This suggests that investors will not be willing to pay premium valuations of up to 10 times price/book value for these behemoths anymore.
- Urvashi Valecha & Malini Bhupta
After the global financial crisis, Indian equities will end the fiscal year with negative returns for the fourth time. In the wake of concerns emanating from the spread of Covid-19, the benchmark fell 29% during the fiscal, while the 30-share Sensex fell 26.5%.
Banks and financials have been at the forefront of this carnage, as investors believe a mini financial crisis will follow the health crisis. While markets did end FY12 (-9.2%) and FY16 (8.9%) in the red, the current fall comes closest to the drubbing markets took in FY09 after the GFC, when the benchmark fell 36%. But markets recouped the losses in the subsequent year to end FY10 with gains of 73%.
This time could be different though. Gopal Agrawal, head macro strategy and senior fund manager, DSP Mutual Fund, is of the view that the real economy will face some problems and so investors should not expect the bounce in the markets like they saw in 2009. “This type of massive correction was witnessed in 2008 and 2013 also. Once India’s pandemic is under control, with the lower oil prices, the CAD and fiscal deficit, one can see an upside in the market,” he added.
The year gone by wasn’t an easy one for the economy and markets. For starters, the slowdown became more pronounced and the economy expanded at its lowest pace in the first quarter of FY20 at 5%. Markets remained choppy through the year, till Finance Minister Nirmala Sitharaman cut corporate tax rates in September, which resulted in earnings upgrades.
Foreign portfolio investors poured in $14.23 billion into Indian equities as equities continued to rally. In fact, even in January and February FPIs remained net buyers of equities at $1.7 billion. Much of the market’s carnage has happened in March, as the spread of the novel coronavirus took the bottom out of the market. With the spread of Covid-19 and the subsequent lockdown, it appears that the much awaited recovery in earnings will only happen in FY21.
UR Bhat, director, Dalton Capital Advisors (India), explained, “During the start of the fiscal, there was a lot of hope that an economic turnaround is imminent but for various reasons that has been postponed by at least one year and the market has to adjust itself to the new reality.”
What the crisis has also done is taken the floor away from financials, which have been hammered in the recent carnage as investors are finding it hard to assess the impact of the health crisis on asset quality.
JP Morgan said, “The investment case for Indian financials at this point looks weak given dislocation and second order impact on growth and asset quality.” The foreign investment bank believes that those with deep funding capability and high provision coverage and limited asset quality issues will be better placed.
This suggests that investors will not be willing to pay premium valuations of up to 10 times price/book value for these behemoths anymore. Not surprising then that the biggest loser on the Nifty50 in FY20 was IndusInd Bank, which fell by 77%. Any revival in the new fiscal will also see a change of sectoral leadership. According to UR Bhat, the leadership would shift to different sectors and “It is the time to wear our thinking hats and visualise the potential changes that this meltdown can usher in.”