The global stock markets can be irrational, as well as rooted in facts. They can behave in mysterious ways, as well as in a manner that’s logical and commonsensical. Sometimes, they move in sync and, at other times, they show obstinacy towards each other. This interplay can lead to trends that are both weird and scientific. Nothing epitomises this better than the defiance and convergence between the indices like the Dow Jones and NASDAQ in America, and the Indian Sensex over the few months during the ongoing COVID-19 pandemic.

On February 12 this year, the American Dow Jones was at a high of 29,551. It dipped by 37 per cent in 39 days (March 23). Over the next 57 days, by May 19, it climbed up to over 24,000, a rise of 30 per cent. A similar trend was noticed in the behaviour of the Sensex. From February 12 to March 23, it plunged by 37 per cent, and then soared by 16 per cent by May 19. On April 30, the index was at 33,718, which signified an upturn of 30 per cent from its March 23 low. The similarities were uncanny; the two seemed closely coupled.  

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In comparison, the NASDAQ, which comprises technology stocks, seemed to defy the insidious impact of the coronavirus pandemic. From its high in February, it tumbled by 30 per cent by March 23, but then surprisingly—actually shockingly—it almost regained the entire losses. On May 19, it stood at 9,185, only marginally down from its high of 9,818. Was this movement rational or irrational? Why did the Dow Jones and Sensex rebound during the period when both the respective economies were shuttered.

Before we answer these questions, a look at a couple of stocks will add to the complexities and creepiness of the stock markets. One of them is Reliance Industries, which is promoted by India’s wealthiest person, Mukesh Ambani. From a price of almost Rs 1,500 on February 19, the scrip took a deep dive to below Rs 900 by March 23. Then it rocketed to a peak of Rs 1,562—the highest in 2020. It seemed as if investors, day-traders, and speculators had combined together to propel the stock to new levels.

India Cements is another stock that seem to buck the overall trend—and how. Apart from two small descents, and one elongated not-too-low depression, the stock boomed from Rs 72 on February 18 to Rs 118 on May 19, a two-thirds escalation. On May 15, the scrip its 52-week high, and there were days, like February 26, when it hit the daily upper circuit, i.e. the specific top limit for the daily increase in the price of each stock. Of course, there is a narrative that drove the scrip crazy, but we will discuss it later.

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The obvious question is: What’s happening to the global indices, and individual stocks? It doesn’t make sense for the indices to bounce back during the worst period of the pandemic, when the entire world was paralysed—or at least most parts of it. It is unfathomable that when comparisons were being made with the Great Depression of 1930s—Gita Gopinath, the IMF’s chief economist, called 2020 the year of the Great Lockdown—a few stocks zoomed by 60-70 per cent.

Economists and stock experts give several reasons to explain these bewildering trends.

Lockdown Effect

American online trading platforms reported unusual increases in volumes. E-trade said that its volumes in April 2020 were thrice as large as in April 2019. TD Ameritrade said that “it did more than three million trades a day in April (2020), compared with 817 thousand a year earlier”. Richard Thaler, a Nobel Prize winner told an American weekly that investors possibly have time on their hands due to lockdowns.  “It could be that it’s just a lot of people have a lot of time on their hands,” he explained.

According to a recent piece in New Yorker, gamblers, who could not go to the casinos, shifted attention to stocks to use their speculative skills to make a killing on the exchange. A fast-moving market, which goes up and down by a few hundred points to a few thousand ones almost on a daily basis, is attractive to the day-traders. They are interested in price movements that can be as small as 50 paise a day. For them to be able to earn Rs 5-10 a share, which is inevitable in a volatile market, is a dream come true.

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Optimism Effect

It is firmly believed among certain sections that the stock markets are quick to react upwards, sometimes much before the crisis ends. Hence, the rebound in stocks can happen before the uptick in economic growths. In recent times, this was witnessed in the US markets towards the end of 2018, and beginning of the next year. There is an undying belief that the V-shape curve is inevitable during the recoveries of equities from their bottom. The investors think that the central banks and governments won’t fail them.

