8 possible reasons why equity markets moved up

It’s a puzzle for everyone over the last 2-3 weeks.

Why the markets are going up when we only see difficult things around like the horror stories of migrant labour, increasing number of Covid19 cases, bankruptcy of big companies in USA, riots in USA Cities etc.,

We also don’t know exactly!  As you would agree, there can’t be “one reason” which is driving the markets up.

In our view, we see the markets are moving up for a possible combination of the reasons below:

1. Lockdown is slowly getting released across India and economic activity has started picking up

2. Some of the sectors are reporting much better consumer demand during the lockdown period contrary to the expectations.For example, the cement demand has held up at 50% to 75% over the last 1 month, though technically we had lockdowns.  There are also reports of AC sales remaining steady in various parts of the country

3. FIIs are buying big time in the markets over the last 2 weeks.With so much stimulus measures announced across the world, the money from western economies was expected to move in search of higher returns from riskier assets like equities.  The heavy FII buying in Emerging Markets like India is happening now.  Reversing their three-month selling trend, foreign portfolio investors (FPIs) infused a net Rs 20,814 crore in Indian equities during the first five trading sessions of June.

4. Last calendar week of the month is usually the derivatives expiry week.Anticipating a possible correction, many traders would have shorted the market (that is, selling the stock and index futures at a higher price and buy back at a lower level to make a profit).  But with the markets not going down as expected, there would have been a rush to close the short positions and that leading to further price increase.

5. The stronger-than-forecast May U.S. jobs report.When there were expectations of further job losses, the reports came in with job gains

6. Over the weekend, an agreement was reached by OPEC+ (group of Oil producing nations) to a one-month extension of its record output cuts.This will lead to more stability in the oil prices and in turn would lead to less pressure on the oil producing countries’ finances.

7. Recently Government of India raised the foreign investment limits in domestic companies.  As a result of this move, the weightage of Indian stocks in global tracking indices like MSCI are expected to increased resulting in additional inflow of USD6.5 billion over the year.  The equity markets anticipating the fresh inflows from FIIs are pricing it higher.

8. Indian Meteorological Department has predicted a normal monsoon for this year, which can positively impact the rural economy.

Always remember:

• Equity markets discount the future. They don’t look at the past or present.  It is always forward looking
• In the past, many a times, Equity markets have bottomed out ahead of the actual economy bottoming out.  It is by no means an assertion of bottoming out in the current scenario but only reflects the collective wisdom of the market participants
• Equity markets surprise most of the participants most of the time, both positively and negatively