Status quo policy decision of the US Fed to stick with zero interest rate for an extended period of time as required, worst US Q2 GDP data (-32.9 percent annually) and weak unemployment data did not provide any rationale to the equity market. Q3 GDP is expected to be better than Q2 but resurgence in virus cases in the world is impacting business sentiment & sustainability of the rally. India unlock 3.0 failed to enthuse the market, as earnings results took priority and turned volatile during the expiry week, in which financials led the losses.
YTD, Nifty50 is down by -9 percent while Nifty Bank is down by -33 percent. The key factor for the financial sector to underperform so hugely is due to being already under tremendous pressure from NPAs and low credit growth from legacy issues, shadow banking and slowdown in the economy. Initially, it was forecast that gross NPA of scheduled commercial banks will fall to 10 percent by September 2020. But now this view has completely changed, since the sector is not able to move out of the legacy issue and pandemic has impacted quality of asset, fall in credit and economic growth. The key question is whether these issues are factored in the current banks stock prices. Nifty Bank index, which is a set of best 12 banks, is valued at 1.5x on a 1-year forward P/B, after touching a seven-year low of 1.1x. We feel accumulation is the best strategy for banks. For the equity market to perform well a lot will depend on the performance of the banking sector, which is the main nervous system of the economy & market, accounting for more than 1/3rd of India's total market capitalisation.
In 2020, retail investors have capitalised well from the sudden market fall. During the 2008 fall, retail investors were heavily impacted by high amounts of exposure in Mid, Small & Micro caps while the period of consolidation in the world equity market was elongated due to the global financial crisis. Here it is very inspiring to know a positive change in the investment pattern of retail investors with better understanding of their own risk averseness along with basis knowhow of investment and well-equipped platforms. We can presume too that the majority of retail investors benefited from better exposure in quality stocks, MFs and low degree of leverage. We should also recognize the fact that retail investors also benefit from no fall in sentiment due to limited loss in jobs and cashflow, triggering higher equity investment due to tremendous jump in free time. We should acknowledge their timing of capitalizing from this healthcare crisis with a drop in prices & valuation which happened in a short period of time.
The sustainability of this could be an issue as Indian equity market is amongst the most valued stock in the world, followed by US & Japan. This may be due to high double-digit growth expected in FY22 for which we may have factored a lot already. We have been challenging the market on a daily basis under this pandemic period of uncertainties. Today in terms of valuation we are trading above the pre-COVID-19 level with no guarantee of growth in the next six to 12 months.
This momentum may be tested in the coming months due to reasons like regulatory change in margin funding in August, second set of Q1 results for which forecast is very weak, all-time high valuations, increase in US-China trade war and high volatility noticed in global currencies market recently. The catalyst for growth in the economy has subsided due to disruption in the globe while the market is up led by few IT enabled companies, expectation on re-opening of the economy & financial support. India VIX subsided to 24x, which is 3-month low. While rally in world Gold prices to all-time and collapse in dollar index (DXY) to two years low is a sign of increase in risk in the coming months. It is advisable to be careful and trade cautiously in which safest segments will be Gold, AAA/Government bonds, Pharma, IT and FMCG.
The author is Head of Research at Geojit Financial Services.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.