December 23, 2020
For every action there is an equal and opposite reaction: that’s why you can expect a reaction (quite a powerful one actually) if you present your loved one with last minute flowers from the service station. But not so fast, not every action produces pushback: some move together, following the same trend in lockstep. And nowhere is that more true than economic markets. Take equity and real estate for example: history tells us that in the long term, stock and property prices will tend to move together in the same direction (up or down), and in the short term an increase in residential property prices will also push stock prices up.
Although the 1960’s were written in Technicolor, the 1970’s were distinctly beige: the sixties swung, landed a man on the moon and gave us the Beatles, but the seventies limped through Watergate to the music of the Osmonds (I’m using the word “music” loosely here)…and they also gave us Stagflation. Anyone who studied economics in the dark days before Kylie Minogue recorded “I should be so lucky” will be familiar with the Phillips Curve: the theory that high rates of unemployment couldn’t co-exist with high inflation, because higher unemployment meant less earned income, and less earned income meant lower inflation. It all made sense on paper and for a while it worked in practice too, but there was a small flaw in the theory…it was nonsense. Stagflation reminded us that unemployment and inflation could be delivered together, at unprecedentedly high levels as part a beige coloured double whammy. The Phillips Curve said it couldn’t happen…but it did.
Well, to test the theory, let’s take a look at trends in Indian markets over the last six months (which, as the short term goes, is pretty short term).
After the initial shocks of COVID 19 had been absorbed and lockdown measures eased, there has been a marked increase in confidence across the subcontinent’s real estate sector, driven in substantial part by the Indian Reserve Bank’s fiscal stimulus package and interest rate reductions, as well as tax breaks and incentives introduced by Prime Minister Modi’s Government. And that old perennial was helping too: moving into your new home by Christmas. Knight Frank India reported “improved sentiment” (www.knightfrank.co.in) and the mid (affordable) segment saw bellwether rental prices increase sharply by up to 9% year on year. After the COVID enforced lull, developers are also resuming and accelerating construction projects to pick up the slack, with 90% of the labour force now back on site. Property prices are rising across the board.
That’s all well and good, but what about India’s Equity Markets? What were they doing over that same six-month period?
The answer is that since June of this year 95% of BSE500 stocks have risen in price, with the benchmark BSE Sensex Index surging by 37% (after hitting a 52 week COVID low in March). And tellingly for present purposes, Indiabulls Housing Finance more than doubled returns for investors in Q4 (www.indiabullshomeloans.com), further fuelling demand for India’s burgeoning demographic and bringing closer the dream of owning a home of their own.
All of which means that when it comes to Indian Real Estate, it looks like economic orthodoxy still holds good after all: Property Markets and Equity Markets are moving upwards together. But even so, think twice before bringing home those service station flowers for Christmas…you might not get the reaction you were expecting.
As someone who works on a daily basis in financial markets, I know economic theory can go wrong as often as it sets us right: but keep an eye on that key variable between property and equity markets, it’ has to be a core part of our forward planning.
And the variable is working better than ever in India.