The disconnect between the economy and the equity market has only grown over past few weeks. It is likely to stay this way for a few reasons.
Markets are forward looking, they discount the future while giving enough consideration to the present. Simple concept but tough to implement, especially when you are surrounded by negative news and views.
COVID has accelerated the shift from unorganized to organized businesses like never seen before in India. Even if the economy dips, if organized businesses are growing at the expense of the unorganized segment and the top 100 companies determine > 70% of the market level, should one be really surprised? The market is not a socialist construct that cares about equality and distributive justice.
GST collection for April 2021 was INR 1.4 lakh Cr, the highest till date. May and June will obviously see a fall but once we get past the after effects of the second wave, who is to say the upward trajectory won’t resume? This naturally follows from the previous point.
Ever since the current Govt assumed power, fertilizer subsidy has only come down every year. This subsidy was more than 1 lakh Cr in 2013 and FY21 number was closer to 70,000 Cr. The Govt earlier this month announced a 40% hike in the subsidy on DAP, an important fertilizer. A small step but a sign of things to come. If GST collections are higher than projected numbers and the RBI is ready to monetize 33% of the gross borrowing for FY22, the Govt has enough leeway to focus on growth. My take is that we will see a lot of Govt spending on capex in urban areas and on welfare schemes in the rural areas. The system is likely to be awash with liquidity by September. This makes political sense too, the Govt needs to go out of the box to claw back some credibility.
Economists express their views with their mouths while investors express their views with their money. When in doubt, trust actions more than words. Also use inferential reasoning generously when investing, if a huge second wave came and we went into lockdowns but the market did not fall much, what does that tell you? Read this publication again if you have to.
Identifying risks is only a beginner level skill, managing risks is an intermediate skill while benefiting from risks is an advanced skill. Any half intelligent bloke can highlight the current risks, making money across market cycles is a different ballgame. Always remember that the bear view sounds more intelligent than the bull view at any point of time, I cannot recollect too many instances to the contrary over the past 10 years.
Stay the course, minimize mistakes and let time work in your favor.
And stay away from gyan givers who don’t walk their own talk.