Why is the stock market rising amid economic slowdown? A portfolio manager decodes

The first quarter numbers announced by the companies in India show drop in sales, but their profitability is still quite strong

Even as the economic growth declined almost by a quarter (24% to be precise) in the first three months of the current financial year, the stock markets seem to remain unfazed as the Sensex rose from the 25,900 levels in March to above 39,100 as on 14 September.  As many economists and analysts are befuddled by the 'mindless' bullish sentiment, Rana Gupta, senior portfolio manager, Asia (ex-Japan) Equity, Manulife Investment Management, tries to make sense of this run-up in the stock market in India.

"When we talk about the stock markets, we are talking mostly about the organised, formal corporate sectors. Whenever this kind of a disruption happens, the organised, formal corporates actually gain market share," says Singapore-based Gupta while talking to BusinessToday.In.  

He further says that the first quarter numbers announced by the companies in India show drop in sales, but their profitability is still quite strong. That is because, he says, all those companies fearing the very worst, have cut into their cost -- they have cut advertisement spending, they have cut salaries and in cases they have reduced manpower. "Therefore, while the top line degrew by 25%, at least the universe that we track, operating profit degrew by only 15% during the quarter, which means operating profit fell much less," he says.

He believes that now, as the recovery comes back, corporates will not give away all the cost benefits that they have achieved. "So even with an uneven recovery, I think corporate - especially the larger ones - will still be doing well," he comments.  Rana Gupta, like many others, believes that the liquidity, both global and local, is playing a part in the way the market in moving.  "Many of us thought that banks will be settled with very heavy credit cost and non-performing assets. Now, make no mistake, credit cost will still be high, but it will not be as debilitating as everyone expected earlier," he says.  

He also sees another positive in the private sector banking space, and that is the fact that most of the major private banks have been able to raise capital, which gives confidence that they are prepared to take the shock, if any.  Gupta further believes that well-capitalised banks, with abundant liquidity, can go out and lend once the pandemic is over.  He also points out that the Indian (stock) market has a fair degree of exposure to the global markets.  

"There are IT, pharma, and then there are fairly large numbers of auto ancillary and industrial companies, which cater to the global demand. I think the global economy particularly the US and Europe has, or rather hope, will recover sooner (than India) because of the fiscal stimulus and monetary stimulus that they are seeing. Therefore, these globally-oriented companies have been providing pretty decent outlook, and that part of the market is also holding up," he says.

Rana Gupta believes that the government's efforts in pushing formalisation, digitisation and manufacturing will stand the country in good stead when it comes to attracting FIIs and FDIs as and when the effect of pandemic starts waning.

"There is huge amount of fiscal and monetary stimulus flushing around. As and when the globally economy sees a bit of recovery, bond yields will move up. And when it happens, allocation happens to emerging markets, and within emerging markets, China and India are the only larger markets which can take this kind of allocation," he says.  He further says that with US dollar weakening, chances of higher allocations to emerging markets increase.

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