehicles was just about a fourth of the numbers sold in the same period of 2019.

Vehicle registration data published by the Ministry of Road Transport and Highways on its Vahan website show that registration of buses, cabs and goods carriers have collapsed. Only 415 buses were registered in December 2020 compared to 3,290 in the same month of 2019. The corresponding numbers for motor cabs were 3,150 and 10,919, respectively. This indicates that the replacement of old vehicles and fleet expansions are on hold – meaning capital expenditure has been postponed.

The CMIE data indicates a fall in capital expenditure at a broader level. Investment activity faltered in October-December, after experiencing a pick-up in the July-September quarter. Capital expenditure envisaged on new projects in the December 2020 quarter was at Rs 84,000 crore, down from Rs 103,000 crore envisaged for the September quarter. Existing capacity continued to be under-utilised in several sectors, and so planned expansions involving a capital expenditure of Rs 29,000 crore were put on hold. The corresponding number for stalled projects in the previous quarter was Rs 8,000 crore.

Weakness in job creation

Anaemic pick-up in employment is another concern that has not affected the euphoria in stock markets. Unemployment rates worsened in December to 9.1%, as the labour force participation rate improved and job losses climbed, the CMIE has estimated. In his weekly commentary, CMIE MD and CEO Mahesh Vyas writes that employment had been falling month after month from September 2020, when it was estimated at 397.6 million. The employment level in November and December of 2020 was lower than it was in the same months of 2019. Employment fell in both urban and rural India.

Provisional data of the Employees’ Provident Fund (EPF) for October also pointed to a decline in new subscribers and those rejoining, after climbing month-on-month to peak in September. In total, over 43.11 lakh new subscribers were added between April and October, and over 40.91 lakh rejoined the scheme after having exited it due to loss of employment or to change their employers.

Healthy hiring was seen in some sectors such as information technology, and intentions to expand employees base in some others, surveys by several placement companies reported. A Manpower Group Employment Outlook survey for the January-March quarter, published early December, notes that Corporate India’s hiring intentions reflected caution, though there was a slight quarter-on-quarter improvement.

The services sector, that employs millions, is still tottering. Transportation and hospitality sectors are under orders to operate below their capacity to observe social distancing norms. And so hotels, restaurants, shopping malls, cinema theatres, gyms and health clubs are underutilised. Railways and airlines are yet to be allowed to return to their normal schedules. Still, more than 63 lakh passengers flew domestically in November, their numbers growing consistently since airline operations were allowed from June.

Exports of labour-intensive manufacturing such as gems and jewellery, readymade garments, handicrafts, footwear and leather goods are negative. Only a strong recovery in destination markets such as the US, Europe and West Asia can revive employment in these industries. There is hope. The World Bank has projected a 4% real GDP expansion for the global economy, with the US expected to grow 3.3%, the Euro area 3.5% and China 7.9%. The world economy is estimated to have contracted 4.9% in 2020, with the US shrinking 5.4% and the Euro area 3.6%. China might have expanded by 2%.

Year-end cheer

As 2020 came to a close, there was some reason to cheer. E-way bills generated jumped 17.5% in December, indicating greater movement of goods across the country and mending of fractured supply chains. Parallelly, goods and services tax collections climbed to Rs 1.15 crore in December, the highest monthly collection since the tax was introduced in July 2017. However, there were concerns over lower collections of income taxes, but that could not have been avoided when taxpayers suffered a 10-25% cut in their incomes.

In other developments in the past few months, construction activity has gained momentum, creating a demand for migrant workers. Home sales have recovered with builders offering discounts and home loans becoming cheaper. On the flip side, prices of commodities such as steel and petroleum are rising. That will put upward pressure on inflationary impulses in the economy and bring risks to economic recovery. Yet, none of that might dampen the flow of money into stock markets in the coming months