The Sensex rallied 200 points in the early trade today while newspapers tried to make sense of the 23.9% contraction in the economy.
Most auto sector stocks were trading at the pre-slowdown levels (we are referring to the slowdown before lockdown), so are most other stocks from manufacturing and real estate. So why are Markets jumping on news of worst ever economic slowdown?
The answer is liquidity. With hardly any transactions happening, some people and business are awash with money. Either the order book are short or non existent hence the money used to facilitate their movement is just not required. So the shopkeepers are no longer paying advances for FMCG stocks neither to the distributor. On its part – distributor would have been betting its money to keep the shopkeeper stocked and its principal happy, but now this money is available to be invested. Only there are hardly any investment opportunities.
The rally in markets is result of this free money which – not long ago had reasons to provide much more meaningful services. Things like tangible growth, job creation, research and innovation are all on hiatus. Instead the money is freely flowing into a bubble that has basis in belief of a V shaped recovery.
It seems everyone believes that from Real estate to Cars – everything will be getting off the shelf rather quickly. The fact that the massive job losses, reverse migrations, long term damages & closures of small and medium industries are not on anyone’s radar. Even bank stocks are doing relatively well when they are looking at a possibility of largest ever loan recasts. The optimisim is such that even Taj GVK Hotels & Resorts is priced at a level better than Sep’19.
Its like that the traders believe that after pandemic consumers went home and are now waiting for their binge watch of Netflix to end and they will all come back in Diwali and kickstart everything back to glory of 2018. Sadly, it’s not the truth.
The closed small businesses will not have enough capital or confidence of Banks for loans to restart production. The migrant labour that went home is not coming back to big cities overnight and even government coffers are empty as evident in the Center Vs State fights over GST compensation.
The worst part is that the neither SEBI nor finance ministry intend to do anything about it. The total disconnect of markets with realities is not raising any eyebrows whatsoever. It seems all stake holders are happy to drive to the highest point before all this comes crashing down.
