Markets | Optimism seen in April could be farfetched

April was better for Indian equities after a stormy March. Both the Sensex and Nifty bounced back by more than 30 percent after hitting lows during the last week of March this year. Sentiments in the broader market also improved considerably, with a sharp surge in the midcap and small-cap stocks. This has come as a much needed breather post the sharp correction in the previous two months.

But what has been the driver of the massive rally and all the optimism when the lockdown of over 4 billion people globally is hurting businesses; unemployment is surging; industrial activity is at standstill; and the global economy is set to shrink by 3-4% in the current year?

The answer lies in expectations. Though the pandemic has affected close to 3.5 million people globally, the situation is much better than earlier expectations. Many corona virus hotspots like Italy, Spain and New York (USA) are showing declining trend in new cases and flattening of the curve. Even at the global level, the daily addition is down to a range of 5.5-6.5 percent as against 10-12 percent a few weeks back. The virus was expected to affect millions in populous countries like India. But that’s not been the case and the spread has been contained quite effectively.

The Indian government is already moving into the next phase of graded and gradual easing of restrictions and reconstruction of the economy. The lockdown has been partially lifted, with areas being colour-coded into red, green and orange zones depending on the severity of the spread of pandemic.

But this is not the time to get carried away. It does not mean all is well. The Indian economy will struggle to show any growth this year. And the stress in the MSME sector will result in failed businesses, job losses and rising bad loans in the banking system. Global trade will also remain subdued due to weak demand and trade restrictions. In such a scenario, one could only expect a gradual improvement in economic growth over the next 1-2 years rather than a V-shaped recovery.

On the brighter side, the aggressive policy measures would ease some pain. RBI has sharply cut interest rates and infused sufficient amount of liquidity in the banking system. On the fiscal policy side, the government has announced a package of $1.7 billion to support weaker sections. The government is expected to announce another round of fiscal stimulus, especially focused on MSMEs, given the stress that these businesses would face in the near term and act as a drag on the economy.

The way ahead for the equity markets would also paved with volatility. In such phases of alternating optimism and pessimism it would not be easy to manage your investment portfolio. Especially if the focus is on the noise around and short term market movements. Thus, as uncertain times continue, investors should invest systematically in phases and make the best of expected near-term volatility. The systematic buying needs to be backed by careful selection of stocks depending upon your risk appetite and investment horizon.

Gaurav Dua is Market Strategist and Fund Manager, Sharekhan by BNP Paribas. View are personal.