The Wind of Change

Sentiment has truly changed with the data point shifting from negative to positive. For many months the narrative on growth was clearly negative. Banks were going to take the brunt of the slowdown with write-downs from the moratorium. Small business bankruptcies were a serious risk. Still, this month, financial stocks were the biggest gainers driving markets higher. Given the drop in employment during the pandemic it would be hard to imagine that auto sales could rebound to a positive. I wonder if the reason behind it is also the inventory destocking that happened during the lockdown. The reverse effect of that is now showing up as inventory is being recreated.

Even then the rebound in GST collections to the highest for 2021 has a story to tell. Clearly, something good is going on as people force themselves back to work.

This lack of conviction with the new all-time high in stock indices around the world can be seen from this chart of equity fund flows that was at its most negative in years and the last month as seen on the chart below. So investors are still afraid of what is going on. But history shows that investors at large never have this right. Negative sentiment extremes from equity investors are historically associated with market bottoms and not tops.

Some sectors like the services sector have probably shown more improvement and others and it can be seen in the services PMI improving.

The net result has been a big shift in asset allocation towards value and emerging markets. The positive data points were also shifted the expectations of fund managers from no growth to a certain growth rebound in the coming months. 

This most recent Bloomberg survey of money managers on earnings and revenue expectations is near the top end of its range. FII flows into India are just short of a monthly record that may be hit if the trend of 3000 to 5000 crores worth of inflows daily continues. so retail investors remain skeptical but analysts and portfolio managers have thrown in the towel and are taking the bull by the horns.