India’s GDP growth for Q1FY021 showed a sharp contraction of 23.9 percent y-o-y, the result of the deep impact of COVID-19 across sectors, barring agriculture that remained a sole silver lining. The steep cut in Q1 GDP prompted economists and ratings agencies to further reduce the GDP growth estimates for the full year. In the past few days, the consensus estimates on India’s GDP growth has been downgraded to an average of negative 9-10 percent from the negative 6-6.5 percent earlier.
Certainly, the headline numbers aren’t reassuring at all. However, it is also a matter of perspective.
For an optimist, the estimate of 9-10 percent contraction in GDP for the full year on the back of a 23.9 percent decline in Q1 essentially means an implied contraction of 3-3.5 percent (roughly) for the remaining nine months of the year. It also means an improving trend in quarterly GDP growth data from Q2 to Q4 this fiscal with perhaps positive growth in Q4. Well, an improving trend from the nadir of economic activity would certainly sound positive in the backdrop of a liquidity-driven global rally in equities.
This brings us to another interesting topic of debate, i.e. the nature of expected economic recovery, and which alphabet would define it. The verdict seems to be split between the hopes of a V-shaped recovery projected by certain voices in government or academia, whereas the chorus is also growing for expectation of a prolonged slowdown defined by U-shaped recovery in the economy.
The third interesting perspective, however, is the K-shaped recovery that carries lot of importance for equity investors. In a K-shaped recovery, there are certain sectors that would recover quickly, while some of the sectors would continue to slide or languish before stabilising or looking up.
The race to catch the COVID-19-immune and faster COVID-19 recovery sectors/stocks is already playing out in the Indian markets. No wonder, sectors such as IT services, pharma and consumer staples have outperformed considerably and trade at premium valuations now. COVID-19 recovery plays like auto and other consumer discretionary sectors are also catching up pretty quickly.
On the other hand, banks and financials is an important part of equity markets that have lagged the entire rally in the equity markets since April. The pressure on banks is understandable given the stress in many sectors and the whole experiments of giving across the board moratorium for six months to borrowers. However, major events like the end of moratorium period on August 31 and the guidelines for recast of loans in across 26 sectors already behind us, banks could emerge as new driver of further upside from here.
Having said this, the road ahead could be bumpy given the plethora of issues such as growing number of COVID-19 cases in India, US-China conflicts, disturbance at the border and the run-up to US presidential elections. The market did give some jitters lately. However, the central bankers seem determined to keep the party going in the equity markets globally.
Gaurav Dua is Head - Capital Market Strategy & Investments, Sharekhan by BNP Paribas. Views are personal.
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