Liquidity and Equity Markets

Liquidity is by far the most powerful input to a Bull or a Bear Market.

Liquidity is basically cash flow (usually from institutional investors or big investors).

So when there is easy credit available from Banks and NBFCs (at low interest rates), it will push the prices higher. Affect is exactly the opposite in poor liquidity situations.

India is moving towards a developed country, so inflation and interest rates have been coming down over the past decades. When this happens equities is the first asset class to get affected due to the easement of entry and exit in this asset class.

Liquidity is so powerful that it overshadows all indicators,  micro or macroeconomic indicators. Good liquidity is a storm that wipes out all headwinds in the markets.

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As markets move up due to positive liquidity, all other fundamental or technical indicators turn to positive trends.

There is one and only one Lead Indicator and that is ‘Liquidity’ and rest of the indicators are behind the curve and are based on historical share prices.

Now let’s look at the current situation of the  Indian Equity Markets. Foreign Institutional Investors (FII/FPI)  have brought in Rs 50,000 crores from February 2019 to April 2019, and Domestic investments in Mutual Funds via SIP route is  on a structural up move. During this period this liquidity has pulled up Nifty from 10651 to 11754 ( 1.2.2019 to 26.4.2019 ) a rise of 10.3%. This is the power of Liquidity.

Indian markets have structurally turned bullish for many years to come. This is because investments in Equity markets via SIP is turning out to be the best way to invest for a small investor. It has given great returns with relatively lower volatility.

The data below shows the growth in the AUM of Mutual Funds ( MF )  :-

1963                    India’s First MF –  UTI

1964                    UTIs first launch of US 64 equity MF

By 2014             Investments in MF                                     10 lac crores

By  2017            Investments in MF                                     20 lac crores

By 2018             Investments in MF                                     25 lac crores

Increase in liquidity – increases demand – increases production – rise in employment – improvement in profit margins –  and a structural bull run that follows over a  long term. That being  the nature of a  Bull Market.

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