X

This is not a paywall.

Register for free to continue reading.

We made a promise to you that we’ll never erect a paywall and we intend to keep that promise. We also want to continually improve your reading experience and you can help us do that by registering with us. It’s quick, easy and will cost you nothing.



Nearly there! Create a password to finish up registering with us:


Please enter your password or get a login link if you’ve forgotten


Open Sesame! Thanks for registering.

Ramaphosa's energy plan Webinar banner

We'd like our readers to start paying for Daily Maverick

More specifically, we'd like those who can afford to pay to start paying. What it comes down to is whether or not you value Daily Maverick. Think of us in terms of your daily cappuccino from your favourite coffee shop. It costs around R35. That’s R1,050 per month on frothy milk. Don’t get us wrong, we’re almost exclusively fuelled by coffee. BUT maybe R200 of that R1,050 could go to the journalism that’s fighting for the country?

We don’t dictate how much we’d like our readers to contribute. After all, how much you value our work is subjective (and frankly, every amount helps). At R200, you get it back in Uber Eats and ride vouchers every month, but that’s just a suggestion. A little less than a week’s worth of cappuccinos.

We can't survive on hope and our own determination. Our country is going to be considerably worse off if we don’t have a strong, sustainable news media. If you’re rejigging your budgets, and it comes to choosing between frothy milk and Daily Maverick, we hope you might reconsider that cappuccino.

We need your help. And we’re not ashamed to ask for it.

Our mission is to Defend Truth. Join Maverick Insider.

Support Daily Maverick→
Payment options

India Has Biggest Disconnect Between Stock Rally, Econo...

Business Maverick

Business Maverick

India Has Biggest Disconnect Between Stock Rally, Economic Gloom

A pedestrian wearing a protective mask walks past the Bombay Stock Exchange (BSE) building in Mumbai, India, on Monday, July 6, 2020. Photographer: Dhiraj Singh/Bloomberg
By Bloomberg
05 Aug 2020 0

Of all the countries in the world, the disconnect between rallying global stocks and deteriorating data is probably the most pronounced in India.

The nation’s shares have logged one of the best rebounds from the March lows globally while battling some of the world’s worst economic data. The surge has pushed up valuations to a record as investors look past the grim reality and the world’s third-highest tally in coronavirus cases.

The conundrum doesn’t bode well for Asia’s third-largest economy that’s set for its first contraction in more than four decades. Further negative surprises from macro data or virus cases can unravel a rally that’s added $605 billion in market value from the depths of the swoon to outstrip the government’s stimulus package.

“Any market activity without supporting fundamentals will not sustain,” said C. J. George, chief executive officer at Geojit Financial Services Ltd., a brokerage backed by BNP Paribas SA. “We are yet to see the fundamentals improving in the country.”

Here’s a look at the contrast between India’s $1.9 trillion stock market and the real economy:

Divergence between Indian stocks and economic outlook has widened since March

Just months into the new fiscal year, the fiscal deficit is close to touching its annual target, depleting Prime Minister Narendra Modi’s government firepower to add to the 21 trillion rupee ($280 billion) stimulus announced in May.

Adding salt to injury is India’s bad loan ratio, which is expected to swell to the highest level in more than two decades in 2021 following the world’s strictest lockdown measures, the central bank said last month.

In fact, the outlook for Indian businesses is the worst in the world, IHS Markit said last month. The data provider’s survey on sentiment turned negative in June for the first time in more than a decade, and many respondents were uncertain about how activity would develop over the coming year.

A separate analysis done by Bloomberg shows that while corporate executives in most sectors expect operations to recover to pre-Covid 19 levels by the end of year, estimates from analysts and the performance of some economic indicators still paint a gloomy picture.

India is expected to lead the contraction in Asia's major economies this year

That raises the stakes for the rapid improvement in business activity that has been priced in, especially with the virus still running riot. The country has one of the world’s fastest growing epidemics, adding about 50,000 cases every day.

Economic activity remains in a limbo even after the gradual lifting of curbs on businesses and movement of people. While most of the large Asian economies, except China, are set to contract this year, India is set to shrink the most in that group, data compiled by Bloomberg show.

Exports and business activity did improve in June, signaling the worst may have passed, though the pace of the recovery has been slow. The latest manufacturing purchasing managers’ index showed activity remained in contraction territory in July and was worse than June, according to IHS Markit.

Sensex Index is trading at record valuation relative to consensus earnings estimate

Meanwhile, the S&P BSE Sensex is up 45% from its March 23 low, thanks to the rising interest of first-time investors and three straight months of purchases by foreigners. The rebound is ranked eighth best among major global equity indexes for the period.

The optimism has had the usual side effect: stocks have become expensive. The Sensex trades at 24 times one-year forward earnings, more than two standard deviations above its 10-year average. The NSE Nifty 50 Index is valued at 23.5 times.

“Market mood notwithstanding, demand aggregates appear challenging and that makes us cautious on the market,” Edelweiss Financial Services Ltd.’s analysts including Aditya Narain wrote in a note last week. The brokerage sees Nifty dropping to 10,800 by June next year, or about 3% lower from Tuesday’s close.

Banking Mess

The tougher it gets for India’s economy, the more investors expect from the Reserve Bank of India. That explains why the Sensex can keep rising even as the virus figures reach alarming levels. On Tuesday, the gauge jumped 2% at the close.

For now, investors will be watching for commentary on the economic outlook from the RBI on Thursday, when policy makers are expected to cut the key rate by 25 basis points.

Gallery

Please peer review 3 community comments before your comment can be posted