Explained: Why The Stock Market Is Surging During COVID-19 Pandemic

Despite the economy slowing down due to the COVID-19 pandemic, the stock markets have staged a dramatic recovery.

The COVID-19 pandemic shock has allowed the stock market to calibrate itself and is the reason for its swift recovery from its lows in March, believes Saurabh Mukherjea, founder of Marcellus Investment Managers.

The SENSEX dropped dramatically to below 26,000 points in March from more than 40,000 points in January as the impact of the COVID-19 pandemic began to be felt by the global economy. The rating agency Crisil stated that India's GDP would take a severe hit and predicted that India's Gross Domestic Product (GDP) could shrink by as much as 10%. In contrast, by July 21, the SENSEX continued its dramatic recovery and rose to 37,907 points.

In an interview with BOOM, Mukherjea said that the philosophy of the stock market to look towards the future and not be frazzled by current events is one of the reasons for its recent recovery. He also said that the market being corrected by almost 35% back in March was an overestimation of COVID-19's impact.

"The stock market is not meant to indicate what happened in India yesterday or last week or last month. Stock prices are trying to discount the future. At most, if you're extremely concerned about COVID-19 and you believe the current fiscal's profits are going to be wiped out, at most you can justify a 5% correction. Back in march, the market had corrected by almost 35%, which was ridiculous. The correction from January 1 to now is actually 5% which is exactly what it would be equal to if COVID-19 wipes out a year of profits," he said.

Despite the current downturn, Mukherjea said that there are signs that the Indian economy could boom in the next couple of years. On June 8, the National Bureau of Economic Research announced that the US economy went into recession in February due to the COVID-19 pandemic. The US reportedly witnessed a five per cent decrease in its GDP from January to March 2020 and it is forecasted to see an annualised decline of 20% or more between April and June.

The American recession will provide the Indian economy with the required fillip, opines Mukherjea.

"We've never had an economic boom in India without a US recession. An American recession is a fail-safe indicator of an Indian economic boom a year later. This happens due to two reasons. American recession brings down the price of oil by 50-80%. An oil-price correction of 50-60% gives our GDP a boost of around 3%.

"The second reason is that when America goes into recession, the cost of money falls globally because the US tenure bond falls by 2-3%. This time it is down by 3% from January to now which has allowed the RBI to cut rates by 2%. Cheap oil and cheap money are the only driver of economic booms in India. Therefore the odds are quite high that over the next two-three years we'll have an economic boom," he said.

This outlook is one of the reasons for the Indian markets to recover. "The market will not only recoup the COVID-19 losses as we go further into the unlock, there is every possibility the market will rally quite strongly as it starts sensing an economic recovery in 2021-22. So the stock market's job is to look forward and not backward. In that regard, COVID-19 is an easy shock for the market to calibrate which is the reason for the swiftness of the recovery from the march lows," he said.

The market's recovery will come with a price. With the economy coming to a halt, small businesses have struggled to survive with many shutting shop altogether. A study found out that almost 50% of micro, small and medium enterprises have reported a 20-50% impact on their earnings due to the pandemic. On the other hand, corporations are expanding and consolidating their businesses.

"When you come out of exigencies like the pandemic, the market cap of the stock market reallocates in favour of titanic companies who have enormous strength and are able to use it to crush weaker players in the wake of difficult times like COVID-19," Mukherjea said.

"Asian Paints went into COVID-19 with 55% market share has a $22 billion market cap. During the lockdown, these dealers had no income. Asian paints unilaterally gave these dealers and shopkeepers hundreds of crores of relief money straight into their bank accounts. As we come through the unlock, Asian Paints' sales are already back to the level they were in June last year. Which almost inevitably means that Asian Paints have gained around 10% of the market share. The quarter ending June will be a washout for Asian Paints and for every quarter for the next 20 years, their market share will be 10% higher. They were able to do it because they went into COVID-19 with enormous financial strength," he added.

Highlights

- Despite the GDP shrinking, the stock market has recovered from its slump before the lockdown due to it's forward-thinking approach

- An American recession like the current one has been a good sign for the Indian economy with experts predicting an economic boom in India in the next couple of years.

- The pandemic has given giant corporations to expand their market share and wipe out local and regional players.

Catch the interview on YouTube or click on the link here.

Updated On: 2020-07-23T15:35:55+05:30
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