Galloping Market & Struggling Economy

“A rising tide tends to lift all boats” however the current market is not following it. At present, the bellwether market is hitting new highs led by the movement of few stocks. The performance of the indices from 1 Jan 2019 to 31 Dec 2019:

Index	01-01-19	31-12-19	Return
Nifty	10910	12168	11.53%
Nifty Midcap 100	17893.5	17102	-4.4%
Nifty Smallcap	6476	5834	-10%

From the data mentioned above, we can understand that the current rally is mainly led by the participation of large cap stocks, whereas nifty midcap and smallcap continue to bleed.

2019 has been a good year for Indian capital markets driven by both domestic and foreign institutional (FII) inflows. Foreign investors poured more than Rs 1 lakh crore into Indian equities in 2019, making it the best year for overseas investments in India since 2013. While their net investment in the debt segment stood at Rs 24,280 crore. At $14 billion in dollar terms, it is the second-highest amount received by a major Asian market this year, after China.

The Drivers of the market

FII flows:

Month	2014	2015	2016	2017	2018	2019
January	714	12919	-11126	-1177	13781	-4262
February	1404	11476	-5521	9902	-11423	17220
March	20077	12078	21143	30906	11654	33981
April	9602	11721	8416	2394	-5552	21193
May	14006	-5768	2543	7711	-10060	7920
June	13991	-3344	3713	3617	-4831	2596
July	13110	5319	12612	5161	2264	-12419
August	5430	-16877	9071	-12770	1775	-17592
September	5103	-6475	10443	-11392	-10825	7548
October	-1172	6650	-4306	3055	-28921	12368
November	13753	-7074	-18244	19728	5981	25231
December	1036	-2817	-8176	-5883	3143	7060
Total	97,054	17,808	20,568	51,252	-33,014	100,844

Source: NSDL

GDP DATA
2014	7.41%
2015	7.99%
2016	8.17%
2017	7.16%
2018	6.81%
2019*	4.5%
*- Q2 DATA

FII flow shows that at the start of the NDA government in 2014 there was huge pumping in of the money mainly on the hope of a stable and reform-oriented government at the Centre which also led an increase in the GDP to 7.4% from 6.38% in 2013.

However, from the mid of 2015 onwards, there was huge decease in the inflows, mainly on account of China stock market turbulence which lasted for about a year. The next major event took place in 2016 “demonetization” shock-and-awe announcement of currency swap made by the government led to huge outflows by FII from equity market which continued for about 3 months, post which inflows started coming as the move was digested. The next major move by the government was the implementation of GST in 2017 which led to FII pulling out the money drastically. These two major moves by the government have impacted the economy a lot leading to a fall in GDP by 1% to 7.16% in 2017. In the year 2018 many factors like US-China Trade war, Brexit, uncertainty over the government's ability to meet the fiscal deficit target, elections scheduled in the first half of 2019 and the emerging political scenario have overall affected the market. With all these factors affecting the market, FII turned out to be sellers of 33014 Cr in the year 2018, thereby leading to a decline in GDP from 7.16% to 6.81% in 2018.

2019 started with the market being busy with elections result expectation. Whereas in July and August huge outflows were seen on account in reaction to the higher surcharge on the super-rich proposed in the Union Budget on July 5. However, the corporate tax cut announced in September led to the bouncing back of the flows by FII.

 SIP Flows:

AMFI data shows that the MF industry had added, on an average, 9.55 lakh SIP accounts each month during the FY 2019-20, with an average SIP size of about ₹2,800 per SIP account. Moreover,  in November 2019 the SIP contribution in equity has been 8273 Cr.

Source: Amfi

The current movement in the index is not supported by economic conditions but is mainly driven by liquidity. The liquidity comes in the market in the form of Sip which is approx 8000 cr per month that is the real supporting factor for the market for this ride. And to an extent, the corporate tax cut has also aided the rally in the frontline stocks.

FDI flows to India on a 12-month trailing basis, have crossed the $30-32 billion range in last 10 years for the first time to reach $38 billion in September,” as reported by Credit Suisse. In the calendar year, 2016 FDI inflows increased by 23% on the back of reforms and liberalization of FDI norms in 15 sectors and also eased the process for FDI approval. However, the flows from 2017 onwards seem to be static which is mostly on account of the base effect.

Year	FDI Equity Inflow ( In Crores)
2015	252,561
2016	311,644
2017	282,768
2018	290,697
2019*	258,604

*2019 – data is from January to September 2019

Source: https://dipp.gov.in/publications/fdi-statistics

In 2019 the flows continued to come but were not supported by the economic indicators in the market which led the GDP to go down further to 5% (Q2 data) which is six-year low. We need to accept the fact that the current slowdown in the economy is structural and not cyclical. To revive the economy the government has to increase the spending but for that, if they prefer the domestic route it will increase the cost of borrowing and it will backfire. So the inflow from outside is the key to the revival of the economy. Fund inflows from outside either in the form of FII or FDI and how successive is the government in attracting the fund flow will decide the direction of the economy.

2020 depends on flows as far as the index is concerned. The domestic savings are routed through SIP format which is on a healthy footing and will help the index to find support. But, having said that FII and FDI flows will determine the overall growth of the economy and the performance of broader markets.