The current economic growth is being led by credit expansion globally. Developed markets debt has been on a constant rise since 2008. In the similar period, the debt in the emerging economies has come down from its peak levels.
Overall, developed markets have three times more debt than the emerging markets. Still, the interest burdens of developed markets and emerging markets are almost at similar levels. This is because developed markets have very low interest rates in their economies. This provides the developed nations with the capital to support their economies and run large fiscal deficits. And it is this money expansion in the developed nations that is leading to asset price inflation.
This money printing has ensured that the demand remains high. Which is why in the US, the operating margins of S&P500 are at all-time high level. One unique thing in this phase of boom is that the big is becoming bigger. Profit margin of their top 50 companies has grown consistently over the years. It has multiplied 3X in the past 30 years.
This trend is being witnessed across the world where big companies are becoming bigger. This may be happening because they are financially well-positioned to ride cycles.
The global market-cap-to-GDP ratio is now at 131%. This is the highest we have seen in recent times. Because of this equity boom, new equity issuances have also shot up. These new issuances are now exceeding the levels seen during the
dot.com era.
On the home front, a key driver of buoyancy in Indian equities market appears to be a rapid decline in daily new infections. New infections at approximately 50,000 were down more than ~87% from the second wave peak.
Active cases are declining in regions that saw early waves. States such as Delhi, Maharashtra and Chhattisgarh are seeing the plateauing of the daily cases curve. The spread of cases to rural areas and the absolute deaths are worrying. However, the regional lockdowns are working.
Vaccine hopes have kept the markets optimistic. Investors believe the situation is temporary. Lessons from last year and faith in the ongoing vaccination drive have helped the market sustain its momentum.
Moreover, flows from domestic and global investors, improving investor sentiment and calibrated opening of the economy are also supporting the market. Another factor supporting the market is the fact that a lot of cash is waiting on the sidelines to be invested in the market at every correction. Normally, the market sees a correction only after such waiting cash gets deployed, as the fear of missing out plays out.
Corporate earnings in the last quarter of FY21 continued the momentum of the previous two quarters and ended the year on a good note. It was aided by the deflated base in 4QFY20 and healthy demand recovery for a large part of 4QFY21. However, Q1FY22 has seen a familiar disruption, with the second Covid wave engulfing India and several states imposing lockdowns in April and May, 2021.
The trend of earnings revision has changed in favour of downgrades again in Q4FY21 after two consecutive quarters (Q2 and Q3FY21) of upgrades. The market can become greedy or fearful in the short term resulting in mis-pricing. However, in the long term, the market will be driven purely by the fundamentals i.e. profit growth. So investors will have to be disciplined enough to differentiate the noise from news, rumours from facts and have the conviction to invest in volatile markets in the longer term.
Time will prove if the markets are insensitive, bubble waiting to burst or discounting future growth. I will stay invested as I believe
“yeh jo market hai woh sub janti hai”. (Market prices every known risk)
