While valuation indicators suggest that the bottom is near the previous levels, nevertheless, one shouldn’t forget that this crisis is, after all, a healthcare crisis that morphed into a financial one.
edited excerpts:Q) Another volatile week for Indian markets – with 8,055 as a base. What is causing panic in the markets?
A) The market is nervous as the number of coronavirus cases in India has been accelerating and there might be the possibility of another round of lockdown to contain the community spread.
As testing increased to around 10,000 tests per day, the number of coronavirus cases escalated to over 4,000, which is alarming. If the lockdown is extended beyond April around the world, the economic activity will slump and we could experience a deeper recession than 2009.
FPIs remained net sellers during March and pulled out nearly Rs 62,000 crore from equity markets. In the face of economic uncertainty, FPIs are pulling out the money from risky assets and parking it into safe havens like the US treasury. This is creating panic selling in the Indian markets.
From the economic perspective, with 87 percent of the workforce in the informal sector, the pain for lockdowns will be severely felt by India which will trigger unemployment and will squeeze the overall consumption demand.
A slowdown in demand will result in sharp cuts in corporate earnings growth in the coming quarters.Q) What are your views on the month of April? Will we be able to see some green on the screen? Earnings will be delayed what are other data points to look for?
A) The pandemic was a health crisis that has now transformed into a financial crisis. Thus, the need of the hour is to find a cure.
The market is unlikely to see structural relief rally till then.
Other macro factors at this point of time are not so relevant except the massive stimulus package announced by the government to support the ailing economy and RBI’s monetary easing.
Q) What is your take on the auto sales numbers - do you think the pain is likely to continue in the sectors, and it is best to stay away?
A) The pain for the auto sector is likely to continue for another 6 to 8 months if the lockdown period is extended. The sales numbers of all auto OEMs for March have been terrible though it was expected.
Thus, the revivals in sales numbers will be delayed given the current economic uncertainties caused by the health crisis. So, it is better to stay away from auto stocks at current market volatility.Q) Experts have suggested sticking with cash-rich companies. Do you agree with the statement, if yes, how will it help in dodging the COVID-19 bullet?
A) As we know, "cash is king" in times of crisis and provides a cushion. Companies that have a strong balance sheet and strong cash flows and thus have significant cash per share will be protected from the downside.
Q) What should be the trading strategy of the coming week?
A) Domestic markets will track global market movements and the spread of the virus in both India and globally.
The developments with regards to viruses are very dynamic in nature and evolving and thus it is always better to stay invested in FMCG, healthcare, utilities & telecom stocks as defensive bets in this market.Q) India’s Mcap-to-GDP ratio has now slipped below 2008 financial crisis levels – do you think the bottom is near? What is a good multibagger opportunity for the next 5 years if someone wants to invests now?
A) While valuation indicators suggest that the bottom is near the previous levels, nevertheless, one shouldn’t forget that this crisis is, after all, a health crisis that morphed into a financial one.
Besides, never in history, economies have been completely shut down choking economic activity. Thus, unless the virus and the spread of the epidemic is contained, there are always risks of the further downside and it could be too early to call the market bottom till the time the cure is invented.
COVID-19 is an unprecedented event, unknown and unknowable at this point in time. The uncertainty of it has led to a crash in the markets world across and the ferocity and pace of the price damage is unthinkable.
Bear markets are always brutal and engulf all of the market participants with fear and make them behave irrationally. A patient investor can only look at the widening gap between value and price with incremental fall and gradually initiate buy in times of extreme fear in companies of his choice, provided the choices are fair in the first place.
Markets never go broke, companies do, and it displays the collective sentiment of the herd from extreme optimism to extreme pessimism from time to time.
The historical valuation metrics reflects the degree of correction from a historical standpoint and gives a good reference point to judge the severity of the fall and the degree of value emerging with incremental decline if at all, from hereon, whether be it P/E or P/B or Earning yield to Bond yield or Mcap to GDP. If there is “Panic” today, the “Unwinding” of it is also inevitable.
Nothing stays permanent in space and time and the pendulum of market and emotion swings both ways. Stay Fit & Stay Healthy and introspect in silence the irrationality to arrive at a fair decision.
Q) What are your views on the financial space? Does it look like the smart money is moving from financials towards defensives' names?
A) Financials are likely to be under pressure given the fact that even considering hypothetically the crisis is solved today itself, it will take the economy a significant amount of time to restart and get back to working at the previous levels.
The fall out of the same is rising NPAs and dismal intermittent credit growth. Thus, at this present moment, defensives are clear favourites.
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