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'Correction in Indian equities to provide margin of safety for fresh entry'

We believe cooling of Indian equities will be healthy for investors as whopping rally in last four months was led by liquidity through FPIs.

August 03, 2020 / 12:23 PM IST

Akash Jain

The crisis caused by COVID-19 has been very harsh and unimaginable as it is a once in a life time event. Threat to life and threat to livelihood have rattled people. Naturally, the containment measures like the lockdown of the entire country to break the chain of virus will have significant effects on the global economy.

While this current situation is unique in many ways, fear and greed are still the common denominators of every crisis. India is no exception as the economy has to come to a grinding halt amidst the ongoing lockdown. The lockdown to curb virus spread has forced permanent damage in exports markets for all the major economies except to some extent Indian Pharma. MSMEs would be the worst affected as there would no cashflow as income would be missing.

India was already in a bad shape with India's GDP taking massive hit in last 2-3 years due to miniscule credit growth and slowdown in consumption. Investment-led spending also took a hit. Various crisis and scams like IL&FS, Yes Bank, DHFL, PMC Bank tore apart the Indian Financial System and questions were raised on the regulatory front and on basic survival of Non Banking Financial Companies.

Bank credit growth was shattered to an over five-decade low of 6.14 percent in the fiscal ended March 31, 2020 amid a faltering economy, lower demand and risk aversion among banks, RBI data showed.

Close

Domestically, disappointing GDP data would always remain an overhang on Indian equities which is expected to clock negative growth during COVID-19 crisis. According to RBI, economic activity Q2FY21 may remain subdued due to social distancing measures and the temporary shortage of labour.

Recovery in economic activity is expected to begin in Q3FY21 and gain momentum in Q4 as supply lines are gradually restored to normalcy and demand gradually revives. Domestic economic activity has been impacted severely by the lockdown which has extended over the past three months.

Recently, S&P Global Ratings had said Indian economy is in deep trouble with growth expected to contract by 5 percent this fiscal. Negative newsflow related to economy will always give opportunities to investors to cheery pick quality companies at distressed valuations. We expect improved earnings performance in FY22 and FY23. Ideally, one should look at companies which has seen massive destruction in their share price, companies that can survive due to the side effects of country lockdown, have strong portfolio of brands, strong management integrity, monopoly kind of presence, competitive advantage, have weathered the storm in different market cycles, low debt and debt free, able to generate positive cashflow consistently. The news related to faster discovery and launch of vaccine for COVID-19 may fuel the market.

We believe cooling of Indian equities will be healthy for investors as whopping rally in last four months was led by liquidity through FPIs. July 2020 rally can be attributed to positive developments related to COVID-19 vaccine, relaxations in Unlock 1.0, 2.0 and 3.0 and better-than-expected Q1FY21 result of majority companies announced so far.

In June 2020, FPIs poured $2.73 billion in Indian equities, which is the highest this year and importantly surpassed pre-COVID-19 levels. The FPI inflows came amidst rush of liquidity in the markets globally after central banks around the world announced stimulus measures to help their economies.

The stimulus measures given by the G4 central banks such as the US Federal Reserve, Bank of England, European Central Bank, and Bank of Japan, have helped fill the global markets with liquidity, marquee Indian companies tapping the secondary stock market by raising funds also contributed towards the increase in FPI flows.

After hitting a record high in January 2020, Indian equity benchmarks crashed 40 percent to hit around four-year low level on March 24, 2020. The Benchmark indices in June 2020 quarter witnessed a sharp and fast rally of 20 percent in both Sensex and Nifty which is very sharp led by liquidity (by global central banks) and gradual re-opening of economies despite virus risk. Hence, utmost caution is warranted at current levels.

Exponential rise in COVID-19 cases and escalating India – China tensions would always remain an overhang on Indian equities. Equities rallying along with Gold make us uncomfortable as it is clear case of global liquidity as big economies have resorted to printing money as part of stimulus package. Progress of ongoing monsoon, global cues and management commentary in Q1FY21 earnings season will drive market direction.

The author is Vice – President Research at Ajcon Global.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Moneycontrol Contributor
first published: Aug 3, 2020 12:18 pm

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