Inappropriate to say that markets have bottomed; invest in a staggered way

At current levels, it is time to be overweight on equities.

India continues to witness a perfect storm. A once in century medical crisis has disrupted economic activities, which in turn, is reflected in financial market stress. Sectors catering to necessity are doing better than those catering to luxury. On the other hand, hospitality, entertainment and aviation have been hit badly. Major sectors such as auto, real estate, BFSI are also feeling the stress. Sectors like FMCG, Telecom, agri industries are less affected.

Financial year 2020-21 (FY21) will witness negative gross domestic product (GDP) growth for the first time after 1980. In April, steel production was down 87 per cent year-on-year (YoY) and power generation was down 22 per cent YoY. Overall business outlook, as measured by the PMI Index, was down to lifetime low. The risk of the second wave continues to exist as we do a calibrated opening of the economy.

Other countries are also in the same boat. As per IMF, the US is likely to see -5.9 per cent while the EU is likely to see 7.5 per cent contraction in GDP despite high fiscal and monetary stimulus.

However, there is a silver lining. Fertiliser sales nearly doubled in May over last year. It’s a sign of a boom in the agri sector. Britannia posted over 20 per cent revenue growth in April and May. Power demand has begun to inch up again – a sign of economic activity recovering from bottom. ‘Fastag’ & E-way bill generation of May also show some recovery from bottom.

There is also demand for good quality Indian papers, as reflected in successful offerings by Reliance Industries (RIL), Hindustan Unilever (HUL) / HDFC Life / Bharti Airtel and Kotak Mahindra Bank. MSCI & FTSE has proposed to increase India's weight in emerging market (EM) indices over next quarter. This can bring anywhere between $3-7 billion foreign portfolio investor (FPI) flows in Indian equities.

Financial firms' clout wanes after coronavirus-triggered market fall

During the start of the year, private banks alone accounted for a fourth of the index weight.

Financial stocks have had a dominant run in the past decade and a half. In 2005, they weren’t even among the top five sectors when it came to their weighting in the Nifty index.

In 2009, private banks’ weighting in the index rose to 12.9 per cent, from just 5.4 per cent in 2005. Since then, it has only gone up. During the start of the year, private banks alone accounted for a fourth of the index weight.

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If one added the weighting of NBFCs and PSBs, the weighting in the index would shot up to 42 per cent. However, the Covid-triggered market fall has hit the financial pack the hardest.

The weighting of the sector has come off from the peak of 42 per cent in December 2019 to less than 33 per cent. Given the underperformance of banking stocks, it could shrink further.

Meanwhile, stocks in the pharma, and consumer goods space have seen their weighting go up in the benchmark indices. On a stock specific basis, Reliance Industries has seen the highest increase in weighting.

RIL to Hindustan Unilever, stocks that drove Nifty off coronavirus lows

Barring three stocks - Eicher Motors, Shree Cement and Bajaj Finance - all the Nifty components have gained during this two-week period.

The markets have rebounded nearly 15 per cent from their coronavirus lows logged on March 23, when the Nifty had posted its biggest single-day loss to end at a four-year low of 7,610. The index jumped 9 per cent jump on Tuesday to end at 8,792, gain of 1,182 points in two weeks.

Barring three stocks — Eicher Motors, Shree Cement and Bajaj Finance — all the Nifty components have gained during this two-week period. However, the share prices of only 23 Nifty companies have bettered the benchmark.

Further, only eight stocks have accounted for nearly two-thirds of the gains. Among the biggest contributor to the Nifty spurt from the March 23 low is Reliance Industries.

Shares of the Mukesh Ambani-led firm has been the biggest gainer and also the largest contributor to the index gains. It has rallied 36 per cent and have accounted for 21 per cent of the Nifty’s 1,182-point gain.

HDFC Bank, Infosys, and Hindustan Unilever have been the next largest contributors, even though aren’t the biggest gainers. The notable laggards are automobile, NBFC and metal stocks.

Will the RBI cut interest rates today? Here's what top brokerages expect

While the Monetary Policy Committee (MPC) of the RBI originally was slated to meet in the first week of April, the central bank in a surprise move is holding a briefing today.

The government provided Rs 1.7 trillion package aimed at providing relief to the poor and marginalized sections of society. Most experts have termed it as the first tranche of the relief measures from the authorities and expect the Reserve Bank of India (RBI) to follow it up with a cut in interest rates besides announcing other liquidity support measures.

While the Monetary Policy Committee (MPC) of the RBI originally was slated to meet in the first week of April, the central bank in a surprise move is holding a briefing today. Here is what leading brokerages expect from the central bank.

Brickwork Ratings

In keeping with the promise of the RBI Governor that the RBI will do whatever it takes, it is reasonable to expect a sharp reduction in the borrowing costs. We expect the RBI to continue with its liquidity infusing tools such as open market operations (OMOs), forex swaps and long-term refinance options (LTROs), but also to announce measures to support corporates suffering from business losses due to the pandemic outbreak.

