If the Indian version of Rip Van Winkle had gone to sleep on January 01, 2020 and woken up in Sep-20, he would have found the Nifty just 5.16% down on an YTD basis. That sounds normal, but it glosses the tumult that markets have gone through, touching a low of 7,610 on the Nifty in Mar-20 and then bouncing 51% from the lows in just 5 months.
The sharp fall in the Nifty was understandable. COVID-19 was the biggest health crisis since the Spanish Flu. The world has changed a lot since the Spanish Flu of 1918. Markets have become more integrated, financial markets move trillions of dollars each day and global economies are highly dependent on each other. India’s GDP and, for that matter most of the world, is likely to show negative growth in 2020. Then what is the market celebrating to the extent that it is almost back to its previous high levels?
Not just India, but markets have diverged in the US too
If the divergence of the Indian stock markets from the Indian economy is perturbing, then India is not alone. Even the US markets have shown huge divergence from the economic reality. The US economy has shown a (-32%) contraction in the Jun-20 quarter and it is likely to repeat the act in September too. But then, what about the US stock markets? Check the chart of the DJIA and the NASDAQ. They are actually at a 25-year high amidst all this chaos.
Comparative movement of Dow and NASDAQ over last 25 Year
Like the Nifty, the DJIA has also bounced sharply since Mar-20 and is closing in on the previous highs. However, the real story lies in how the tech-laden NASDAQ is nearly 22% above the previous peak made in Feb 2020. In the midst of the Coronavirus pandemic, two sectors gave hope i.e. technology and biosciences; and both reflected in the NASDAQ.
Technology and biosciences have a disruptive story
In a tumultuous year, market observers were surprised to see Jeff Bezos, Elon Musk and Bill Gates getting richer by the day. Mukesh Ambani who did a digital coup with Jio, managed to overtake Warren Buffett in the wealth index. But these are the side stories. The real story, perhaps, is that the pandemic has underlined the disruptive potential of the technology sector like never before.
In terms of global market capitalization, biosciences are still quite small in their ability to influence the markets. But that is not the case with technology. Some of the world’s most valuable companies globally are technology companies. In the US the value stakes are dominated by Apple, Amazon, Google, Facebook and Microsoft. In China, it is the likes of Alibaba and Tencent. Digital companies rule the roost in India too in terms of market cap. What has changed since the pandemic?
The pandemic means several things for the IT sector. Firstly, social distancing could become a norm rather than a temporary rule. That means reduced travel and greater use of technology to interact. Secondly, a more distributed workforce will mean huge demand for cloud products as well as the use of artificial intelligence dealing with anonymous customers. Lastly, global companies will enhance tech spending in a big way to prepare for the post-COVID scenario. That means billions of dollars of orders for Indian IT companies.
Make in India could be the big India bet
Sceptics who said India cannot replicate the China story, just missed the point. More than ever before, global economies acknowledge the need to de-risk their business models and supply chains. Outsourcing manufacturing to China and relying on their supply chains turned out to be a risky venture. While Vietnam, Thailand and Philippines were options, only India can manage scale on multiple fronts.
The shift is visible. Foxconn, the biggest outsourcer for Apple, is investing $1 billion to create I-Phone capacities in India. Samsung will make India the preferred choice for a global export hub. Above all, the government has opened up the defence sector to domestic manufacture and that could attract big FDI.
It cannot get worse than this syndrome
The technology shift and India sourcing opportunities prised open by the pandemic, are real reasons for optimism on future growth. That is being reflected in the markets. But there is also an endearing optimism that things cannot get really worse than this. While it may not entirely be true, it gives the confidence that things will get back to normal.
For now, there is one simple reason; and that is the relentless flow of liquidity. The glut of liquidity means that stocks are going to be expensive compared to fundamentals. But, at a time when gold (which generates nothing) is quoting at a historic peak, you really cannot be sceptical about value generating equities.