Economic Indicators: Is it the right time to go for stock shopping?

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November 17, 2020 7:00 AM

As the stock markets have bounced back from multi-year lows to all-time highs in less than a year, investors should pick stocks as per their risk appetite

The economy is showing multiple signs of recovery in the festival season especially during Diwali.The economy is showing multiple signs of recovery in the festival season especially during Diwali.

As far as equity markets are concerned, there is not a single dull day as constant highs and lows keep investors in a busy mode. The recent recovery in the markets makes investors wonder about the future direction of the Sensex and Nifty. Let us discuss some of the recent indicators which will help the investors to make an educated guess about the future direction of the stock market.

Market performance
Often stock market indices are considered as the barometer for the economy. In spite of the pandemic and series of lockdown and unlock-down situation, there were as many as 144 scrips where the prices have more than doubled while around 330 generated more than 50% returns. In spite of a pandemic year, both Sensex and Nifty are showing good numbers.

Multiple signs of recovery
The economy is showing multiple signs of recovery in the festival season especially during Diwali. For instance, the value of Unified Payments Interface (UPI) transactions in October is Rs 3.86 lakh crore which is a record high. Purchasing Managers Index (PMI), which is an indicator to measure the financial health of both the manufacturing and the service sectors has seen a rebound. PMI helps investors to confirm information about the economy. GST collections in October exceeded Rs 1 lakh crore and record e-way bills were generated during October owing to the festival season. Further, car sales got a boost again owing to the festivals.

Exim numbers shows signs of rebound
For the first time in the last seven months, i.e., during September, exports rose by 6% to $27.6 billion and at the same time imports fell by 19.6% to $30.3 billion. Thus, the trade deficit narrowed sharply to $2.7 billion from $6.8 billion in August.

Unemployment rate dips
According to the Periodic Labour Force Survey report, unemployment rate in urban areas moderated to 8.4% in July-September compared to 8.9% in April-June 2020. Further, urban unemployment in the age group of 15-29 years grew 20.6% in July-September which is lower than 21.6% in the previous quarter. During the same period female unemployment rate dropped 1.6%. For male agricultural labourers, the average wage in rural India has increased almost 28% during the last five years. At the same time, for male non-agricultural labourers average wages rose around 24%. Karnataka state records the highest increase in wages at 42.3%.

IPO statistics
Whenever optimism prevails, there comes a slew of initial public offerings (IPOs). The Indian primary market has seen 24 IPOs during this year until now. There were four IPOs in the third quarter of 2020 by companies in sectors such as real estate, hospitals, construction, technology and communication, etc. Europe, Middle East, India and Africa accounted for 15% share of the global IPO market. However, India stood at number nine in the global IPO markets. The over-subscription levels and listing gains observed in the recent Indian IPOs sends a positive signal about the economy.

To conclude, if one looks at the market holistically, all the indicators we have discussed above indicate a positive direction. So, investors should pick stocks as per their risk appetite.

Reading the signs

Prices of 144 scrips have more than doubled; around 330 shares have generated more than 50% returns

  • The value of Unified Payments Interface (UPI) transactions in October is Rs 3.86 lakh crore which is a record high
  • Purchasing Managers Index (PMI), which is an indicator to measure the financial health of the manufacturing and service sectors, has seen a rebound
  • Exports rose 6% to $27.6 billion in September. Imports fell by 19.6% to $30.3 billion

The writer is a professor of finance & accounting, IIM Tiruchirappalli

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