As the ongoing slowdown will drastically impact the financial health of many sectors, we expect the RBI to introduce forbearance measures towards the most affected or stressed sectors, and extend the repayment schedule and moratorium, along with implementing other measures, to avoid large NPAs and reduce risk weights. We expect the RBI to continue with accommodative monetary policy actions and stance; and cut the repo rate by 50 basis points.

Nomura

We believe the RBI is running the risk of falling behind in terms of proactive policy intervention, especially with the magnitude of shocks currently hitting the Indian economy and the financial system. So far, the measures have been on increasing domestic and dollar liquidity to ease financial conditions.

Coronavirus pandemic burns Rs 1.9 trillion hole in LIC's investments

The value of insurer's holdings in listed companies at the end of December 2019 quarter stood at Rs 6.02 trillion.

A 30 per cent drop in the S&P BSE Sensex and the Nifty 50 thus far in the calendar year 2020 (CY20) has weighed heavily on the fortunes of state-owned life insurer, Life Insurance Corporation of India (LIC), which has suffered a notional loss of about Rs 1.9 trillion in the past two-and-half months. The insurer, known for making large equity investments, has substantial holdings in many listed companies. The dent comes at a time when the government is drawing up plans of listing LIC at the bourses, subject to legislative changes and regulatory approvals.

The value of insurer’s holdings in listed companies at the end of December 2019 quarter stood at Rs 6.02 trillion, which is valued at Rs 4.14 trillion now, translating into a mark-to-market hit of Rs 1.88 trillion, or 31 per cent. The study is based on 209 companies from the S&P BSE 500 index where LIC held over 1 percentage point stake in the December 2019 quarter. These companies accounted 65 per cent of total market capitalisation of BSE-listed companies.

Among sectors, financials including banks, non-banking financial companies (NBFCs) and insurance companies, the top value destroyers, accounted 30 per cent or Rs 56,810 crore of total LIC value erosion during the period. Oil & Gas (Rs 36,020 crore), cigarettes makers (Rs 17,374 crore), information technology (Rs 15,826 crore), metals (Rs 12,045 crore), automobiles (Rs 11,329 crore) and infrastructure (Rs 10,669 crore) are other sectors, in which LIC lost a more than Rs 10,000 crore values during the period.

“Services-related sectors will be the worst hit due to Covid-19. Agri will largely remain unaffected, while manufacturing will be hit to the extent that there will be a supply-side issue. Within the services, too, there are sub-divisions for the impact. While telecom may largely remain unaffected, hotels, travel & tourism will bear the brunt. All this will continue to impact investors’ fortunes, including LIC. This is a systemic issue,” explains G Chokkalingam, founder and managing director at Equinomics Research.

Over the next few months – at least till there is clarity on the impact of Covid-19 on the economy and the fortunes of India Inc – analysts at Credit Suisse Wealth Management expect fund flows into equities – both domestic and foreign – to taper off, which again will put the Indian markets under pressure.

Good time to start SIP in this market mayhem

The entire panic has been initiated by fears that the system to curtail the Coronavirus (COVID-19), across the globe, is misplaced.

The way markets crashed on Friday, with the Nifty hitting the 10 per cent lower circuit is a global market -led panic.

The rout was triggered by the sell-off in the global markets, initiated by a 10 per cent crash in Dow Jones Industrial Average, followed by the Korean markets freezing in the lower circuit.

The entire panic has been initiated by fears that the system to curtail the Coronavirus (COVID-19), across the globe, is misplaced.

Truth be told, we don’t know when will this chaos will ease. Over 100,000 people across the globe have been infected by the virus and nearly 5,000 have died. India, too, is seeing a consistent rise in the number of cases.

However, this doesn’t mean that we can’t control the outbreak. We need to put in stringent restrictions, possibly a lockdown, to curtail the spread.

However, investors must realise that this is a very short-term phase, and normalcy should come back to markets soon.

Right now, investors should be inactive and should avoid any sort of buying or selling. For long-term investing, it is a precise time to wait and watch and start accumulating quality stocks via the systematic investment plan (SIP) route.

Why the Sensex has rallied 600 pts today and will the up move sustain?

Last week, Indian bourses saw their worst weekly fall in a decade with the S&P BSE Sensex and the Nifty50 tumbling nearly 7 per cent each during this period.

A drop of nearly 3 per cent on Friday amid a global sell-off on coronavirus health scare and fears that weak economic data from China over the weekend ticked most of the checkboxes that could have sent the markets spiraling down further as they opened for trade on Monday. However, the over 600-point up move intra-day caught many by surprise.

The markets, analysts say, over-reacted to the developments and sold-off in a panic mode on Friday. The rally on Monday, according to them, could also be on account of short-covering. Most global markets suffered their worst weekly fall since the 2008 global financial crisis last week. The velocity of the fall in stocks was sharp across markets in Asia, Europe, and America. Indian bourses, too, saw their worst weekly fall in a decade with the S&P BSE Sensex and the Nifty50 tumbling nearly 7 per cent each during this period.

