To be fair, the stock markets have always been ahead of the economy and of corporate results. There appears to be a dichotomy between the news flows you see in the media and the journey of the Sensex and Nifty in the last few days. For example, the media is talking about shortage of vaccinations, unreported COVID deaths, spread of COVID to rural areas, FII selling, risks of a sovereign downgrade etc.
In the midst of all this pessimism, the Nifty crossed the psychological 15,000 mark and Sensex crossed the 50,000 mark in a rather convincing fashion. The Sensex actually gained 1400 points in about 7 hours of trading between 17 May and 18 May. But, first the story of the bounce.
How the Nifty and Sensex rallied
The sharp rally in the Sensex and the Nifty after several days of quiescence did come as a pleasant surprise.
Almost the entire rally has come since Monday, when the markets bounced despite selling by the foreign portfolio investors. Is this an indicator of things to come or will the rally once again peter out? It is hard to say but one thing is clear; the Nifty and Sensex are surely learning to be optimistic and look at the brighter side of the India story. Here is how.
Getting a better hang of COVID resurgence
In the last few weeks, the biggest concern for the market was the handling of the resurgence of COVID. There was just too much negative press about shortage of vaccines, lack of vaccine alternatives, huge loss of lives etc. Things are getting sorted out. The supply of oxygen is now under control, private sector has also lent its weight to the cause, India is pushing for rapid administration of COVAXIN and Sputnik-V. What the markets are really looking at is that there appears to be a concerted game plan now to tackle the crisis. It is this clarity that really matters to the markets.
Mar-21 quarter has been a positive revelation
When the results season started, the initial trends were that profits were higher on a yoy basis but lower on a sequential basis. As more results have been announced, that appears to have changed for the better. For example, even on a sequential basis, the net profits are now up 3.6%, which belies the concern that profits may have peaked out in Dec-20 quarter. But what is more gratifying is that on a sequential basis, sales are up 14.2% and gross profits are up 9.6%, benefiting from softer commodity prices. This sample is just a little over 10% of listed companies but the trend shift is quite revealing.
Domestic flows are still robust, even as FPIs sell
Firstly, FPI selling has to be put in perspective. The $2.5 billion of FPI selling in April and May comes in the backdrop of $37 billion infused into India in FY21. Secondly, domestic institutions are buying and they are buying aggressively. If you look at March and April data, mutual funds have been net buyers, equity funds are getting positive flows and monthly SIP flows are at record highs. Global flows are a concern but markets are convinced it is temporary and till then, there is enough ammunition with domestic investors.
Of course, there was a good bit of short covering too
It would be naïve to believe that the rally in the last 2 days was all about buying. There was a heavy dose of short covering too as was evident from the FPIs remaining consistent sellers. But this has a positive implication. It shows that traders are unwilling to remain on the short side, especially in high beta names in metals and banking. As we have seen in the past, such aggressive bouts of short covering are normally followed by the FOMO (fear of missing out) effect. We need to wait for that.
Above all, markets have learnt to become optimistic once again
There is no better justification for the optimism than the VIX remaining around 20 levels in the midst of all these economic concerns. The sustained low VIX is a message that there may be short-term concerns, but that is unlikely to dampen the long term attractiveness of markets. Perhaps, it is this spirit of optimism that the Nifty and Sensex are reflecting!