On 6th January, 2021, afternoon although Donald Trump’s supporters stormed at Capitol Hill, yet the Dow Jones Index was unruffled and ended the day at an all- time high. On 8th January, 2021, Dow Jones Industrial Average went up to 31,097.97 points which is regarded as highest till now.

Rather than being influenced by this, the markets were enthused by the news of the Democratic Party winning two Senate seats from Georgia and getting a slender majority (with Vice President- elect Kamala Harris’s vote), which could ease the path of a big stimulus announcement by the President elect- Joe Biden after he takes the charge on 20th January, 2021. While there has been controversy around the election outcome and there was chaos in Capitol Hill by Trump supporters, many feel that politics will play a limited role in the markets. Markets are more about trade and commerce and now politics does not matter much in commerce as it is big and powerful.
But what does it mean for Indian Markets? In India the Sensex closed at record high on 8th January, 2021. It is important to note that the economic stimulus in the US and inflow of funds into Indian equities has been one of the dominant factors for the rise of equity markets. So, a majority for Biden on the Senate floor and his ability to push a stimulus will have a positive impact on Indian markets as a part of that money is expected to find its way into Indian equities too. On 8th January, 2021, Sensex closed at the highest 48,782.51 points. Foreign Portfolio Investors, net investment of Rs. 2.22 lakh crore in Indian equities since April 1, 2020, resulted in Sensex and Nifty gaining 63.4% and 64.4% respectively. While Biden has spoken about his big stimulus, even if half of that comes through, it would be big. Markets are thinking that big money at low cost of interest will find its way into emerging economies including India and that will keep it higher in the next term. Big stimulus which Joe Biden spoke of bringing about is estimated of 5 trillion dollars, which would be beneficial for the developing countries, especially India.
Though Foreign Portfolio Investors (FPIs) have been dominant players, Indian Investors- both Retail and High Net Individuals (HNIs) also played a big role in the market surge, as they entered the markets in big numbers following a sharp decline in indices in February and March 2020. According to the Central Depository Services Limited, Between April and December, more than a third (77 lakh) of the investor accounts that it held until March 2020 (2.12 crore) to reach 2.89 crore in December.
But ultimately there are certain downside risks. Foreign Investors have been the Big Bulls in the market so far. If the liquidity dries up and the economy doesn’t show the expected resilience, the FPI flow will also come down and the markets will stagnate or slowly decline from the current high levels. There is already a feeling within a section of participants that the market valuation is running ahead of fundamentals. If any unexpected risk factor comes into play then the market will either correct or react. Much will depend on the FPI flows and the Budget which is on the anvil. Retail investors should be cautious in this market. Another risk is the possibility of inflation remaining at an elevated level and the RBI unwinding the accommodative policy stance. While the Covid graph is curving downward, GDP growth will have to pick up speed in the coming months. If the economy doesn’t pick up the way it is projected, the high market valuation will turn out to be a bubble.

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