Where are markets headed ?

The markets in recent times have been rising unconditionally and are in conflict with the real economy. The gap between the real economy and the stock market remains unusually wide. This is the case everywhere, including India. With India’s GDP print for Q4 of FY20 coming in at 3.1% and forecasts for FY21 pegged at -5% (by some prominent brokerages/rating agencies), the recent stocks rally is baffling many.

With grim growth outlook and badly affected economies the world over, the markets are in bad shape. The markets are always correlated positively to the economy be it national or global. But recent times has shown divergence to the correlation. While economies are suffering from the ongoing pandemic, market which initially shed much are recovering. Take for example the indian nse / bse markets. These markets shed and fell by 20-30% in march end. The outlook was bad and market remained at this position for next two months. But just couple of weeks before the revival of economic activities in the country in june, the markets began to revive. Negative rating by credit agency of the country and its companies could not prevent the rise of the market. The were also growth forecast which showed that the economies were in bad shape. But still market recovered. So why did this divergence to the real economy happen in the market ?

There are few worthy reasons for this. The market at its low provided investment opportunity plus nations declared packages to revive economy. The countries showed that while there was a slack in demand, the future held revival of demand and established players benefitting from it. All these reasons along with surplus of cash with investors which they couldn't plan to divert in other investment avenues led to the revival of the market. Investors invested their surplus in established companies whose operational profits were affected by the pandemic but which promised to revive growth in coming years. There also investment in companies which showed solidarity to difficult times. All this became the reason for gap in real economy and markets.

So where are markets headed. My assumption is that markets will rise to a level and fluctuate. The volatility will give opportunity to invest in good stocks but there will be unpredictability. Companies which come out strong and unaffected in this crisis will give returns to its investor while there may be cases where companies will lapse. Thus investors will have to be very smart and careful while reading the market and investment opportunities in companies. One advice would be to look into companies with good management and promising future.