The domestic market along with the global equity markets are going through a roller-coaster ride for the past few weeks, especially after central banks across the globe have announced measures to support their respective economies amid spread of novel coronavirus. The massive stimulus packages thus far however have failed to soothe the equity markets which have continued to bleed amidst extreme volatility.
In the month of March 2020, only in 12 trading days as on March 18, Indian benchmark indices have corrected over 23 percent as coronavirus outbreak, or COVID-19, has spread rapidly across more than 155 countries and has not shown any signs of containment. After China, infections have steadily risen in Iran, Italy, Japan and South Korea. India reported 147 confirmed cases on March 18, an increase from 6 on March 3.
The epidemic is having a major impact on global economy and the stock markets across the globe. As per a UN report the trade India figures among the top 15 economies most affected due to this pandemic as slowdown of manufacturing in China and shutdown across developed economies disrupts world trade.
China has become the central manufacturing hub of many global business operations and any disruption of China's output is expected to have repercussions elsewhere through regional and global value chains. Domestically the most affected sectors include precision instruments, machinery, automotive and communication equipment as these are heavily dependent on input from China.
Policymakers around the world are trying to contain the economic damage being caused by the spread of coronavirus. The IMF has already announced a $50-billion aid package to combat the impact of the coronavirus. Earlier the US Federal Reserve reduced interest rates by 50 basis points and in recent interest rate cut to near-zero on Sunday in another emergency move to help shore up the US economy amid the rapidly spreading global coronavirus pandemic.
In the past couple of weeks, Bank of Canada and Reserve Bank of Australia cut interest rates by 50bps each. South Korea proposed to inject $10 billion to support the economy and China allocated $16 billion for virus prevention. In India, RBI Governor Shaktikanta Das also said there was a strong reason for coordinated policy action.
Before the COVID-19 the Indian economy appeared to have bottomed out, December quarter (Q3 FY20) GDP growth rate was along the expected lines. Services growth has continued to strengthen since November when it came out of a two-month spell of contraction. This has been in line with manufacturing activity, which mirrored a steep upward move of the growth curve in January when the PMI reached 55.3, the highest in nearly eight years.
However, the coronavirus impact on global growth and India’s growth is a major factor that needs to be considered at this point in time. The positive side for Indian economy is that the significant correction in the crude oil prices has been a major impetus to the Indian economy as India imports 85 percent of its oil needs.
Indian equity markets do not have a clear direction at this point, and the near-term trajectory is being set by the developments around the COVID-19 spread. In the absence of any positive catalysts in the short term, the markets are at the mercy of COVID-19 spread, the markets are closely watching how the spread will progress and effectively be contained in Europe and North America.
The markets have effectively priced in the impact of this pandemic on global growth as of now, if the pandemic spread leads to further closure of developed economy including US we can expect significant downside even from here. Therefore our advice for investors is to desist from impulsive shopping in the equity markets just because the markets have corrected significantly.
The equity markets are forward-looking and the recent correction is factoring in the future earnings impairment due to the COVID-19 aftermath. It is also advisable to have enough dry powder in terms of cash handy which can be deployed swiftly if the correction deepens.
Although India has done a remarkable job thus far to effectively contain the spread of the virus, the next few weeks will be telling in how effective the government interventions have been. So far the markets have not witnessed any fiscal or monetary support in light of the Covid-19 spread as the government is more focused on containing the spread.
However, at some point the government would have to intervene along with the Central Bank to provide major relief to the economy through monetary and fiscal policy interventions, we expect that these interventions whenever they come would be positive catalysts for the Indian economy as well as the equity markets.
In light of these developments investors are advised to exercise caution in terms of their investments, just because the markets have corrected sharply does not mean that it is the right time to enter.
The right time would only arrive once the uncertainty around COVID-19 subsides, there has been some real damage that has occurred to the global economy due to this virus and that’s what is being reflected in the current stock prices.
As an investment strategy, perhaps this is the time to start looking at individual names in select spaces that have seen significant corrections, banking is one sector that we are especially positive about after this correction, select names in the PSU banking space have reached attractive valuations and perhaps one can start creating small positions with a long term horizon.
Infrastructure is another space that we expect could see swift recovery once the dust settles, therefore select names in this space should be on the shopping list too. Hospitality, airlines, auto are some sectors that we expect would take a longer time to recover therefore investors are advised to stay away from these counters at this point.
The benchmark index NIFTY50 has already corrected more than 3400 points (28 percent) from its lifetime high and more pain is expected along the way. However, over the long term, equities have been among the top-performing asset classes even though equity investments come with intermittent short-term volatility/corrections.
It is advisable for investors to invest systematically into equities that too in quality stocks that have a visible and stable earnings outlook and good corporate governance track record with a long term investment horizon.
The author is Director at Wealth Discovery/EZ Wealth.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.