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'Market can break recent lows, no earnings growth in FY21 if COVID-19 uncontrolled'

Indian MF investors have so far refrained from redeeming their units in a large way.

March 28, 2020 / 02:21 PM IST

"While it is too early to forecast the impact of the coronavirus (COVID-19) pandemic on India's GDP and hence the corporate earnings growth, if things don't settle down in a month's time, we could be glaring at low single digit or even no growth in corporate earnings in FY21," Deepak Jasani, Head Retail Research at HDFC Securities tells Moneycontrol's Sunil Shankar Matkar. 

Q. Do you feel the market has overreacted to the COVID-19 situation or the selling is not yet over? What are your thoughts overall on the market way ahead?

A. We must appreciate the background of this fall. Markets had run up led by a few index heavy stocks (and small participation from mid and small-caps) based on healthy foreign portfolio investor (FPI) inflows and hopes of corporates earnings recovery happening soon. Due to COVID-19, FPIs have become risk averse and have started to withdraw monies from equities across the globe. Also due to lockdown locally and possibility of recession in various countries, the corporate earnings growth has stalled and could reverse in the interim. We have not yet seen the end of COVID-19 either in India or globally. Hence it would be futile to expect FPI selling to halt or reverse now.

In such a panic inducing event valuations tend to go to the other extreme. Depending on the developments on the COVID front, we could see some bounces which may be sold into. We could see lower levels on the Nifty than the recent low of 7,584.

Q. Foreign Institutional Investors (FIIs) consistently sold nearly $9 billion worth of shares in India from February 24, but Domestic Insitutional Investors (DIIs) continued to support the market. What are your thoughts and do you expect revival in FII money?


A. FPIs may halt their sales when they feel that either the negative effects of COVID-19 on Indian equities has ended or the valuations have reached such levels that they adequately reflect no earnings growth for three to four quarters. Also risk-on sentiments will revive globally together and Indian equities may have to wait for that to happen. FPIs may start to relook at countries which introduce credible stimulus programs which are likely to result in growth momentum reviving soon. Equity funds globally shed $20 billion in the second week of March, the second-highest sum this year, on top of the record outflow of $23 billion in the first week of March. They were also aggressive sellers of emerging market debt.

Investors generally and FPIs in particular expect rapid intervention from central banks and governments, which includes interest rate cuts, asset purchasing programmes, emergency lending facilities and fiscal stimulus to overcome the pandemic’s financial and economic toll.

Q. Have you spotted any redemption move in the market from mutual funds (MFs) as the way the market has been falling in last couple of weeks or has SIP flow turned stronger?

A. Indian MF investors have so far refrained from redeeming their units in a large way. The suddenness and sharpness of the fall seem to have numbed the investors. They are hoping for better values before they put in large redemption requests. SIP inflows have so far been steady and may not rise much from here. However, lumpsum investment by savvy investors who wish to add at attractive levels may be witnessed. Lockdown is also putting some investors into inaction mode.

Q. What should be investors strategy in terms of their portfolio in the current market turmoil? Should they sell it, add it, average it or change the entire portfolio due to attractive valuations?

A. It is important to review your asset allocation at regular intervals (say quarterly or half yearly) to rebalance the portfolio. For example, if equity allocation rises due to an increase in stock prices/MF Scheme NAV, it should be brought down to its original levels. This approach helps to reduce risk in the portfolio and take profits in bull periods.

Sticking to asset allocation matrix, taking regular profits and doing bottom fishing in select stocks/mutual fund schemes, staying away from most media coverage (except few dependable ones) and building your own stock/mutual fund analysis and money management skills will help investors ride out turbulent times like the current one.

Smart investors may review their overall asset portfolio and equity portfolio and take corrective action on reasonable bounces in the stock markets.

Q. As most of stocks/sectors are available at suppressed valuations, where do you see the maximum value to buy and what are those sectors/stocks to bet on now with next two to three years perspective?

A. Once the current issue stabilises, we think most economies could become more inward looking and cross border trade and investment could take a back seat for some time. In such an era, sectors focusing on domestic economy could come back in favour. These include financials, consumer facing sectors, domestic pharma etc.

Q. The virus has been spreading more rapidly in European countries and that is why markets globally are more worried now. What is your growth projections and have you changed your earnings estimates? Will earnings get impacted till June or September quarter by COVID-19?

A. The wait for corporate earnings recovery keeps getting longer. While it is too early to forecast the impact of COVID-19 on India's GDP and hence the corporate earnings growth, if things don't settle down in a month's time, we could be glaring at low single digit or even no growth in corporate earnings in FY21. This could be heightened by the stress on fiscal deficit and domino effect of defaults and downgrades in financial sector and later in other sectors.

Q. Gold also caught in bear trap, US bond markets also hit badly following equity market turmoil. Why is so much pessimism in the market and investors’ mind? What should be the trigger for recovery then?

A. We have seen in the past (especially 2008 crisis) that all asset classes tend to fall together. Global funds invest across asset classes and they need to rebalance their portfolio at intervals. This leads them to sell a particular asset class as its weight has risen due to fall in values of another asset class. Also fund managers tend to book profits in asset classes where they are in the money to compensate for the losses in other asset classes. Relentless easy money and easy liquidity has led to bubble like formation in a number of asset classes/instruments. Nobody knows what will be the turning point for this mayhem. However return of stability in the real economy and no major turmoil in the financial space could induce turnaround for sentiments across asset classes.

Disclaimer: The above report is compiled from information available on public platforms. advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Mar 28, 2020 02:14 pm
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