Due to the lockdowns, India will also witness a sharp contraction in GDP forecasts. FIIs have been aggressive sellers of Indian equities and with lack of buying support stocks are falling disproportionately.
- By Rusmik Oza
As per latest Bloomberg Economics the world economy will see its worst recession since the financial crisis in the first half of this calendar year with a recovery in subsequent months likely but not assured. For now Bloomberg Economics is predicting 0.2% GDP decline for CY20 as compared to more than 3.5% growth estimated before the Covid-19 outbreak. Among their predictions US and Euro area economies are likely to shrink by 0.5% and 2%, respectively in CY20 while China will expand by 1.4%. Unlike the past Asian and Financial crisis the coming contraction is not a replication of underlying economic imbalances. Hence, when the outbreak is over there is hope growth can come back rapidly in the second half of CY20.
The speed at which we entered a bear market this time was 10x faster than the average of 164 days and much faster than the Great Depression of 1929 & 1987 Black Monday crash. To avoid any longer downturn and prevent financial stress becoming a debt crisis Governments and Central banks across the globe are committing whatever they can. Governments have pledged ~USD 2 trillion in fiscal support. In a recent move the Federal Reserve has unveiled unlimited QE wherein they will buy unlimited amounts of Treasury bonds, corporate and municipal bonds.
Due to the lockdowns, India will also witness a sharp contraction in GDP forecasts. FIIs have been aggressive sellers of Indian equities and with lack of buying support stocks are falling disproportionately. The fear factor and panic selling has increased the gap between stock prices and their fair valuation. The long term fair value of most companies will not change materially based on lower earnings or cash flows of a few quarters. Similar to other countries Indian Government will need to look at a large fiscal stimulus to help small enterprises who do not have the cash flows to sustain the downturn in business and support low-income households who do not have the required savings. Fiscal response could be more effective than monetary stimulus. For India, falling crude prices is a blessing in disguise and can act as a quasi-stimulus.
The charts, valuations, oversold RSI Indicator and VIX Index shows that too much of forthcoming negatives and outlook of a recession have already been priced into stocks (too fast, too soon). In these panic-like falls it is difficult to fathom the bottom but given the extremely favourable risk-reward situation investors need to take a long term view and keep on accumulating stocks at every decline. Keep in mind that recovery will take time and mean reversion will happen in the medium to long term.
We advise to focus on mega caps or large caps at this juncture as the valuation gap between large caps and mid caps has narrowed down. One needs to keep in mind that volatility is going to remain for some time and we are not out of the woods yet as the number of cases of Covid-19 are going to keep escalating across the globe in the coming weeks.
- Rusmik Oza, Sr. VP (Head of Fundamental Research-PCG) at Kotak Securities Ltd. Views shared are the author’s own