Macro Economy

Economy Down, Stock Market Up; Why This Dissonance?

Praveen Chakravarty

July 16, 2020

Transcribed from video

India imposed a total and extreme lockdown to fight the Covid-19 epidemic. It was among the harshest and the longest in the world. Businesses, factories, shops, markets were all shut. Economic activity was at its lowest levels in many decades. Starting June, India slowly started to unlock but it was certainly not back to normal. The expectation among economists is that India’s economy will shrink and GDP growth will be negative for this year.

This has not happened in 50 years. There is doom and gloom all around.

But not in the stock markets.

In June, India’s stock markets were among the best-performing markets in the world. The BSE Sensex was up nearly 8%.

Economy Down, Stock Market Up; Why This Dissonance?

The average Indian seems bewildered and puzzled at the stock market behaviour.

How is it possible that the stock market is behaving like it is festival time when the entire nation is in mourning over the economy?

Many common citizens, that are not financially savvy investors, have asked me for an explanation of the stock markets.

Stock markets don’t take up too much of my mindspace usually but with so many people asking, I felt the urge to glean some explanation, if I could. So I spoke to a lot of financial analysts, investors, market economists, most of whom believed that excess liquidity caused by monetary and fiscal responses to Covid-19 was finding its way to asset markets, a’la Ben Bernanke’s ‘savings glut’ explanation for asset price inflation during the dotcom boom.

I also looked at some of the standard stock market data from stock exchanges and depositories. While it revealed no clear answers it did throw up some very interesting and curious findings. So, I decided to highlight some of these findings in a simple manner for the average non-financial citizen.

Market Surge: Investment Or Speculation?

Usually, if people feel it is a good time to invest in companies, then the demand for shares is high and the stock market goes up. But it can also be the case that instead of investing, people are merely buying and selling shares during the day. For example, an investor may believe that it is a good time to invest in a company like say, Tata Motors because the demand for cars may go up and can buy shares of Tata Motors. Or one can buy shares of Tata Motors early in the morning, sell them before lunch at a slightly higher price, then buy them again post-lunch and sell them again before the close of market.

In the first case, the investor will take ‘delivery’ of Tata Motors shares. In the second case, the trader is merely speculating on the price of Tata Motors and has not taken “delivery”. In both cases, the share price of Tata Motors can go up. So, was the big stock market jump in June driven by investment or speculation?

Stock markets publish data on the overall delivery percentage on a daily basis. If the delivery percentage is high, that indicates many people bought shares as investment and if it is low, then there were more speculators than investors.

It turns out that the delivery percentage for June in India’s stock markets was very low. That is, speculation in June was very high.

In fact, measured as delivery percentage, speculation level in June in India’s stock markets was the highest in 15 years.

It was higher than even during the time of the great financial crisis of 2008.

Economy Down, Stock Market Up; Why This Dissonance?

Market Surge: Domestic Or Foreign Money?

Now that we know that speculation levels were very high in June, the next question is who was speculating so much? Was it promoters driving their own stock prices up or banks putting their excess money in stock markets or was it mutual funds or was it foreign money?

Again, market data offers some answers.

Indian mutual funds have actually been taking their money out of the stock markets in June and previous months. Domestic investors have also been taking their money out. It turns out that there was a large sum of foreign money that came into India’s stock markets in June. Nearly, Rs 22,000 crore of foreign money came into India’s stock markets in June. This was the fourth-highest in the last 5 years.

At a time when the global economy is reeling under the pandemic and economic activity in India is among the worst affected due to the extreme nature of the lockdown, when domestic investors are withdrawing their money, why did foreign investors pour so much money into India’s stock markets?

Is this surge in foreign money due to one-time or special investments in the month of June (the Jio investment by foreign investors is not accounted in this) or is it speculative money? We do not know but it merits closer analysis.

Economy Down, Stock Market Up; Why This Dissonance?

Market Surge: Three Independent Facts, Coincidence Or Connected?

So, here is what the data tells us clearly.

1.India’s stock market rose 8% in June, among the highest gains in the world.
2.Speculation levels in the stock market, measured as delivery percentage, were the highest in June in more than a decade.
3.Huge amounts of foreign money came into the stock market in June.

Economy Down, Stock Market Up; Why This Dissonance?

Economy Down, Stock Market Up; Why This Dissonance?

It is then natural to ask the question – Is the story of India’s stock market rise on account of a gush of foreign hot money speculating in the stock markets, or are these three data points mere coincidences, which could also well be the case.

The answer is not clear, but the circumstances certainly call for a closer investigation by stock exchanges and the regulator.

Praveen Chakravarty is a Political Economist, and Chairperson – Data Analytics in the Indian National Congress.

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