Robert Shiller, another Nobel Prize winner known for his book, Irrational Exuberance, said in an interview that the V-shape conviction isn’t true. He explained that the bear market of the Great Recession of 2007-08 began in September 2007, and the market didn’t bottom out till February 2009. During the Great Depression, the fall “began with the Wall Street crash of October 1929 and lasted until the middle of 1932”. During the period, the US market was depressed by 80 per cent, and “did not hit new highs” till the 1950s.

‘Promoters’ Impact

Companies that had scheduled their rights issues are expected to get a tepid response in these market conditions. Hence, their promoters may be expected to react in several ways. A few may urge their loyal brokers, and supportive institutional investors, to go on a buying spree to maintain stock prices, or even drive them northwards. Others may accept the inevitable, and directly or indirectly subscribe to the portions of the issues that remain unsold. They will wish to sell these shares later at higher prices.

One of the reasons for the spurt in the Reliance Industries’ counter over the past few months was the expectation of the rights issue, which opened on May 20. Another positive for the stock was Facebook’s decision to invest Rs 43,574 crore in Reliance Jio (telecom arm) platforms. In return, FB acquired 9.99 per cent stake in the latter. Simultaneously, Reliance Retail, Mukesh Ambani’s retail operations, inked a commercial partnership with FB-owned WhatsApp. The former will support small businesses on WhatsApp.

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Cash-rich companies, which haven’t been hurt much by the coronavirus, may use the lower stock prices as an opportunity to buy back their shares, instead of using the money in its coffers to pay higher dividends or issues shares for free through bonus issues. A few experts envisage a flooding of buyback offers from the promoters in the near future. Such hopes among the investors have the tendency to push up prices of select stocks. If these stocks happen to be heavyweights, they influence the indices.

Cash Factor

In times like these, when the markets and most other asset categories are down, cash becomes the king. Most investors try to remain liquid, and adopt a wait-and-watch attitude. But this may not be true of aggressive and large investors, who see the lower prices as an opening to increase their stakes. Take the case of Radhakishan Damani who, along with family members, increased his stake in the Chennai-based India Cements to almost 20 per cent. This was the major reason for the stock’s recent spurt.

Damani has emerged as a major Indian entrepreneur. He is ranked No. 2 richest Indian, with a wealth of nearly $17 billion, on the Forbes ‘Real-Time List’ of the world’s wealthiest, behind Mukesh Ambani ($52.6 billion). The stock price of Avenue Supermarts, owned by Damani, shot up from just above Rs 600 in March 2017 to Rs 2,454 on May 20 this year. It is almost at the same level as its previous high on February 13, 2020. Like Reliance Industries and India Cements, Damani’s stock seems to be COVID-proof.

Safer investors, who are sitting on cash, are also lured during a crisis to invest in known blue chips, which are available at lower prices, but are bound to do well when the going becomes good. Among the Indian stocks, these include renowned MNCs, as well as Indian firms that have consistently done well, and are managed professionally. Such secure buying, along with opportunistic ones, has an upward impact on stock indices.

Loss-aversion Bias

Almost three decades ago, Amos Teversky and Daniel Kahneman demonstrated what is called the loss-aversion bias among humans. It contends that “losses are twice as powerful compared to equivalent gains”. Thus, a loss of Rs 100 will give twice as grief to a person, compared to the happiness with a similar Rs 10 gain. In practice, it implies that most of us display a tendency to be risk-averse, rather than seek risk. This can manifest in different ways in varying situations.

In the case of owners of stocks, the bias reflects in propensity to retain them, even if the prices are considerably down, and the best option is to sell. Investors continue to hold to loss-making stocks in the hope that prices will go up in the near future. This is most evident during stock crisis and market crashes, when it may be better to sell, stay in cash, and buy the same or other stocks at lower prices. On an overall basis, this reduces the selling pressure, and increases the chances of an upward volatility.

The above factors contribute to the volatility, and result in short phases of upward and down movement of the indices. Rest assured that if the negatives overshadow the positives, the bears can crush the markets for longer periods. Obviously, the bulls gain an upper hand if the opposite becomes true.

By Yagnesh Kansara in Mumbai

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