Detailed Analysis of the Out-performance of Stock Markets – 3rd April 2019
On 1st April 2019, for the first time Sensex crossed the mark of 39,000. Sensex went up till 39,100 and closed at around 38,900. Though it closed below 39,000 but it still reached its lifetime high. On 2nd April Sensex opened at 38,974 and closed at 39,056. Why Are Stock Markets Going Up so much? What are the factors behind this? In this article, we will see the detailed analysis of the out-performance of stock markets.
Reasons for the out-performance of stock market:
1. Increased Foreign Institutional Investor (FII) Inflows
- The period of January 2018 to December 2018 was negative as there was FII outflow from Indian stock market.
- From February 2019 onwards the inflow of FII’s has increased again. Indian equities observed investments worth Rs. 17,000 Cr from FII’s in February 2019. In March 2019, the FII inflow was worth Rs. 34,000 Cr.
- After these investments in February the markets started going up and after the investments in March the markets got boosted even more.
- But why did this FII inflow increase? The rate of 10-year government securities yield in USA has come down from 3.18% to 2.4%. This means that in USA a downward trend has started in the 10-year G-Sec.
- This is happening because people are thinking that the GDP of USA would not grow as per the expectations. Thus, the capital from there is automatically being shifted to emerging markets.
- India, in 2018, was negative if one looks at the broader market. The small cap and mid-cap indices were down by 25%-30%. The large cap indices were maintained just because of some 7-8 stocks. And thus, the overall broader market was quiet down.
- Therefore, the FII’s found the valuations of Indian market attractive at this point of time and which is why their inflows increased.
2. RBI Rate Cut Expectations
- As per RBI, inflation and all other monetary factors seem to be under control, which is why there is consensus in generation that RBI should declare another rate cut.
- In the last bi-monthly meet of RBI, they had cut the Repo rate by 0.25%. When rate cut takes place, the interest rates on loans go down and the profitability of companies and corporates may increase.
- There are chances that this may get repeated in one of the future bi-monthly RBI meets. Thus, because of this projection, there is a positive feeling in the market.
3. Corporate Profitability Growth Expectations
The market is expecting the corporate profitability to grow by 15% to 18% in the next 10-12 months. The market is going up also because of this expectation.
4. Modi Government in Lok Sabha 2019 Elections
- In 2013, it could be seen that when a stable government was being formed, the markets had experienced a positive rally and also the FII inflows had increased before that.
- The same thing is happening even this time also with the increasing FII investments and the expectations of a stable government being formed. Thus, in the anticipation of a strong government coming in power the markets are rallying up.
5. China’s PMI number
- The Purchasing Managers’ Index (PMI) is an indicator of economic health for manufacturing and service sectors. If the PMI number goes above 50 it indicates that the economy is expanding. And if below 50 then the economy is termed to be contracting.
- People, or the world economic experts, were expecting the China PMI for manufacturing to be 49.9. But the actual China’s manufacturing PMI number came out to be 50.8. This was very surprising for the markets.
- And this is the major reason that the markets went so up on 1st April 2019. The metal sector especially performed very well. If the manufacturing output in China is good then the demand for metals can also be good. That is why the metal sector was up by almost 2% on 1st April 2019.
- Sensex went up till 39,100 and closed at around 38,900 on 1st April 2019. It opened on 2nd April in the same range.
- Above mentioned are the factors that are contributing towards the rising market.
- China’s PMI number specifically helped the market on 1st April 2019.
- The market rally of 1st April 2019, was majorly supported by the metal sector.
- The numbers that are used are approximate and may have been rounded off for presentation purposes.
- We are not suggesting anyone to immediately go and buy stocks or invest in the stock markets.
- Only an analysis has been presented here. No judgments or final statements are being made here.