The equity markets started the rise with the accommodative policy of the central bank which provided ample liquidity as well as targeted support for select sectors. The expansionary fiscal policy also provided the much-needed support at a time when economic growth was not happening and there was general economic distress. This paved the way for the economy to come up from the lowest rate of economic growth in history, as economic activity gradually gathered pace. From a negative seven per cent for FY 21, the rate economic growth is expected to touch a positive eleven per cent as we move into FY22. But the improvements in the rate of economic growth also resulted in the earnings of corporates over the last two quarters. The Q2 earnings were a pleasant surprise as companies reported better than estimated earnings. This performance was ascribed to two factors, cost rationalization and the advantage of more or less stable to lower input costs. This was construed as the advent of better times in terms of earnings and probably a lot of earnings upgrades. The picture presented by the earnings so far for Q3 also present a similar or better picture as companies have far outperformed the estimates. With incremental earnings upgrades it becomes more explicit that the immediate valuations that look relatively expensive may look reasonable over the next few quarters as economic recovery gets wings. The fundamental direction to the markets has been set and reaffirmed by the union budget for FY22. The budget has assured continuity, while providing stability in tax rates, and also good amount of expenditure in key sectors of the economy. The budget also contains proposals for privatization of a couple of government run banks, and also for disinvestment of some of the public sector enterprises, both of which would bring in better allocative efficiency to capital. All these have been appreciated by investors and has led to the broad based, massive rally in the markets. The rally has been sustained to a significant extent by the inflows form overseas investors who have committed investments to emerging markets for a little more than three months now. This also drives home the fact that the perception on emerging market’s performance is likely to be pretty strong and it is this perception that is leading investors into India, China, Taiwan, Vietnam, South Korea etc. But it should be noted that these inflows are conditional and closely linked to how economic conditions are evolving in the US in the next two to three quarters. The impact of external developments, like the trajectory of the pandemic in the US and Europe, the movement in the US Dollars against other currencies, the price of oil which looks north-bound etc. cannot be entirely ruled out. But that impact may be transient or temporary. We have seen in the last few months that there have been corrective downward movements in the markets in sympathy with other major overseas markets, but it did not dent the fundamental direction of our markets. While the markets will continue the secular uptrend, it is very much in the nature of the markets to go through corrective movements as well, at times. As we are entering a secular uptrend in economic growth, and the markets, the sectors which are fundamental facilitators of growth, and which are the beneficiaries of growth, are likely to do better than the others. As mentioned earlier, banking, and financial services including NBFCs is something that is important from the long-term growth perspective. The reliance on IT is only going to increase with transformational things happening there, and India is home to some of the largest software services and product companies in this segment. We may see rapid changes happening in the automobile sector, healthcare, real estate and infra, and logistics etc. In a secular bull run all segments tend to benefit but the ones which are the backbone of the economy benefit the most
