December 26, 2019 · 5 min read •
The author is leading the International Business Strategy and an Educational Appliance for TCS iON
“Why is the stock market soaring, when there is an economic slowdown?”
This question was tabled during one of the lunch conversations with my colleagues.
So I went about revising the definitions of the stock market jargon, and then looking at the trends of the same.
What is soaring is not the stock market per se, but indices like the BSE SENSEX and NIFTY-50. These aren’t the representation of the universe, but a group of companies. By definition, the BSE SENSEX (also known as the S&P Bombay Stock Exchange Sensitive Index or simply the SENSEX) is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange
NIFTY, National Stock Exchange Fifty, represents the weighted average of 50 Indian company stocks in 13 sectors and is one of the two main stock indices used in India, the other being the BSE Sensex.
Now these “well-established” and “financially sound” companies are into diversified GLOBAL business. This means, they generate revenue and attract capital/ investment from foreign investors as well. Add to this, the USD-INR love hate relationship. The INR has gone down significantly, giving a boost to these companies.
The universe, as per the analogy made above, constitutes of about 5,000 listed companies on the BSE, while NSE has more than 1,600 companies listed on its platform, with many common stocks between the two.
The true representation can be visualized by looking at the domestic firms, which are facing the heat. These are called the mid-cap and small-cap companies. These firms seldom attract a foreign inflow and cater to the domestic target group/ market. Historical data says that mid-cap and small-cap return has been following Newton’s 3rd Law: Every Dip has seen an equally strong Rise in the following year.
However, like in every experiment, the success is attained if the environment is STABLE. The golden question is, with the infusion of (reformatory?) decisions like Demonetization & GST (and the host of socio-political law revisions), which can deeply impact domestic-centric business, will the Newton’s 3rd Law hold good?