40% jump in Nifty from March lows: 3 factors driving this surge

Historically it has always happened like this after every major crisis, says Aditya Narain, Head of Research, Edelweiss Financial Services.

The market has bounced 40% from recent lows, when everybody was on the same side of the boat because of bad news all around. Still there is bad news all around. Market gurus globally and locally have been advising caution. Yet markets are going higher as if there is no tomorrow. What is causing this kind of comeback?
I think it is a bunch of things. If you were to look at it from a historical context, whether it was the Global Financial Crisis, or the Great Depression, when you got into these problems after the early round of correction, there has always been a reasonably sharp bounceback. To some extent, history has supported the fact that even when the immediate outlook is poor, if stocks have reacted enough, they tend to come back substantially. That is one way to look at it.

The other thing is what has actually happened is that fundamentally there has been a lot of money getting pushed into the system globally. What typically tends to happen in such cases is that at the end of the day the money will either be going to markets or it will go to credit. In the initial jump, it tends to go to markets and that is what you are seeing at this point in time. All the liquidity that has been pumped in is largely finding its way in some form or the other into the markets. The issue is when does it start going into the credit markets? Because that is what is fundamentally required. Once that starts happening, it is actually better for the economy from a longer term perspective. That will potentially start putting off some of your headline equity market levels.

The third thing that has happened in this particular case is that after having seen supply completely stop, the market is now following supply as it opens up. What you are seeing at the moment is someone moving up to 50 per cent production levels, some moving to 70 per cent. You are seeing people on the streets, you are seeing airlines beginning to take off, and people are tending to follow that.

So it’s combination of the facts that historically it has always happened like this, the fact that there is money in the system and the fact that people are looking at supply, which is obviously tending to look much better than what one was seeing a month ago.