Bulls vs. The Third Covid Wave: Impact of US Market Dynamics

06 August, 2021

            Personal Finance for Investors

The article is from our conversation with Chintan Haria the VP of ICICI Prudential on what he considers are the main macro factors affecting the Indian markets from a global perspective. Sustainable returns in equity mutual funds, even during volatile times, is one of the reasons we consider ICICI Prudential mutual funds as a good investment choice. Chintan spoke about some key factors about the impact of interest rates, liquidity infusion bonanza across all key sectors, and even why India is looking more attractive than the US markets.

The world has surely changed over the last 12 months compared to the last 12 years!

The US mother markets have rallied sharply with a shift in investing patterns from debt to equity

Equity inflows in the last 12 months in the Global equity markets touched 800 billion dollars. CNBC report says - $569 billion was in the last 5 months,Read More. This is more than the total of equity inflows in the last 20 years.

Liquidity Infusion Bonanza by America in the last 12 months ago grew all asset classes

Liquidity infusion also happened in 2008, when the global financial crisis broke out. But at that time, this money was pumped into the banking system to stop it from collapsing. In 2020, when the pandemic broke out, it was a health crisis, not a financial crisis. The goal of this liquidity steroid was to reduce economic impact due to a health hazard. And unlike 2008, this time the money went straight in the hands of people to spend. And therefore, goods and services demand went up.

In the US, because this money is being spent by the mid and lower strata we are seeing expenditure on basic needs like wheat, soya and maize going up. Agricultural inflation has gone up globally.

Infrastructural spending is also seeing an influx of 1.9 trillion dollars in the US. This is causing a big demand in metals like aluminium, zinc, copper and steel.

“This time, almost all the money printed has gone directly into the hands of people and this has led to increased consumption, which has caused prices of all goods and services to go leading to inflation. Therefore, the clear expectation is that equity markets will do well because profitability of companies should go up both in US and India. And India markets look s relatively more attractive because of better valuations”

Vice President, ICICI Prudential
Asset Management Company Limited

With the US markets on a great high, many Indian investors have turned to US market investments today. Asset allocation is the key to financial success and alpha returns. We suggest a 5% to 7 % allocation to global equity markets as part of the overall equity allocation of your portfolio. And most important we must stick to this plan to manage volatility and turbulence.


Then why are US markets not looking attractive?

  • In USA - 2008 the market cap to GDP in the US was 120%, while today it is at 220%. $45 trillion of market cap to $20 trillion GDP which is not sustainable.
  • Tax cuts have been effected and GDP growth is already high.
  • Employment is running at practically full capacity as before the pandemic.

Therefore, the US markets don't have scope to grow the way Indian markets grew at 15% on nominal basis. Hence US market cap to GDP at 220% to 230% is not sustainable in the long run.

And why is India looking attractive to foreign investors?

  • In INDIA – 2020 - We are currently about 110% percent market cap to GDP.
  • In 2008 at the market peak, we were at 160% market cap to GDP.
  • 12 years back in 2008, we were a $ 1 trillion economy with a $1.6 trillion GDP.
  • We grew from 1 trillion dollars to 3 trillion dollars and the economy in the next 4-5 years is expected to be 5 trillion dollars.

The expectation is that with 6% -to 7% inflation and 8% GDP growth over the next 2 years, we will grow between 14 to 15% on nominal basis, which makes India a very attractive destination for foreign investment.

Why are interest rates important?

Over the last 8 years interest rates have dropped every year globally compelling people to migrate to equities.

Close to 13 trillion dollars of global sovereign bonds are in negative interest rates,Read More. The US pension industry alone invests close to 30 trillion dollars which is 10x of the Indian economy, Read More. With inflation going up, these funds are moving to equity markets.

Even in India, fixed deposit yields post tax are lower than the GDP growth rate and inflation . People are now looking towards equity to create wealth. Fall in interest rates has caused a shift from debt to equity. If interest rates go up, debt fund managers would want to move towards higher yielding emerging market debt as well as emerging market equities

Over the past 6 months, many people have asked me – What should I do now with low FD rates? When will it go up? Where should I invest to get better returns? FD rates are not going up in any hurry and this is a fact. This has led me to have many conversations about the importance of having a plan and adding equity investments as the best solution for inflation adjusted returns into portfolios. But what is most important to remember is – TIME. Equity returns will only come over a 5 year plus horizon. One must be ready to ride market volatility for alpha returns and stay disciplined and not panic. And this is why it is so important to have a financial advisor to guide you during challenging & turbulent times as well as times of euphoria.


Larger picture from India perspective

India’s $6 trillion savings has only 6% invested in equity; so headroom for growth is immense. Compare that to the US where 40% of savings is in equity.

And as we move from a $3 trillion to $5 trillion economy, there will be enough sectors to allow us to capture this India Growth story.

If you stay invested for over a 5 to 15 years period, you are sure to maximize your returns from the growth in the equity markets. Don't look at short term. Always look long term with equities.

Inflation is something which may stay for 3 to 4 years. The earnings growth of equity markets is expected support inflation. Therefore, we don’t see a scenario where investments will stop towards equity for some time


Value Investing vs Growth Investing

The inflationary environment has caused value sectors like metals and energy, real estate and construction to move up. In the last six to eight months, oil prices have gone up, metal prices are being supportive, real estate sales are improving in India especially Bangalore, Hyderabad, Gurgaon, Delhi, because IT sector is doing so well.

Banks are getting a booster dose because metals and real estate have started doing well. So, sectors which had problems before are turning around now and growing.

So is the rally sustainable? What are the pain points of concern?

The first pain point is when will oil prices go above $100?

The second and the more important point is when will the US increase rates causing liquidity to go away? These two factors are key triggers to global volatility and will make us feel jittery about the equity market.

And the third point is when will the liquidity bonanza end? While there is inflationary pressure in the US, it is not out of control. It is likely that interest rates will go up but not soon. Globally, no country wants to upset the apple cart when their economy is just about stabilizing.

We must always remember that stock markets always are ahead of such news which will get factored in and therefore we have seen a rally in the Indian Markets. We most likely have a 12-18 month period before inflation runs up and we see our Indian economy overheating.


The US mother markets have rallied sharply with a shift in investing patterns from debt to equity. Liquidity Infusion Bonanza by America in the last 12 months ago grew all asset classes. Market cap to GDP for US vs India is almost double, which makes India look very attractive. In addition, there is more participation in this rally by HNIs and millennials than institutions. We are also seeing much more savings going into equity, with the percentage going up by over a 1000 basis points over the last 12 years.

Value stocks are delivering value, but there is a scare on oil prices and interest rates going up, which will cause further inflationary pressure in the near term (12-18 months).

“When the American Markets smile, Indian Markets laugh! And when the US Markets sneeze, India catches a cold! This used to be common chatter amongst investors and analysts. And this euphoria coupled with the liquidity bonanza has surely caused a surge in the stock markets globally. But we must remember the markets are way ahead of any news. Any excesses in the market will get removed sooner than later. What we need is to remain balanced, especially during such ’ uncertain volatile ‘times , and be disciplined , patient and invest with the right fund managers.”

Managing Director,
Sinhasi Consultants Pvt. Ltd.

All in all, the indications are that the Indian markets are going to grow further, but with uncertainity and volatility for sure! It is never the wrong time to enter equity markets. Only a wrong time to stop investing. One must add surplus monies during market corrections and falls. And always think with a clear plan for your money and long term while investing in equities and you are sure to make good returns. Persist with discipline and you will see your financial goals coming within grasp.

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