Equity and credit markets can retest recent lows, warns Chris Wood

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a 'bull phase', typically defined as a rise of 20 per cent or more from the recent lows.

Equity and credit markets can go back to their recent lows, and probably slip even further if the infections caused by the coronavirus (Covid-19) pandemic do not peak out by April-end, wrote Christopher Wood, global head of equity strategy at Jefferies in GREED & fear, his weekly note to investors.

“In the unlikely case where infection rates do not peak out by the end of April, stock markets and credit markets will re-test recent lows and worse. At that point, there will be growing pressure for people to return to work because at a certain point the negative impact on the economy and people’s general livelihood becomes a bigger negative than the disease itself,” Wood said.

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a ‘bull phase’, typically defined as a rise of 20 per cent or more from the recent lows. The US, South Korea, Philippines and Indonesia have already entered technical bull markets, having risen over 20 per cent from their respective low levels. Indian benchmarks – the S&P BSE Sensex and the Nifty 50 – are also flirting with this territory now.

With most countries in a lockdown mode given how quickly Covid-19 has spread, Wood believes it will be tough to extend the lockdown phase beyond this quarter given the high debt levels. This, he says, is even more the case in the developing world than the developed since safety nets are not the same in the case of former to support the unemployed.

“It is hard to see the Western world locking itself down into another Great Depression. But that threat is real if the lockdowns are extended beyond this quarter because of the sheer level of outstanding debt. In this respect, it is hard to imagine that the three-week lockdown in activity ordered by Indian Prime Minister Narendra Modi on March 24 can be extended. That is assuming such a lockdown can even be implemented effectively in such a densely populated country,” Wood wrote.

How some financiers are benefiting from India's shadow banking crisis

Many shadow lenders have been effectively shut out of the nation's credit market as the more than 15-month-old banking crisis raises investor wariness about the financiers' ability to refinance debt.

As the shakeout in India’s credit market shows few signs of abating, one group of financiers is benefiting from the turmoil: shadow banks that provide loans in exchange for gold.

In a country deeply attached to the precious metal, whose people stockpile more gold than citizens of any other country, borrowers are increasingly pawning their family jewelry to get cash amid a fundraising crunch.

That’s helped double the share price in the past year of Manappuram Finance Ltd, one such firm, while the stock of Muthoot Finance Ltd, the country’s largest cash-for-gold lender, has jumped 47%. Those financiers’ bonds are also in demand at a time when investors are shunning debt from other shadow banks, which are struggling from lack of funds and credit downgrades.

More than half of the loans from these lenders get repaid in less than six months, providing firms with a steady stream of cash to pay off their own debt and thus avoiding a so-called asset-liability mismatch. The recent rise in gold prices is also a boon. Indian households have almost $1 trillion worth of gold, and the nation is the biggest buyer of the metal after China.

“Shorter tenure of our loans helps to keep a check on asset-liability mismatches while a rise in the gold prices will help in keeping a check on asset quality too,” said V P Nandakumar, the chief executive officer of Manappuram Finance, in an interview. “Both equity and credit markets are looking favorably at non-bank lenders with robust business models who have got both these pieces right.”

Many shadow lenders have been effectively shut out of the nation’s credit market as the more than 15-month-old banking crisis raises investor wariness about the financiers’ ability to refinance debt. Lenders including Dewan Housing Finance Corp and Altico Capital India Ltd, which have been using short-term debt to fund long-term loans they extended, have defaulted in 2019, adding to the risk-off sentiment in local markets.

Cash-for-gold lenders face risks of their own. A major one is the price of the metal. While gold has gained this year, if it reverses course and falls steeply that could hurt the companies’ asset quality and business, according to rating firm ICRA.

Business Standard