India continues to witness a Perfect Storm. The once-in-a-century medical crisis has disrupted economic activities, which in turn is getting reflected in financial markets. Sectors catering to basic necessities are doing better than those catering to discretionary spending. 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 remain less affected.
However, every sector and every company is impacted by the Covid-19 crisis. FY21 will witness negative GDP growth for the first time after 1980. In April, steel production was down 87 per cent year on year while power generation was down 22 per cent. Overall, the business outlook, as measured by PMI Index, was down to a lifetime low.
Currently, major industrial states and cities are in the red zone, which is likely to delay the recovery. The risk of a Second Wave of Covid-19 infection continues to exist as we go for calibrated reopening.
Other countries are also in the same boat. As per IMF, the US is likely to see -5.9 per cent degrowth and the EU zone -7.5% despite very high levels of fiscal and monetary stimulus.
Amid this darkness, there are a few silver linings as well. Fertilizer sales nearly doubled in May over last year in signs of boom in the agri sector. Britannia Industries posted over 20 per cent revenue growth in April and May. Power demand has begun to inch up again, a sign that economic activity recovering from the bottom, e-way bill generation of May showed some recovery from the bottom.
There is also demand for quality Indian papers as reflected in the successful offerings by RIL, HUL, HDFC Life, Bharti Airtel and Kotak Mahindra Bank. MSCI and FTSE have proposed to increase India’s weightage in emerging markets indices over next quarter. This can bring anywhere between $ 3-7 billion FPI flows to Indian equities.
Nifty has rallied significantly from March bottom. At its current level at 10,000, Nifty is discounting many positives. They include a $ 40 billion drop in lower oil import bill, lower trade deficit with China due to the boycott of Chinese goods, a lower gold import bill, smooth implementation of economic package announced by the government, execution of monetary package in terms of improved credit flow and reduced borrowing cost. The market is also discounting an early medical solution in form of drugs or vaccine to tackle Covid-19.
In our opinion, if the actual events and news flow are better than what the market is discounting currently, then prices can rise further from here. In case the actual events and news flow are worse than what is priced in by the market, then prices will fall from current level.
It will be inappropriate to say that the market has made a bottom till the time medical solution is found.
At current level of valuation, it is time to be overweight on equities. While market looks expensive on P/E ratio as earnings have declined significantly; the market cap-to-GDP ratio at 64 per cent is below historical average of 75 per cent; forward P/B at 2.2 times is below historical average of 2.6 times.
We believe investors can upgrade their risk appetite by one level to capture the below-average valuation. Investors may invest half of their incremental investment in a staggered manner in this falling market. The other half can be invested when the medical solution emerges for business normalcy to return on a permanent basis.
Extremely conservative investors can look at hybrid funds like equity savings or debt hybrid to participate in equity markets at current valuations. An investor requiring regular income can activate the SWP option in these funds. This will give them higher tax efficiency. Conservative Investors can look to invest in balance funds or largecap funds, while aggressive Investors can look at smallcap and midcap funds.
While we always recommend STP and SIP options for investment, one can look at balance advantage funds for
lumpsum investment. Investors who panicked in April in credit risk funds lost between 2-3 per cent absolute return in May. It is important to take help of a good financial adviser rather than follow Whatsapp gurus or social media warriors. Short-term investors may consider ultra-short term debt funds for their investing needs while long-term investors should go for dynamic bond and credit risk funds, which still provide good opportunities. Prudent asset allocation also calls for some weightage to gilt funds. We continue with our recommendation for an ‘overweight’ positioning on gold and offshore funds like before.
Stay safe and stay invested!
