1 May 2020
India continues to witness a Perfect storm. A once in century Medical crisis has disrupted economic activities which in turn is reflected in financial market stress. Sectors catering to necessity are doing better than those catering to luxury. Hospitality, Entertainment, and Aviation have been hit badly. Major sectors such as auto, real estate, BFSI are also feeling the stress. Sectors like FMCG, Telecom, Agri industries are less affected. However every sector and every company is impacted by the covid 19 crisis.
FY 21 will witness negative GDP growth first time after 1980. In April, steel production was down 87% YOY & power generation was down 22% YoY. Overall business outlook, as measured by PMI Index, was down to lifetime low.
Currently, major industrial states and cities are under the red zone which is likely to delay recovery. The risk of a second wave continues to exist as we do calibrated opening. Other countries are also in the same boat. As per IMF, the US is likely to see -5.9% and the EU zone is likely to see -7.5% growth in GDP despite high fiscal and monetary stimulus.
In this dark could there is are few silver linings like Fertilizer sales nearly doubling in May over last year. It's a sign of a boom in the Agri sector. Britannia Inds posted 20 % + revenue growth in April and May. Power demand has begun to inch up again - A sign of economic activity recovering from the bottom. 'Fastag' & E way bill generation of May shows some recovery from the bottom.
There is also demand for good quality Indian papers as reflected in successful offerings by RIL / HUL / HDFC Life / Bharti Airtel and KMB. MSCI & FTSE has proposed to increase India's weight in EM indices over the next quarter. This can bring anywhere between $ 3-7 billion FPI flows in Indian equities.
Nifty has rallied significantly from April's bottom. At the current level of ~ 10,000, NIFTY is discounting many positives. Lower Oil Import bill of ~ $ 40 billion, the Lower trade deficit with China due to boycott of Chinese goods, lower gold import bill, smooth implementation of the economic package announced by the Government, execution of monetary package in terms of improved credit flow & reduced borrowing cost. The market is also discounting an early medical solution in form of drugs or vaccines to tackle covid 19.
In our opinion, if the actual events and news flow are better than what is discounted by the market then prices can rise further from here. In case the actual events and news flow are worse than what is priced by the market then prices will fall from the current level.
It will be inappropriate to say that bottom of the market is made till such a time a medical solution is discovered.
At the current level of valuation, it is time to be overweight on equities. While the market looks expensive on PE Ratio as earnings have declined significantly. Market cap to GDP ratio at 64 % is below the historical average of 75 %. Forward P/B at 2.2x is below the historical average of 2.6x.
We believe that investors can upgrade their risk appetite by one level, to capture below-average valuation.
An investor may invest half of their incremental investment in a staggered manner in a falling market. The other half can be invested when the medical solution emerges for business normalcy to return on a permanent basis.
Extremely Conservative investors can look at hybrid funds like equity savings or debt hybrid for participation in equity markets at current valuations. An investor requiring regular income can activate the SWP option in these funds. This will give them higher tax efficiency. Conservative investors can look to invest in balanced funds to large-cap funds. Aggressive Investors can look to add small and mid-cap funds.
While we always recommend STP and SIP for investment, one can look at a Balance advantage fund for lump sum investment. Investors who panicked on April 20 from credit risk funds have lost between 2-3 % absolute return in the month of May.
It is important to hear the advice of a good financial advisor rather than follow what's app gurus or social media warriors. Short term investors may consider ultra-short-term debt for their investing needs. Likewise, for long term investors, dynamic bond and credit risk fund still provide good opportunities. Prudent asset allocation also calls for some weightage to gilt funds.
We continue with our recommendation on overweight Gold and offshore funds like before.
Stay safe and stay invested.
