Despite Indian equities ending in the red on July 24, 2020, it has been a sixth consecutive week of gains for the indice, with 50% gains since the market witnessed rout amid coronawoes in the last week of March. So, what is driving the rally even as economy is facing headwinds with most agencies forecasting a huge decline in GDP going forward for FY21. Though, recovery is anticipated by few next year.
1. Dollar weakness:
Dollar considered to be a safe-haven currency amid a crisis just like any other safe haven asset or currency behaves differently. And this time as the economic crisis in the US seem to deepen with the latest comments from Trump and the weekly jobless claim data, for a while now it is trending lower.
This weakness in dollar's strength is pushing funds into developing markets including India. Though this may be a short term phenomena the situation is much similar to 2003-2007 period where stock markets witnessed significant boom.
2. Zero interest rate or near zero interest rates in most economies:
This can be another reason drawing investors to tap on returns from equity investments as the valuation now have turned cheaper in comparison to few months back.
3. Better Q1FY results than feared:
IT companies and in fact few financial sector companies have posted better than expected FY21 results for the quarter ended June despite corona led lockdowns and business disruption. Now much needs to be seen how few other heavyweights post their result including RIL SBI which are due to release their results next week.
4. Global central banks stimulus led liquidity:
The markets are flooded with abundant liquidity and this is finding way in all of the possible asset classes with equity being no exception, that is also cheering investor sentiment.
So, as economic stimulus package being rolled out across economies are pinning hopes of an early recovery despite negative factors of huge unemployment rate, yet again emerging US-China crisis after the US has asked China to shut its Houston consulate and tension between India and China still far from peaceful, there is seen a bull run.
Furthermore, stocks are considered long term assets and 90% of the stock's value comes from the estimated future earnings much beyond the current financial year. So, this is what is pushing up the markets in the current scenario.
Indian markets have rallied a substantial bit and given the current crisis at hand of the pandemic and other geo-political uncertainties, investors need to be cautious and may take positions in the stocks as and when there is deeper correction.