Widely read:
Anand Kumar
Why isn't the market falling? When will it fall? That's the core question that a huge number of people are compulsively asking. Of course, a lot of them are putting the questions in more sophisticated language - about valuations, the pace of recovery, or some technical mumbo-jumbo. Fundamentally, there is a widespread belief that there is some hidden variable, some trick to the rising markets or that it's an illusion. Like the Cinderella story, the clock will strike midnight and then it will all disappear.
Why is this so? My guess is that there are two reasons. One is that within the investing lifetime of many Indian equity investors, there have been many bull runs that have turned out to be a trick and which have suddenly collapsed on some specific event. Whether it was the Harshad Mehta market decades ago, or the dotcom boom, or the global 2007-08 collapse, the collapse of bull runs has often tended to be events, rather than processes.
Back in March last year, the Chinese virus appeared to be such an event. When it did not, many people assumed that it was basically a crash postponed. Surely, goes the logic, there must have been widespread economic destruction and just as surely, eventually it must show through in stock prices. Reality was bound to catch up. Well, reality has so far shown no intentions of doing any such catching-up.
This wait for a disaster has led to an exaggerated tendency to slip into a 'too good to last' mindset amongst traders, investors as well as external commentators. In fact, it's those who are external commentators who seem to be most eagerly waiting for a collapse. As we have learned during the pandemic, the business of news and commentary is basically a business of bad news, whether justified or not.
So, is this a Cinderella market? And if it is, then when will it be midnight? Well, if you are in the business of selling panic and bad news, then I have some bad news for you. The sustenance of the equity markets is not some froth that has risen to the top. There are some very deep reasons for the kind of resilience that we have seen so far.
The deepest and the most sustainable reasons are that the nature of the inflows into Indian equities have changed. This stands on three pillars, represented by this alphabet soup: NPS, EPFO, SIP. A few years ago, when the Indian equity markets were full-time slaves of FII inflows, none of these existed in the form that they do. Among these three, the inflows into the Indian domestic markets are in the region of Rs 1.5 lakh crore. However, the quality of this flow is even more important than the quantity. This flow is sustained and long-term. In the case of the EPFO and the NPS, it is practically guaranteed to be not just sustained but increasing at a predictable rate. It will also never (strong word, but justified) turn into an outflow. Such phenomena are common in other markets but wholly new in India. The 'Mutual Funds Sahi Hai' campaign has boosted equity SIP inflows to the scale of around Rs 10,000 crore a month. This money doesn't seize easily and does not go out easily either. Essentially these three sources have led to a deeper democratisation of equity investing in India, and the process has barely begun yet.
More fundamental reasons are also at play. For a variety of reasons, the impact of the virus on corporate earnings has not been as deep and sustainable as once feared. The increasing formalisation of the economy in the last few years has also meant that the smaller and medium businesses - which have suffered more from the lockdowns - are not the ones that have a real representation in the equity markets.
None of this is a direct answer to the questions that I started this column with. That's because those questions are unanswerable. I can guess, so can you and so can any number of people and indeed, any number of people are doing so. Some of the guesses are bound to be right but it doesn't actually matter. Ignore these questions.
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