The barometer of stock market, the Bombay Stock Exchange's (BSE) 30-share index Sensex, is within kissing distance of key 50,000 mark. It's a remarkable feat as the index rose from 25,638 points in March last year after the outbreak of Covid and the news of subsequent lockdown. Sensex has almost doubled in a year's time. This frenzy in the market is expected to continue due to roll-out of vaccine globally, normalisation of business operations and the monetary and fiscal support from the government. Like they say , everything that goes up, comes down. What are the big risks or things that could disrupt the rally and bring down the market ? Business Today interacted with Nirmal Jain, the founder and Chairman of India Infoline Group, to understand the possible risk factors.
New variant of Covid Virus and mutations
The stock market is eagerly following the news of COVID-19 variants and mutations. Virus mutates and gets into a deadly form like the way it is currently happening in UK. There is a second wave of infection and also a lockdown in the UK. In fact, UK was the first country to start with vaccination. The vaccine may work to control the new variant, but there is no clarity on the new forms of variants out there in the communities. What if the virus mutations take a deadly form like Covid -19 ? "That could be a big risk if it again starts spreading like a wildfire," said Jain.
Border Tension with China
The border escalation between India and China has not settled yet. After decades of Sino -India peace at the border , a deadly confrontation in May last year resulted in deaths for the first time since 1962 war. The military tension in the eastern belt of Ladakh is still continuing , though India and China have reduced some troops because of a harsh winter. "The market gets worried if there is a confrontation or if it escalates," said Jain.
China is clearly emerging as a big economic force in the world. Post COVID-19, when the entire world is struggling to keep their economy float, China is marching ahead as it managed to control the virus much more effectively. There are estimates that China will overtake US in the next decade as the world's largest economy. The US under the President Donald Trump administration did retaliate on trade front to cut China to size, but the mainland's trade expansion and also focus on new high-end sectors would sustain its rise in future. "Sometimes, these geopolitical tensions get escalated and go to a level of war," said Jain.
The local domestic issues also play a role in influencing the stock market. Take for example, the farmers unrest against the farm bill was creating some uneasiness as the confrontation between the government and the farming community was building up gradually. Jain said, "Though things are unlikely to go out of control , but local issues do impact the markets."
The single-most reason for the market rally globally is the low interest rates and the surplus liquidity. The easy liquidity conditions are supporting the increase in asset prices. Clearly, the surplus liquidity stance of global central banks would revert for normalisation of monetary policy or if the inflation comes back in a big way. But so far , there are signals that the easy liquidity conditions would continue in 2021. " The extent of market correction depends upon at what stage of index level, the reversal of easy liquidity policy takes place. Higher the altitude, higher the correction," added Jain.