Why are the economy and markets delinked?
Share prices and several cases in the country are surging simultaneously. While it is not expected that the economy will revive soon, why are people investing in stock markets? Are markets and economy decoupled?
Let’s try to dig this further
If you look at the number of Demat accounts opened in the recent past you will understand why?
In March and April this year, despite the ongoing lockdown, as per a report by The Economic Times around 1.2 million new investors opened Demat accounts with the Central Depository Services (CDSL). Meanwhile, the report noted that April saw NSE internet trading volume rise by 53 per cent.
It can be attributed to the fact that people are at home and markets are open while everything else around them is shut. Also, we know during the fall of the market we get good valuations so people are rushing so as not to miss the subsequent rally of stocks.
From where are they getting money? Are they changing their portfolio allocation?
There have been various rate cuts by RBI in the past to flush money in the economy. More money in the economy means more demand for goods and services by the people, more demand will attract producers to manufacture goods by borrowing money from the banks. However, the whole process takes time and it is not expected to occur overnight.
Due to rate cuts by RBI, deposit rates also fell which makes deposits with banks less attractive. So people look for avenues that can provide them with better returns and the first thing that comes to their mind is equity.
One more thing that is to be looked at is the composition of nifty
Nifty comprises pharmaceutical companies, FMCG companies and other top tier companies that are not much impacted by COVID’19. With the world moving toward new normal, these industries are shining their prospects.
What are your thoughts? Let’s discuss in comments below