The market appears to be teeming with optimism even as central banks across the globe are aggressively lifting rates to bring the soaring inflation down which in turn, has fuelled the worries of a looming recession.
Agencies such as IMF, and World Bank have trimmed their forecast for global growth, and economists and analysts believe that the next one and a half years will be challenging for the world economy and the market.
On July 27, the US Federal Reserve hiked rates by 75 basis points to the 2.25%-2.50% range which was the second consecutive rate hike by the Us Fed.
Yet, markets logged strong gains in the very next session. Sensex and Nifty rose almost 2% on July 28 and in the morning trade on July 29, Sensex rose more than a percent while Nifty is now above its 200-day simple moving average, trading near 17,100.
Why is the market happy?
Some experts say the market is taking comfort from the fact that the Fed rate hike was on expected lines and the central bank sounded less hawkish this time.
Vikram Kasat - Head Advisory, Prabhudas Lilladher pointed out that there are two positive indicators boosting market sentiments. One is the Fed is not providing forward guidance and second, the Fed believes this is a neutral rate. Both the above opens up a dovish pivot post.
Another factor is that since the talks of a recession in the US have been getting stronger and the US gross domestic product (GDP) fell at a 0.9% annualized rate last quarter, hopes are high that the Federal Reserve may slow down on rate hikes going ahead.
Analysts think the market is ignoring the recent macroeconomic data and having faith in the resilience of the economy.
"Markets have ignored the technical recession in the US - GDP contracting for two consecutive quarters- and are pinning more faith on the resilience of the economy as reflected in very low unemployment of 3.6% and job vacancies at historical highs. Also, the Fed chief's observations indicate that the Fed is likely to slow down rate hikes after one more large hike in September," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Also, the return of foreign investors has supported the market. Foreign portfolio investors are slowly coming back to the Indian market as the uncertainty over rate hikes is behind us while they anticipate that the Indian economy is well-placed to endure the pain of a recession in the US.
"India's dependence on global growth is restricted to a few export-oriented sectors (like IT, pharma etc.) and as such, the direct impact on our growth should be limited," said Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance.
"Though there have been some concerns on the macro front due to the rising trade and current account deficits in recent months, we believe that India’s overall macro position is relatively better than in the past with a higher forex reserves buffer to cover external trade," he added.
Misplaced optimism?
For now, it appears that the market has factored in rate hikes and a recession and is expecting a gradual slowdown in the pace of rate hikes. Also, there is optimism that the domestic economy is going to do well because of the prospects of a normal monsoon and the recent reforms of the government.
While normal monsoon is a short-term factor, the reforms will take time to bear fruit. At this moment, a recession in the US looks very much possible which could have a global impact. India's dependence on the global economy may be limited but it cannot completely decouple from the global trend.
"Several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide––especially in the United States and major European economies––triggering tighter financial conditions; a worse-than-anticipated slowdown in China, reflecting COVID-19 outbreaks and lockdowns; and further negative spillovers from the war in Ukraine," IMF said in its July update of World Economic Outlook.
Faltering economic indicators may force central banks to pause rate hikes but IMF believes with increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers.
"Tighter monetary policy will inevitably have real economic costs, but the delay will only exacerbate them," IMF believes.
There is much uncertainty in the market and occasional gains should not be interpreted as the reversal of the trend.
"If the ongoing market rally continues for some more time there is the danger of the market moving into overbought territory with the risk of vulnerability to correction," said Vijayakumar.
Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.
