It is important to recognise equities as a good long-term asset class, and the need to ideally have a minimum of 5 years as their time-frame.
2020 thus far: The year 2020 has been a turbulent one in global history due to the Covid-19 pandemic, and equity markets, globally as well as in India, have been no less turbulent. The global sell-off commenced in February, while the Indian market reacted in March, with a very sharp fall. Subsequently we saw global markets rallying from the lows; and likewise with a lag, in India, where the Nifty-50 index has rallied 30% from the mid-March lows over the next 2-3 months, to close to 10,000 levels in mid-June. The extent of the bounceback in India, even in the face of concerns on the economy post the lockdowns and the continuously rising Covid-19 cases, has been slightly surprising.
Near term outlook – Cautious
We remain cautious on the market in the near-term. A sharp recovery in the US market, abundant liquidity globally, along with depressed valuations at lower levels and continuing inflows in equity mutual funds, have aided this recent rally. Announcements to address the most-affected segments of the economy and the population by the Government, along with the interest rate and other measures by the RBI for improving liquidity and pushing banks to lend to the sectors/entities which presently need funding, and finally the unlocking of the extended lockdowns, have also been intermittent triggers for this sharp bounceback.
While the Nifty-50 is still about 25% below its lifetime high, one has to consider the fact that an entire year (FY20-21) earnings growth expectation has been erased (GDP itself is now expected to be in the negative territory in the present year), and though we could see a sharp earnings growth in FY22, the present valuation fairly values the 2-year CAGR in earnings. Hence the valuation upside appears limited from current levels.
Economy – Normalisation and subsequent growth
Even after the unlocking in phases, of the lockdown, the economy will take time to normalise, as companies will have to deal with supply-chain as well as labour issues; and as demand itself could be lower post the initial pent-up demand in some of the sectors. In the first unlock, there continue to be a few states (which also happen to be larger constituents in terms of the contribution to national GDP) and a few sectors which could take longer to be “unlocked”. In the near-term, unemployment could emerge as a big concern area, and there would be measures required to restore employment as well as demand.
The government has announced an additional borrowing figure of Rs 4.2 lakh crore, an addition of more than 50% to the budgeted figure of Rs 7.8 lakh crore. However, this could primarily address shortfall in tax revenues and disinvestment receipts. An additional borrowing may be required for providing a growth stimulus possibly in the second half of this financial year, by when hopefully most sectors and states would be functioning normally. Though we have seen a downgrade of the sovereign rating by Moodys, the revised rating puts it at the same level as the other rating agencies, and is therefore not as much of a concern.
In fact, the recent affirmation of the existing rating and outlook by S&P should provide the comfort required for the government to spend on infra and growth measures later this year. On the revenue front, the government would be facing severe challenges this year, and it is therefore even more important to have measures which would strain the fiscal position initially, but would eventually translate into better revenues next year.
In the second half of this financial year, hopefully by when the possibilities of a second wave of the pandemic or further lockdowns are behind us, and when most of the sectors across India are fully functional, is when we should hopefully see growth stimulus measures (some of which could be on the taxation front) from the Government: the recent announcements of a stimulus by the Government consists of some welcome measures, but whose impact on the demand front is likely to be limited. The deferral of fiscal measures for stimulating demand may possibly be a conscious decision, as the usefulness may have been limited in the present situation.
Who could be the winners?
Well-managed companies from various sectors which have the ability to withstand the present challenging economic environment could reap the benefits in the longer term. Such companies, with strong managements and business models, along with surplus cash or minimum debt on their balance sheets would be better placed to tide over the present situation. There is a cause for concern on leveraged companies as well as leveraged promoter-groups.
Pharmaceuticals and chemicals sectors could continue to do well. But the pharma sector in particular has witnessed an increasing positive bias among institutional investors and analysts, resulting in a sharp rally in the past few months, and therefore one would need to be cautious and very stock-specific at this stage. Select stocks with telecom businesses could also emerge stronger going forward, due to various reasons: partly regulatory, partly demand and partly pricing. Consumer staples could continue to do well, particularly with a revival expected in the rural demand, and since this segment is unlikely to have the temporary setback which consumer discretionary may witness. The cement sector and oil-marketing companies are two other sectors where valuations are favourable.
The banking & NBFC sectors have been significantly downgraded in terms of expectations over the past few months. There are a few pockets in these sectors, which could do better than expected. We are already witnessing some shift to value on a selective basis (PSU banks, for example). But the Supreme Court’s pending decision on waiver of interest during the moratorium period is a risk-factor for banks.
Some of the important factors which could influence the market over the next 6-12 months: the pace of the spread of Covid-19 in India particularly post the end of the lockdowns; and global newsflow on the US-China trade developments, US election-related announcements, the progress of the vaccines that are being developed for Covid-19, and the nature and timing of measures for reviving growth by the Government. Positive developments pertaining to vaccines with successful commercialisation, could well be among the most significant developments which could impact the global economies and markets later this year.
It is generally difficult to time the entry and exit in equity markets, as evidenced in the past few months. It is, therefore, important to recognise equities as a good long-term asset class, and the need to ideally have a minimum of 5 years as their time-frame.
(By Shyamsunder Bhat, CIO at Exide Life Insurance)
Disclaimer: This is the personal view of the author. Readers are advised to consult their financial advisor before making any investment.