Keeping Head above Water
There are three things that make the market and the stocks move. These are earnings, liquidity and narrative. Now here is a poser: how have these three factors come into play at a time like this when the world is reeling from the effects of the virus pandemic? Globally, the markets have witnessed one of the fastest bear markets in the wake of all-time highs. The equity markets have been witness to a whole lot of bleeding. And so intensive has this been that even those investors who swear by the principle of buying when there is bloodshed on the street have been gripped by fear. But, ironically, just as the situation turned so grim, the markets begin to surge higher. How did that happen?
To explain this surprising phenomenon, we need to take the above mentioned three factors into consideration. The first and most prominent factor which could be attributed to this breathtaking rally from the March lows would be liquidity that came into play with central banks around the world announcing mammoth stimulus packages to help combat the economic crisis triggered by the pandemic. In fact, the US Federal in its latest policy announcement has made it clear that it remains committed to keep the taps of liquidity flowing till the time growth returns to the pre-pandemic status.
This has been followed by encouraging narratives like positive results seen in the clinical trials of corona virus vaccines, the start of a good monsoon in India and the job market getting revived with the gradual easing of the lockdowns. Meanwhile, on the domestic front, corporate earnings acted as cherry on a cake given that they have not been as bleak as expected. The year 2020 has been filled with surprises and shocks. If you have been taken aback with the rallies seen in the segments of equities, gold, silver and bitcoin, you would be thrilled to hear that one of the stocks has rallied more than 2,000 per cent this week.
This particular company is known for its ‘picture perfect’ moment. Yes, we are talking about Kodak whose recent market valuation has surged close to USD 2 billion. And what triggered such a breathtaking rally in the stock price? The reason is that the company received a loan from the US government which will be used to make drug ingredients in response to the corona virus pandemic. President Donald Trump flaunted the agreement as one of the most important deals in the history of the US’ pharmaceuticals space. Someone has rightly said that ‘anything and everything is possible in 2020’.
Meanwhile, the trend of the markets looks strong as the prices are making a series of higher highs and higher lows. The market is scaling higher while the volatility index (VIX) is going lower. This descending Indian VIX clearly reflects the fact that the street is not expecting any kind of uncertainty in the near term. Going forward, the asset prices, especially of equities and precious metal, may continue on their upward trajectory due to abundant liquidity, lower cost of funds and poor debt returns. Many are calling this a bubble, but if you view the markets with a long-term perspective the returns over the last 4-5 years are abysmal.
The valuations appear stretched due to extraordinary fall in earnings. The negative real interest rates may afford higher valuations to sustain in the short term. For the coming week, a level of 11,050 is likely to act as strong support, and on the upside, a level of 11,310-11,350 is likely to act as resistance. We expect the markets to trade in this range. However, all eyes would be on Bank Nifty as this has a lot of catching up to do. Further, the RBI monetary policy, which is due next week, could act as an important catalyst and perhaps dictate the market trend in the near term.
