Visible Covid & market rally, invisible growth
Last fortnight I offered the reasons for what seemed like a baffling bull market in the face of a nation gasping for oxygen and the dreadful loss of lives, as Covid spread like wildfire in a second virulent wave. The reason for the market rally is simply strong earnings growth by many good-quality companies, a trend that started way back in the second quarter of FY21. And it is earnings growth which pushes up stock prices, which in turn moves the indices higher, something that we interpret as a market rally. The market rally is visible, as is the horrendous impact of Covid 19. What is invisible is earnings growth.
The surprisingly strong earnings growth is the micro picture — the immediate reason for the bull market. But since too many companies in completely disparate businesses from cement to plastic pipes, from kitchen appliances to fibre board, from software services to steel, from ceramics to chemicals to textiles, are reporting outstanding results, we need to look for the invisible micro picture.
Such eye-popping corporate results are reminiscent of the big economic boom of 2003-07, which caused synchronised super growth in all three major economic blocs — Europe, the US, and Eastern Asia (China, Japan, and South Korea). Also, since there was also a concurrent massive boom in commodities (copper, oil, iron ore, and steel, aluminium, etc.), Australia, Russia, and Brazil also participated in the big global economic expansion at the same time. This time, too, we have a commodity upcycle while economic growth in China, Russia, Brazil, and the US is strong.
But what is happening here in India is less global and more local, less of the wrong type of growth and more of the right type of growth. The 2003-07 boom was caused partly by a massive capital-fuelled boom in infrastructure and real estate. Along with good businesses in capital goods, paints, and consumer products, companies like Unitech, GMR, GVK, Reliance Power, Lanco, and Jindal Steel too hogged the limelight, drew oodles of capital from private equity investors and banks, and then collapsed in a heap of mismanagement and false expectations. Remember, at the height of the boom, with horrible timing, Tata Steel, Tata Motors, and Hindalco made very large and expensive acquisitions, which they took years to digest. This time is different from the mid-2000s. For one, the economic boom (as reflected in corporate results) is invisible against a very visible pandemic. Indeed, investors, focused on rising prices, want to join the party without wasting time digging deep into the source of the growth. Those who don’t care about stock prices are sceptical that any strong and sustained economic growth is even possible, given the trauma that India is going through. As of now, the growth is real and largely across the board, barring maybe one or two corporate groups whose stocks are hugely manipulated without backing fundamentals. I notice a lot of confidence in the voices of even conservative business leaders (from Asian Paints, Cera Sanitaryware, Astral Poly Technik) in their quarterly earnings call with investors and analysts. Moreover, we are not witnessing indiscriminate waste of capital this time, especially since banks are not in a position to lend aggressively.
Is it sustainable?
All we know is, even as late as December 2019 and early 2020 there were no signs of strong economic growth. Despite being ruled by a Vikas Purush for more than five years, growth has crashed from 7.5 per cent to 4.5 per cent. There was no credible official economic explanation why India had slumped into the economic doldrums. Indeed, Bibek Debroy, head of the Prime Minister’s Economic Advisory Council (PMEAC), argued in a piece, in late 2019, that there was nothing to get worked up about low growth. The Modi government (which came to power by trashing the Congress’s economic record) cannot do much about it. His various arguments were: One, be happy, India remains among the fastest-growing countries in the world. Two, be happy because inflation is low. Three, blame weak global trade, not the government. Four, structural reforms are not possible because land and labour are state subjects. Net-net, according to Mr Debroy, there is no gloom and doom in a 5 per cent growth rate; it will pick up to 6 per cent but not much more and the ongoing “clean-up” will lead to a “more efficient and more formal economy”, but not overnight.
It is indeed baffling that only six months after such a defeatist explanation of why we should not expect much growth, and when we were hit by a global pandemic with accompanying layoffs and shutdowns, Indian companies have started reporting sustained growth quarter after quarter. In the September quarter it seemed that profits were boosted by cost saving due to the lockdown. Till the December quarter, it seemed that pent-up demand from a washed-out June quarter was being serviced. But throughout the last nine months, companies have reported higher sales and now many are capacity-constrained; they have to plan expansion to meet strong demand. I have not seen any explanation for this macro phenomenon. Maybe it is the consolidation caused by GST, maybe it is government spending in different schemes that are boosting demand. Maybe many Indian companies today are exportoriented and a substantial demand is coming from overseas. The growth drivers are mostly invisible but the growth is undeniable at least for now.