A girl wearing a protective mask reacts as she is splashed with coloured water during Holi celebrations amid coronavirus precautions, in Chennai. (Image: Reuters)
The disconnect between the Indian equity markets and the growing alarm over rising coronavirus cases was much in evidence this week. India now leads the world in the daily number of fresh COVID-19 cases and there is concern over a shortage of vaccines, which has led to several immunisation centres being closed in some states, although the central government stoutly denies it.
As for the markets, the blunt truth is that throughout the course of the pandemic, there has been little correlation between caseloads and the markets. In fact, the equity markets have lost no opportunity to look through the pandemic and focus instead on the sunlit uplands beyond.
Globally, there could be a good reason for that cheery attitude. As a report by Moody’s Investors Service says, “High-frequency alternative data indicate a strong rebound in economic activity even as infection rates rise and restrictive measures remain in place in several countries.” We are learning to live with the virus.
The JP Morgan Global Composite PMI, a snapshot of world economic activity in both the manufacturing and services sectors, came in at a 79-month high in March. Even the services sector, the one most affected by the pandemic because many services require close contact, had a 33-month high in its PMI reading. In Europe, where many lockdowns have been declared and the authorities have managed to mess up their vaccination programme, Chris Williamson, chief business economist at IHS Markit said, “The survey, therefore, indicates that the economy has weathered recent lockdowns far better than many had expected, thanks to resurgent manufacturing growth and signs that social distancing and mobility restrictions are having far less of an impact on service sector businesses than seen this time last year. This resilience suggests not only that companies and their customers are looking ahead to better times, but have also increasingly adapted to life with the virus.”
From the point of view of vaccine manufacturers, of course, the commercial possibilities of adapting to life with the virus are immense.
In India, although the PMIs for March were strong, sentiment among manufacturers has been hit. A more up-to-date assessment is provided by our weekly recovery tracker, which is flashing red. The Reserve Bank of India’s surveys show that consumer confidence was down in the dumps even before the rise in caseload, but businesses were surprisingly upbeat.
There has been other good news. The RBI unleashed its GSap 1.0 (Government Securities Acquisition Programme) missile on the bond markets, bringing bond yields down, although inflation expectations moved up sharply. In another policy decision, the government brought in pre-packs for the insolvency resolution process of small and medium enterprises. The GST mop-up in March was at a record high. The International Monetary Fund said India’s economy will grow 12.5 per cent in 2021-22, albeit from a low base.
While the restrictions on businesses in several Indian states will delay the recovery, the nervousness in the markets on this count is a blessing in disguise for investors. We believe that the worries are likely to be short-lived -- much like the September/October phase in 2020 -- and the concerns should ease in the next few weeks. In fact, we stuck our necks out and predicted the Nifty would reach 20000 by September this year, on the grounds that we are nowhere close to the all-around euphoria that signals the end of an economic cycle. Indeed, India hasn’t even started a new capex/investment cycle yet.
We are in good company, with the IMF acknowledging that market exuberance is rational when viewed in the context of very low-interest rates, although it does warn that low rates pose risks to financial stability. Markets haven’t just learned to live with the virus -- they’re dancing the tango with it.
If we take a longer-term view, there is no dearth of optimism. Anish Shah, MD&CEO, Mahindra & Mahindra, told us in an interview that it will have an RoE of 18 percent over the next 3-5 years and that he’s very hopeful about global opportunities. Godrej Consumer Products’ growth in international operations could call for a re-rating. The return of inflows into equity mutual funds is another positive.
We argued that the resurgence of infections and local lockdowns will have only a limited impact on Titan. In spite of 80 percent of Suven Pharma’s sales being in Europe, which has been affected by a fresh wave of lockdowns, we believe its growth levers outweigh the negatives. On the other hand, firms such as D-Mart, which sell essential items, will not be affected much by the fresh restrictions.
Low valuations are a reason why we recommended stocks such as LIC Housing Finance, Federal Bank and IndusInd Bank. The economic recovery story continues for Man Industries and IFGL Refractories. We also tried to understand Adani Ports’ consolidation strategy.
As usual, our fiercely independent research analysts weren’t afraid of pointing out concerns, such as high input costs at Marico; the sacrificing of margins in FMCG stocks; and the loss of market share at Maruti. We recommended that investors should book profits at Barbeque Nation. We looked at the lessons for investors from an arbitrage trade that went wrong in Wabco India and analysed the implications of the Vedanta open offer. We asked what Byju’s acquisition of Aakash means for the Ed-Tech sector, which has grown by leaps and bounds during the pandemic. And both we and the FT considered the implications of Janet Yellen’s proposal for an international minimum corporate income tax on multinationals.
I leave you with the unnerving report that experiments carried out by physicists now show, according to the New York Times, that "a tiny subatomic particle seems to be disobeying the known laws of physics… a finding that would open a vast and tantalizing hole in our understanding of the universe". If you find that a bit abstruse, you can spend your weekend profitably by reading this exquisite piece by Woody Allen, which may or may not clear things up.