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Stock market and economy are not always in sync

Indian equities continue to be on fire, with benchmark indices Sensex and Nifty touching new highs every other day.

However,a bullish stock market need not necessarily indicate that all is well with the economy.

A recent Credit Suisse analysis showed the ties between the economy and markets is tenuous at best. “Not only are market returns more P/E than earnings per share (EPS) driven, markets and economy also have different structures,” the brokerage said in a presentation on September 13.

Markets and the economy have different structures, meaning there exists a large informal economy, large parts of the formal economy may not be listed, and a large part of the market is driven by global factors or growing penetration and share, it said.

India’s quarterly growth saw a sharp decline from 7% in the third quarter of fiscal year 2017 to a three-year low of 5.7% in the first quarter of fiscal year 2018, hurt by demonstration and implementation of the Goods and Services Tax (GST). However, the market’s continued ascent does not reflect the pain impact of these events on the large informal sector, a key contributor to GDP.

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