Market movements- Too much hype?

Set aside the last couple of weeks, the run up in the Indian equity market has been impressive. One would say that it has been in line with an emerging economic recovery - GDP numbers bettering, companies beating analyst expectation and the global economy giving indications of stability and gradual growth. India being the second fastest growing economy after China, has but naturally attracted FII flows which have been to the tune of Rs 181 bn so far this year, domestic institutions which stayed away from the previous rally have started participating and retail investors are gradually gaining confidence. The negative news of deficit rainfall has been practically brushed aside by markets because of the now not so significant contribution of agriculture to GDP of  less than 20 per cent. Markets have appreciated by over 80 per cent in 10 months.

In the last couple of weeks though, the situation seems to have changed - correction to the tune of ~12% since Muhurat trading. Sentiment has turned cautious. Don’t forget that this is happening in the midst of an earnings season which in my assessment has been relatively good barring a few exceptions. Yesterday’s live mint said, “Nifty companies have posted best results in seven quarters.” Then why is it that markets are reacting the way they are? Correction in a market that was running up fast was warranted, but 12 per cent in two weeks? It does seem like something is amiss. That leads me to the question; do equity markets give you an indication of where the economy is headed?

In an ideal scenario, equity markets should reflect the economy’s performance and they do over long stretches of period as is evidenced by history. In the short term, anomalies tend to have a grip on the market- factors such as excess liquidity, FII participation among many others. What else can explain a dramatic fall in 2008 in a market that had nothing fundamentally wrong with it apart from the fact that growth would slow on account of recession globally?

A classic case in point is the current corrective phase. No significant negative news has emerged w.r.t to the Indian economy. The only visible parameter impacting markets is the fact that FII’s have turned net sellers. Whether we are decoupled or not, as a nation we can’t deny the fact that FII’s still have a strong hold on our markets. This clearly brings to us the fact that growth is not the only parameter that impacts markets in the short term. Several compulsions and aberrations can overpower rationale and logic.

Interestingly, after cricket scores, the most favoured discussion in the last few days has been the shape of recovery because of the sudden change in direction of markets. Is it U, V, W or some other mathematical sign? It’s amusing that one can base an argument of the shape of economic recovery on market movement over a few days. Take short term market movements with a pinch of salt, they make portray a picture which may be different from reality. It is also easy to get carried away with the hype created- you may make an investment decision which may look foolish in hindsight. Look beyond the surface.