Why is Nifty50 behaving as if Covid 2.0 has never happened?

NEW DELHI: One question that has been racking the brains of investors on Dalal Street over the past few days is: why is the stock market not falling apart despite all the bad news around us?

Some called Mr Market ‘heartless’, while others tried to explain it as its typical ‘forward-looking’ behaviour.

Market data suggests while foreign investors have been dancing to the tune of ‘Sell in May and go away’ when it comes to Indian equities, domestic institutional investors have been sticking their neck out and lapping up those shares. There’s no evidence of large-scale pullout by retail investors either.

Smart traders are minting money by betting on momentum stocks – metal stocks have been the latest trend – while long-term investors are staying put with their favourite blue chips. After a mild slump, Nifty50 shot up some 1.3 per cent last week.

So, what's making our market Covid-proof when large parts of our country is under lockdown and Covid cases and deaths are hitting records every second day?

Money managers say the answer lies in the lessons learnt from the first wave of Covid-19 last year, when the market crash was followed by a sharp and quick rebound.

“It is a case of ‘once bitten, twice shy’. Domestic investors had stayed away last year when Sensex and the broader market rebounded rapidly. This time, they do not want to miss that. Domestic investors are sensing that the panic is slightly overdone. They know that RBI and the government will be supportive of the economy. Domestic investors are being smarter, and there is no panic reaction like what they had shown around this time last year,” says Sunil Subramaniam, MD & CEO, Sundaram Mutual Fund.

Saurabh Mukherjea, a fund manager for the wealthy, echoed similar views. “Investors have learnt that even if you have three months of lockdown like we did last year in April, May and June -- when the economy contracted 25% -- leading market franchises like Asian Paints, Pidilite, Divi’s Lab, Dr Lal Path Labs, Relaxo, HDFC Bank, Kotak Mahindra Bank and Bajaj Finance can come back very strongly.”

"A lot of people had sold these stocks in the panic of February and March last year. We do not want to make the same mistake twice and sell in a panic,” Mukherjea, who runs PMS firm Marcellus Investment Managers, told ETNow.

While the market’s resilience is the result of the faith imposed by domestic and retail investors, pullout of capital by overseas portfolio investors has caused volatility in the market.

After taking out some Rs 9,659 crore in April, FIIs have withdrawn some Rs 5,936 crore from Dalal Street in the first week of May.

NSE data showed FIIs owned 21.7 per cent of total market-cap as of April end, compared with 7.4 per cent holding by domestic mutual funds and 9 per cent by retail investors.

Given their dominance, it will be tough for Nifty to scale new high without support from FIIs.

"At the moment, we are going through a pause in the long-term picture of flows, which are still supportive of India. I would not see the current situation as a permanent one, but more of a transitory phase,” says Abhiram Eleswarapu, Head of Equities, BNP Paribas Securities India.

He says FII flows will remain favourable for India and other emerging markets, as the gap between earnings yield and bond yield is much more favourable here as opposed those in the US or other developed markets.