Expectations driving the market alarmingly high

2022 started with the threat of Omicron looming large and partial lockdowns imposed in various states. With inflation raging high, the threats associated with the third wave of Covid-19 is an ominous sign for the economy. Moreover, last Wednesday the US Federal Reserve decided to hasten the withdrawal of the stimulus. Strangely, the investors in the equity market have decided to overlook these threats.

On early afternoon today the BSE Sensex was at 61,307 points, just four hundred points below its record high. It closed at 58,253 on December 31. Thereafter, in all the sessions this year, except for two, the index has rallied. If the present trend continues, it may breach the previous record high in some days. This has not only stumped the experts, but has become a riddle by itself.

It is possible that the market has become shock proof. It is also possible that the Federal Reserve decision was anticipated and factored in. And still, the alarming rise in the market can be explained only by the fact that people are expecting better days. It is not commensurate with the reality, as a full-fledged recovery may be at least a couple of years away, if not more.

The same thing is happening in almost all major markets of Europe and the US. It is a good sign, no doubt, for the ultimate driving force of the economy is the expectation of the people who matter. And in this case, the market is leading the hope-driven recovery. It is a great force, and it may change things for the better to a great extent.

One of the immediate factors contributing to the Indian market rising at the moment is the easing of the selling pressure from foreign portfolio investors (FPIs). FPIs sold stocks worth a net of Rs 38,521 crore between October and December 2021. But the trend has reversed, and they have invested more than Rs 3,000 crore so far. Some feel, they too have been stumped by the resilience of the Indian market, and have reversed the decision to leave.

Meanwhile, domestic inflows into equities are continuing. In December, domestic institutional investors invested Rs 31,231 crore, and mutual funds invested to the tune of Rs 25,000 crore in the same month.

There are a lot many problems that may dampen the spirit in the coming weeks: An unforeseen rise in Covid-19 cases, economic recovery not at expected pace, large scale FPI outflow, an unconvincing union budget and unbridled inflation to name a few. The government so far has not shown any real intention to check inflation, as evidenced by raging fuel price.

Another area of concern is that most of the share prices are overpriced. In other words their prices are not worth their real value, at least in the short term. If the economy performs very well, and both demand and production go on rising, this problem may end. But that is in the womb of the future, and is just one of the many possibilities.

Interesting the trend this time is just opposite to what happened during the second wave. In March-April last year, when the Delta variant raged and daily infection shot up to more than 4 lakh, Sensex fell by near about 6 per cent. The trend reversed only when the cases declined during May. Since then, it is rising higher and higher, from 48,000 level to 62,000 in five months. It is still surging ahead.

One of the possible reasons is the perception being created that Omicron is much less deadly, and even the damage caused by the older variants is much lower. The death rate has gone much below one per cent of the identified cases. In the perception of the people, actual number of infected is much, much higher, and the threat of death due to Covid-19 is just negligible. Such perceptions are making people bold and more expectant of a bright future.

If this perception comes true, then of course the investors’ expectations will be vindicated. On a lower base, the economy that has lost two years may outperform many previous years, and for some time double-digit growth may become the norm rather than exception. In that case, the rally will continue, at whatever pace may be, till another crisis hits the market. But if it is not the end of the virulence of Covid-19, the future will be uncertain and unpredictable. – IANS