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Macroscope | Why India’s China-fuelled equity surge could come at a high cost
- The unpredictability of Beijing’s regulatory interventions is accentuating the appeal of India’s tech sector, but the optimism is excessive
- Lingering damage from the pandemic, overpriced equities and regulatory risks could set India up for a brutal sell-off
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The disconnect between the damage wrought by the Covid-19 pandemic and the surge in asset prices is one of the biggest talking points among investors. Even as the highly infectious Delta variant spreads rapidly across the globe, the MSCI All-Country World Index, a gauge of global stocks, is trading close to an all-time high.
There are plenty of examples of markets being dangerously out of kilter with underlying fundamentals. One of the most conspicuous in recent months has been the continued surge in India’s stock market despite the deep economic scarring from the catastrophic coronavirus outbreak.
As recently as mid-May, India was still averaging a staggering 300,000 new cases a day. Even before the pandemic erupted, the Indian economy was slowing and contracted 7.3 per cent year on year in the 2020-21 financial year.
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Although the second wave receded by the end of June, a projected growth rate of about 9 per cent in the current financial year would still not fully offset the virus-induced damage that is expected to leave economic output 7 per cent below its pre-pandemic level.
Yet, investors appear unfazed. The threats that have been putting pressure on asset prices worldwide – the spread of the Delta variant, slower growth, the surge in inflation and uncertainty over the timing and impact of a withdrawal of stimulus by the US Federal Reserve – have had little effect on sentiment towards India.
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India records lowest number of coronavirus cases in 160 days
India records lowest number of coronavirus cases in 160 days
The S&P BSE Sensex, a leading gauge of Indian shares, has gained 6.9 per cent since July 1, compared with a 6.8 per cent decline in emerging market equities and a 3.2 per cent rise in developed market stocks. Since its low in early April last year, India’s equity market is up more than 100 per cent.
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