Correlation of COVID 19, Economy and Market Return

 Correlation of COVID 19, Economy and Market Return

 

As we are all aware, it has been a difficult year for the Indian economy. The Covid-19 pandemic has severely impacted normal business functioning. However, after falling more than 37.5% between January 1, 2020, and the bottom on March 23, 2020, markets have since recovered, rallying by 49.6% between March 23, 2020, and August 31, 2020. 

Therefore, the main concern among investors currently is the disconnect between markets and the economy.

As our economy now slowly works towards reaching the pre-Covid-19 normality, a look at the below historical NIFTY-50 returns may bring out certain interesting perspectives to our minds: 

As can be observed from the above table, whenever the NIFTY 50 has delivered a compounded annual growth rate (CAGR) of 5% or less over the last 10 years, it has generally performed very well in the next 3, 5 and 10 year periods (please refer the highlighted cells). 10 year returns below 5% have generally occurred due to a strong reason related to economic/political or domestic/global events. And historically, markets tend to generate better returns in the next 3 or more years. After a gap of several years, the 10 year NIFTY 50 CAGR fell to 5% as on March 31, 2020, due to the impact of the Covid-19 pandemic.

Interestingly, there is also another important perspective to note. While the NIFTY 50 has given a CAGR of 5%, India’s nominal GDP has grown at a CAGR of 11.5% over the last 10 financial year. India’s nominalGDP has run ahead our equity markets in the last decade. There is, therefore, a material disconnect between the performance of the market and our economy in the last 10 financial years. 

With this in mind, it must also be noted that theCovid-19 pandemic is a rare event or disruption. Our economy may suffer for a period, but it is expected to trudge back to normalcy at some point of time, aided by the concerted effort of the Government and the Reserve Bank of India (RBI). The markets, therefore, appear to be focusing on the likely recovery in future, instead of the current economic disruption. Foreign Portfolio Investors (FPIs) too appear to have echoed the sentiment, investing around INR 91,044 crore from May to August 2020, after withdrawing INR 68,857 in the months of March and April, 2020.

Additionally, the Indian economy has already begun to show initial signs of recovery in the past few months. In the long term, India’s excellent demographics, abundant natural resources and a young and competitive manpower may prove to be huge positives. India may also provide businesses a possible avenue to reduce their dependence on China.
Although rising Covid-19 infections continues to remain a significant risk for the economy, it will be interesting to observe how the markets perform in the next few years.

 Sources: Various publications

Disclaimer: The information provided herein is based on publicly available information and other sources believed to be reliable, but involve uncertainties that could cause actual events to differ materially from those expressed or implied in such statements. The document is given for general and information purpose and is neither an investment advice nor an offer to sell nor a solicitation. While due care has been exercised while preparing this document, we do not warrant the completeness or accuracy of the information. We will not accept any liability arising from the use of this material. The recipient of this material should rely on their investigations and take their own professional advice.

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