Business & Investment

Seven Reasons The Market Is Discounting Short-Term Covid Pain For Long-Term Benefits Of Higher Profit

The stock market BurlanHowever, India has just emerged from the second wave of the raging new coronavirus, and many are afraid of the third wave. And the economy was hit another way. Why is the market bullish?

Is the market “insensitive” to people’s suffering, or is the Sensex and Nifty bubble about to burst?

A wiser answer might be that the market is discounting Covid’s short-term pain for the long-term benefits of higher corporate profits.

Undoubtedly, the second wave of Covid-19 had a negative impact on everything from work to business. For a while, consumers will hesitate to spend money. They may postpone the purchase of expensive tickets such as TVs and cars. The small and medium-sized enterprise (MSME) sector, which has just recovered from the first wave, has been hit hard by lockdown. Rural India Can be adversely affected by the Covid epidemic compared to the first wave.

The only hope for the second wave is to use regional lockdowns rather than national lockdowns. This reduces business disruption.

So what is the market betting on when the market is rising? Here are seven things the market currently believes in.

Vax effect: Acceleration of vaccination, rapid expansion of medical infrastructure and good behavior for the new coronavirus will normalize economic activity by the second quarter of 2021-22. And the third wave will be less damaging than the second wave in terms of death and disruption to economic activity.

Indian interests: Larger (listed) companies will gain market share from smaller (unlisted) companies in the medium term due to the good financial condition of smaller (unlisted) companies. This big thing tends to grow, leading to higher profits for listed companies. The profitability of companies after 2021-22 will accelerate as well as in 2020-21. In the third quarter of 2020-21, corporate profits increased to Rs 2,09,795 thousand, exceeding expectations. In the fourth quarter of the previous fiscal year, we could see even more high revenues than ever before.

Few options are better than stocks. For domestic investors, there are few good options for investing. Lower returns on bank deposits, gold and real estate can increase the flow of funds into equities. Investors are willing to take higher risks as they have been successful in investing since March 2020.

Foreign currency: Foreign Portfolio Investors (FPIs) began to aggressively buy Indian stocks between 2020 and late 2021. The FPI is likely to be neutral to India next quarter. Because other countries in India that have opened their economies will give better results. However, in the long run, FPIs could become buyers of Indian stocks as growth recovers. Low interest rates and high global liquidity, supported by non-stop printing of money by central banks around the world, FPI It will flow in the long term.

Good job by RBI: RBI has done a great job in managing rupees, interest rates, financial market stability and large government borrowing programs. RBI’s clever management of economic and financial markets supports faster economic growth and higher corporate profits.

The stimulus is coming: The market expects fiscal stimulus as the economy opens. This could result in higher-than-expected GDP growth in 2021-22.

Manufacturing / housing boom: Thanks to the production-linked incentive (PLI) scheme and the resurgence of the housing sector, GDP growth will reach the high single digits beyond 2022-23. The PLI scheme has the potential to act as a catalyst for India to expand into the world as a manufacturer. The housing sector has fallen from double-digit contributions to India’s GDP to the mid-single digits. But now, slumping home prices have increased affordability, mortgages are available at record low interest rates, and working from home is creating demand for new homes. Stamp duty incentives are also helpful.

Sure, the valuation of the Indian market is high, but it looks reasonable when compared to the world average. India’s market capitalization / GDP ratio is 104%, which is higher than the historical average of 78%, but lower than the world’s market capitalization / GDP ratio of 131%.

To make money in a market of considerable value, investors must be well trained to distinguish between news and news, rumors and facts, and to be confident that they will invest in a market that is volatile in the long run. No.

Over time, it will be proven whether the current bullish trend in the market is wrong. At this point, your assessment depends on whether the market believes in the wisdom of pricing all known risks.

The writer is a managing director, Kotak Mahindra Asset Management. Impressions are personal)

Seven Reasons The Market Is Discounting Short-Term Covid Pain For Long-Term Benefits Of Higher Profit Seven Reasons The Market Is Discounting Short-Term Covid Pain For Long-Term Benefits Of Higher Profit

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