The pandemic has widened the gap between markets and the economy

Sure, the stock market and economic growth hardly moved together even in the pre-pandemic era, but in an intuitive move the wedge has widened. The latest survey of global fund managers highlighted that this K is the most influential in investment decisions.

According to a September survey by Bank of America Merrill Lynch, global fund managers have taken a bearish stance on the global economy. Global economic growth is now expected to net 13%, the lowest since April 2020. Also, it is a significant drop from the peak of 91% in March this year. The survey report states that the delta variant of the virus is behind this pessimism.

In contrast, the broader equity market position among fund managers remains firm. Net global equity allocation was 50%, which is significantly higher than the 20-year average of 29%, the BofA survey said. Further, investors have not adjusted their portfolios with cash levels marginally to 4.3 per cent in September, up from 4.2 per cent in the previous month.

Further, despite sluggish earnings growth and weak fundamentals, global equity market capitalization has risen 75% from March 2020 lows to $119 trillion, showed an analysis by Motilal Oswal Financial Services Ltd. “The gap between Wall Street and Main Street—the pandemic dates back but has widened over the past year. At a finer level, the universe of benchmark indices, ie listed companies, is a subset of the growth/GDP representation; So these variables do not necessarily go in sync,” Radhika Rao, an economist at DBS, said in an emailed response.

But this time, there are many more reasons behind this yawning gap. “These include low cost of borrowing and inflow of liquidity chasing returns, affordable discounting of future profits, valuations based on sector-specific outperformance,” Rao said. Although the extraordinary financial and monetary support by central banks was aimed at preventing an economic slowdown, economists say that the unorganized sector has suffered greatly in emerging economies like India.

This is in line with the IMF’s warning that major pandemics this century have exacerbated income inequality and hurt the job prospects of those with only a basic education, while hardly affecting the employment of those with advanced degrees.

“Not only are the sectoral indices rising, but there is also anecdotal evidence of increasing social inequality. On the one hand, massive recruitment by Indian tech companies has resulted in spurt in income levels for their employees and, on the other hand, blue-collar workers employed in small and regional firms who cannot work remotely, Lost job with shutdown. Many small companies,” said one economist requesting anonymity.

Some analysts believe that this disconnect is unlikely to subside even after global central banks withdraw surplus liquidity. Since the equity market has already moderated the gradual decline to a large extent, there may not be a rapid correction in the actual event. Thus, responses may differ in terms of tapering by central banks in different countries, another risk to global growth. The result is that the gap between growth and markets may well continue.