The impact of the virus spread is too early to be measured and react to, although everyone agrees that the impact on growth, consumption, earnings will be large and may take quite some time for recovery.
It may be hard to estimate the impact the lockdown will have on economic growth and financials of companies, but both the government and RBI’s stimulus packages will support market sentiment. In an interview with FE, Deepak Jasani, head of retail research at HDFC Securities, says FPIs could relook at countries that introduce credible stimulus packages. Edited excerpts:
Markets are down about 36% since their peak. How far are we from the bottom?
It is a difficult call at this point. While the so-far known negatives seem to be discounted at the low of 7,511, we are still in the dark about the future ramifications of the coronavirus globally and in India. The impact of the virus spread is too early to be measured and react to, although everyone agrees that the impact on growth, consumption, earnings will be large and may take quite some time for recovery. The second and third order effect of the virus may still not be easy to identify and discount.
How will RBI policy impact markets, and will this ease stress on financials?
Markets had anyway risen ahead of the actual announcement, anticipating most of these measures. Some disappointment arose as the moratorium of term loans is not automatic, it seems banks have to be approached for this. Also, working capital loan repayment has not be postponed (only the interest portion has been deferred). Businessmen would have expected a blanket moratorium on all repayments and some relief in terms of interest rate to be borne by the government. Though financials have got some temporary relief, they would be worried about how soon the demand for credit would revive, how deep will the damage be to the business models of borrowers and whether slippage would shoot up once the moratorium period ends.
It appears that the FPIs are selling as there’s a drawdown from ETFs. Is there any clarity on why and how much more is likely to flow out?
FPIs may halt their sales when they feel that either the negative effects of Covid-19 on Indian equities have ended or the valuations have reached such levels that they adequately reflect no earnings growth for three-four quarters. Also risk-on sentiments will revive globally together and Indian equities may have to wait for that to happen. While some bounces may happen due to markets being oversold and various regulatory prescriptions/central bank interventions/government stimulus, such bounces may get sold into. FPIs may start to relook at countries which introduce credible stimulus programmes, which are likely to result in growth momentum reviving soon. Equity funds globally shed $20 billion in the second week of March — the second-highest sum this year — on top of the record outflow of $23 billion in the first week of March. FPIs were also aggressive sellers of emerging market debt.
What about impact on earnings going by the lockdown?
The wait for corporate earnings recovery keeps getting longer. While it is too early to forecast the impact of Covid-19 and lockdown on India’s GDP and hence the corporate earnings growth, if things don’t settle down in a month’s time, we could be staring at low single-digit or even no growth in corporate earnings in FY21. This could be accentuated by the stress on fiscal deficit and domino effect of defaults and downgrades in the financial sector and later in other sectors.
Which sectors are likely to see early recovery?
Once the current issue gets stabilised, we think that countries could become more inward looking and cross-border trade and investment could take a back seat for some time. In such an era, sectors focusing on the domestic economy could come back in favour. These include financials, consumer facing sectors, domestic pharma etc. IT services could also look attractive after a dip despite uncertainty on order flows from developed nations.
Which sectors will be worst hit if this continues for a few more weeks?
Financials, consumer-facing are the two main sectors (apart from others) that can face the brunt if this continues for a longer duration.
Why are financials so badly beaten down? What are you pricing in — in terms of pain?
Financials will get hit on two-three counts — one the demand for credit will fall even more, two slippages of asset quality could accelerate as income levels of businesses and individuals get hit and three, operationally these financials will face a lot of difficulty during lockdown. One hopes that the domino effect of defaults and rating downgrades is limited.