WHY ARE THE MARKETS SCALING NEW HIGHS EVERY DAY?

By Research Desk
about 10 years ago

 

By Ruma Dubey

“So why is the stock market hitting new high every day?”

This has become a routine question for most of the analyzing the markets. Almost every single day, this question pops up, right from a retired pensioner to a housewife and even her teenaged son!

Even before one can start explaining, most follow up their question with an answer, which actually sounds more like a question, “The Modi effect? But itna lamba chala?”

Well, it is not as simple an answer as that. Yes, the Modi factor has spread optimism which is probably why compared to the rest of the emerging markets, India is doing so well. But that alone cannot sustain for so long, since May’14, as things have yet to pick up on the ground.

Persistent questioning every day has made one ponder and we have come up with these few reasons for why the Indian markets are hitting new highs, with the BSE fearfully close to 30,000 and NSE to 10,000.

1: The first and foremost reason, the Modi effect currently makes India look better than the emerging markets. Brazil, Russia and China, all are facing issues. Brazil with fall in commodity prices, it is hurting bad as it is a net exporter of commodities. China growth is slowing down and Russia is hurting badly due to fall in crude prices and its falling rouble, down 30% against the US dollar. And the Euro zone is hurting. IMF has scaled down growth numbers for all except India.

2: But doesn’t all this hurt India too? For now, no. Yes, China slowdown affects the entire world and that could have a domino effect but directly, India exports some 5% to China and is not directly a big link in China’s supply chain. And unlike Brazil, we are not net exporters of commodities and falling oil price, which is a curse for Russia is a boon for India, as we are net importers and naturally, stand to gain. Again Euro zone is domino effect, directly it will affect Turkey and Russia more who are bigger trading partners.   

3: Apart from scientific reasons mentioned above, there is the lure of money, which is the primary reason. Look at it logically – all the other avenues of investment for HNIs is down. Real estate is limping, gold is down and crude is also on the slump. So all these three avenues which are usually ‘spots’ for HNIs wanting to make a quick buck are down. Currently equity is the only place where prices are on the rise.

4: Today, the bank deposits earn around 8-9% interest and the perception is that the stock market is the only place which can give you higher returns than this 8-9%.

5: Let’s not get carried away – there is a lot of black money also flowing in – the rise in P-notes is a pointer to the very fact. (Read this for more details - https://www.sptulsian.com/article/82228/p-notes-should-be-cleaned-out-under-swachh-bharat-). So in a big way, the hot money coming into the markets is also a big reason for the markets hitting new highs.

6: There is growing perception that with inflation coming down, interest rates will be brought down on 2nd Dec, with pressure coming in from the Finance Minister too. And that to some extent is also pushing up the “optimism index”. But that is too far-fetched. It would be too premature to bring down rates now and if at all Mr.Rajan does, it would send a wrong message – India is looking for quick fixes and has thus ditched fiscal discipline.

There is no doubt, the markets have gone much beyond its fundamentals and one should thus tread with a lot of trepidition.

And next time someone asks, “Why are the markets scaling new highs every day?” Well, we have a list of reasons ready. Let us not blame it all on Mr.Modi alone!