Stock Update - The second wave of COVID-19

The Current Situation

The second wave of COVID-19 came as a shocker, which proved to be the final nail in the coffin when it came to economy growth. But surprisingly, the Indian share market seemed insensitive, delivering huge gains to the investors.

The benchmark market indices- NSE Nifty50 and S&P BSE Sensex managed to ride the turbulent economy confidently. In fact, the Nifty 50 index jumped to 65% in the past year and outperformed all the major equity benchmarks across the globe.

While the see-saw trend continues to persist in the market, one question is already troubling the naive investors, viz., why is the economy falling and share market rising? Well, let us first discuss the reasons behind the downfall of the Indian economy before we talk about the factors that are deriving positive market movements.

Why Is Economy Doing a Free Fall?

Decelerating GDP Before COVID-19: Even before the pandemic, the GDP was on a downward slope. The struggle started in Q4 FY17, and it reached 3.1% in Q4 FY20, which is an 11-year-low. Moreover, the GDP contracted 7.3% in FY21.

No Economic Activities Surge Loses: The harsh restrictions imposed by the government halted economic activities. As a result, there was no production, which disrupted the supply-chain demand, and ultimately loss of revenue. Moreover, several individuals lost their jobs, which further derailed the economy. Pressure on Banks Builds Up: The already stressed banking industry suffered a credit flow decrease due to default and corporate governance in financial institutions like DHFL, IIFL, etc. Loss of value of traded financial instruments and increasing demand of credit by corporates to meet their needs are other reasons why the banking sector is affecting the economy negatively.

Reduced Private Capex: The country was under lockdown for a majority of the time with no economic Rosebags activities. As a result, companies were least interested in business expansion. Thus, there was no production, which hampered the GDP and economy as a whole. The capital expenditure fell to 88.6% in Dec. 2020. Increased Debt to GDP Ratio: The debt to GDP ratio increased from 74% to 90% post-pandemic. The rise, obviously, took the risk of default higher. As a result, panic was created in the international and domestic markets.

Decrease in Government Revenue: The union budget of 2021 targeted Rs 24.2 Lakh Crore gross tax collection. But, in actual, it fell short of Rs 5.2 Lakh Crore. This decrease in government revenue is another reason for the economic downfall.

Fear of Inflation: As the inflationary pressure builds up, the purchasing power of money comes down. The gradual increases in the prices of goods restricted the purchasing power of the consumers, and hence the demand decreased in the market.

Why Is Share Market Unaffected by Economy Crisis?

Q4 Was a Hit: The strong earning quarter has helped the investors to stay optimistic. Moreover, the downfall of corporate tax rates increased the corporate profit to GDP ratio. Keeping the future outlook and growth potential of the country in mind, investors are investing more.

Low-Interest Rate: A low-interest-rate environment go well with the equity market. The RBI cut interest rates which paved the way for liquidity. For individuals, it meant that they could buy more at the same EMI, and for the corporates, it meant that their borrowing capacity increased.

Participation of Retail Investors, FII & DII: The Indian government slashed the corporate tax rate, eased the foreign investment rules in manufacturing, retail, and coal mining. This has filled the void of opportunities for retail investors, FII & DII. Moreover, the huge growth perspective of India is again a plus point.

Regular Returns by Mutual Funds: One cannot go wrong with mutual funds; this was further proved in FY2021 when the instruments once again spur good returns. Thanks to Nifty, which increased by 6.51%, the May-21 returns were sharply higher than Apr-21 returns.

No Alternate Investment Available: When it comes to good returns, there is no better option than the equity market. Moreover, during the lockdown, the expenditure was less, so many naive investors indulged their money in return for good profits.