“The markets now seem to have realised that coronavirus may not be as bad a scare as it was made out to be. The only way it can spread is via physical contact amid conducive temperature / climate. India, though not completely insulated from the global meltdown in financial markets, is still relatively safer as regards this health scare. I don’t see the markets selling-off in a way they did on Friday. There can be intermittent corrections but quality stocks will start to perform now,” says A K Prabhakar, head of research at IDBI Capital.

Another reason is the hope of a fiscal stimulus by global central banks to prop-up growth, which was already hit by US China trade spat, till the onset of coronavirus made things worse. The developments, according to experts, are enough reasons for central banks to cut rates and inject liquidity into the system to aid growth. This, in turn, will benefit most asset classes.

“The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy,” Fed Chairman Jerome Powell said over the weekend.

Coronavirus impact: Experts see weakest quarter for global growth since GFC

The main channel of economic disruption at this stage, according to UBS, is largely via reduced tourism flows (in/out of China), and reduced import demand from China.

With coronavirus getting a tighter grip on the China and impacting world trade, most analysts have started lowering global growth forecasts as measured by the gross domestic product (GDP) for the first quarter of calendar year 2020 (Q1-2020). Those at UBS, for instance, expect this would be the weakest quarter for global growth since the global financial crisis (GFC) and on par with the Asian crisis in the late 1990s.

Global GDP, according to Arend Kapteyn, global head of economic research at UBS, will take a serious knock and slip to 0.7 per cent in the January 2020 quarter (Q1-2020) from 3.2 per cent in the December 2019 quarter (Q4-2019). Though he expects growth to rebound in the April – June 2020 quarter, the impact could slow the overall 2020 GDP growth by 20 basis points (bps) to 2.9 per cent.

The main channel of economic disruption at this stage, according to UBS, is largely via reduced tourism flows (in/out of China), reduced import demand from China — particularly of consumption goods — and restrictions imposed by third countries to avoid the virus spreading.

“We expect import growth in China to fall from 3.2 per cent in Q4 to a negative 4 per cent in Q1. The rebound we hope for in Q2 largely reflects delayed consumption effects in China, while the improvement in Q3 reflects the lagged impact of stimulus coming on line, particularly in China,” the UBS report says.

With the number of suspected/confirmed cases rising at an alarming rate, close to 99 per cent of those are in China, reports suggest. The economic impact, experts say, will also be magnified this time around compared to the SARS outbreak as Asia's weight in the global economy has risen from 21 per cent in 2003 to 37 per cent now.

Market News

Exit polls and markets: Beware! Play the expected euphoria with caution

It will be interesting to see how the new government will generate additional revenues to fund populist schemes already announced without dampening the market mood.

Markets remained highly volatile during last week with the Nifty conquering the 11,400 mark after threatening to go below 11,100 early in the week. It started the week on a pessimistic note, after IIP contracted to 0.1 per cent in March 2019, the lowest in 21 months. Continued selling by the FIIs ahead of the General Election outcome and the prevailing trade war tensions between US and China kept the market nervous. Sentiments got further hit after Indian Met department’s announcement of a late arrival of monsoon, dampened the early revival prospects of consumption focused sectors.

However, later in the week, sentiments improved after comments from U.S. President Donald Trump that he has decided to delay tariffs on auto imports by up to six months resulting in the trade war tensions easing a bit and finally Markets got a second booster from the supposedly leaked outcome of the Exit Polls predicted a Modi win.

The Exit Polls on Sunday evening revealed a smooth win for BJP-NDA with a median of about 300+ seats. The markets have given this probability a thumbs up with a gap up opening of 250 points on the Nifty and 850 points on the S&P BSE Sensex.

One needs to see whether this sustains as the final outcome rolls out on May 23. Except for 2004 where the margin of error of all the exit polls went horribly wrong, rest of the election years from 1998 were fairly consistent in terms of the direction. However, 

looking at the margin of victory as per the exit polls, it seems BJP-NDA will sail through even if one would assume a 10 per cent margin of error. Assuming that it’s a comfortable victory for BJP-NDA, we could see the up move converting into euphoria as the foreign institutional investors (FIIs) may again make a beeline to invest in an economy where there is political stability and visibility. It would have also caught the naysayers on the wrong foot with short sellers running for cover. All those sitting on the side-lines would be forced to jump in lest they miss the rally.

After the initial festivities, the marketmen and especially the FIIs, would look to see how Modi 2.0 will kick start the consumption cycle, improve trade deficit, provide employment opportunities and deal with farm distress. A “Damocles Sword” hanging on the NBFC sector needs to be handled deftly and swiftly lest it engulfs the economy into another rut like what Banks’ NPA did in the last two - three years. Real Estate is another elephant which is groaning under its own weight of unsold inventories and unserviceable debt. And globally President Trump’s attention may turn towards emerging markets, especially India, after China has been tamed.

Business Standard