2020 gave investors a chance to invest their money in equity and make excellent profits. It was a risk since no one knew how long recovery would take. Investors who took the risk multiplied their wealth as the market recovered much faster than anyone had predicted. The rally did not stop in 2020 – it continued in 2021 as well. This year the NIFTY has increased close to 30%. As we come close to the end of the year – there is a common question among investors. Is it sustainable for Indian markets to rise that much in 2021?
Looking at the history
A lot of people have been comparing the 2008 financial crisis with the 2020 pandemic. Yes, both the events saw the market correcting by a large percent, but there are differences. The 2008 recovery was slow, unlike the present one. This time around, the market recovered in about four months. The market did recover in 2009 as well – S&P 500 gave a return of 30% in 2009 and even better in 2010. If we look at the 2008 recession, one can conclude 2022 will be even better for investors. However, it would be like comparing apples with oranges. Hence, we need to factor in other factors as well.
Let us look at some factors that give us a better picture of the Indian equity market:
Low-interest regime – Banks have lowered interest rates in India. Indian corporates have used the opportunity to refinance their debt at a much lower rate and save high on interest costs.
The economy has almost opened, and the demand is expected to grow, which will lead to higher corporate profitability. It will help companies pay off their debt at a much faster pace and improve their balance sheet. As per estimates, the net debt of NIFTY50 companies will be more than halved by FY23 to Rs 5674 billion compared to Rs 12,622 billion in FY20. If this happens, the bull run will continue.
FII continues to pour in money – The supply of money has increased in the US post-pandemic. The slowing demand there has forced investors to look for alpha in other countries. India has been the first choice for most foreign investors. Experts believe that the demand in India is likely to improve further. It will make it even more attractive for foreign investors. Even the macro indicators remain strong with falling current account deficit and record high GST collections. Looking at all these factors, one can assume that the FII flow will continue in the Indian market. If this happens, the Indian market rally will surely continue.
The growth of mutual funds – Mutual funds investments in India have grown exponentially in the last few years. Yet, we are still at a very early stage with only a small percent investing in mutual funds. Let us look at some numbers. The world average for MF AUM to GDP ratio for the world average is 63%, while for India, it is only 12%. India has a very young population and they are expected to invest in equity (via MF) as financial literacy in India is also on the rise. With more investors coming into the equity market, the momentum is likely to continue.
Passive funds – We have seen a massive flow in the passive funds in India in the last two years. The passive fund investment has increased from a mere 1% in 2010 to 10% in 2021. However, we are still far behind the advanced nations. In the US, the share of passive funds is 50%. As the share of passive funds increases in India, the intensity of the crash will reduce as when investors invest in passive funds – it is via SIP only. The consistent flow in passive funds will make sure the bull run continues.
We have mostly talked about the positive factors that may drive the bull run. Are there any factors that can trigger a correction or a crash?
Sadly, some factors can lead to a crash. One of the reasons that could lead to correction or crash is tapering. Most of you would know, the central banks across the globe have infused liquidity in the economies. However, it has led to inflation worries, and now central banks have to control it.
To control inflation, central banks have to reduce the money supply in the economy (done through tapering). However, banks will not increase prices all of a sudden as tapering happens over time. Though tapering will control inflation, it could lead to a crash or correction. However, experts believe this has already been factored in by the market. Everyone is aware that rates will increase. So it may bring about a correction rather than a crash.
Another reason for the crash could be a trade war between the US and China. Also, the state elections are coming in some major states in the coming months, and one should monitor those.
Yes, the market has given exceptional returns to investors in 18 months. But the above points suggest that the bull run is not over, and it will continue. However, investors should be prepared for some corrections on the way and use them as buying opportunities. It is essential to know that a bull run is not a guarantee that you will make money. It needs some level of expertise to make money, even in the bull run. Someone who is just starting with investing can use Jarvis Invest to help them select stocks and maximize the chances of good returns.