The global economy today has come to a standstill; neither can it move forward nor can it move backward. Also, it cannot stay in the current situation either. Globally, central banks are pumping liquidity, countries are announcing large fiscal and monetary stimulus. Currently, the fiscal stimulus is approximately 9 per cent of the global GDP in the major economies.
However, too much fiscal stimulus has led to a sufficiently large increase in the global debt-to-GDP ratio levels. The only way to sustain this is by reducing interest rates. Over the years, the global aggregate yields have fallen against an increase in the global debt-to-GDP ratio.
Global central banks hope that money supply growth might induce industrial growth. Between March and April 2020, global bond prices corrected sharply. But that has recovered because of liquidity pumping and policy rate cuts. In March 2020, global equity markets witnessed steep corrections. Though owing to large fiscal and monetary stimulus, two-thirds of equity losses have been recovered in May and June 2020. But this recovery has come with a sharp polarisation.
The gap between high and low valuation stocks has widened. China, which was the epicenter of the virus, is getting back to work though not fully back to normal.
On the domestic economy front, some sectors will get impacted less: agriculture, telecom, FMCG etc. On the other hand, there will be sectors that will be hit hard such as aviation, tourism, gems & jewelry and multiplexes. Going ahead, leveraged companies may face difficulty in the current economic situation. As per global agencies, India is expected to contract 5-7 per cent in FY2021. However, agencies are of the view that FY22 GDP growth may be in the 7-10 per cent range. For Q4ofFY20, there was a steep decline in Nifty50 earnings even below muted expectation.
Nomura India’s business resumption index shows initial trends of business resumption. One trend which is visible is that Bharat, or rural India, is doing far better vis-à-vis urban India. For example, retail fertiliser sales was 2 times higher in May 2020 compared with that in May 2019. Similarly, tractor registrations have touched 90 per cent of FY20 levels. Even two-wheeler sales have been better in rural and semi-urban areas compared with urban areas. The long-term aim of the government is to increase farm income. And some of the steps announced in the Covid-19 economic package can probably help achieve this, if we really free our agriculture sector by removing the Essential Commodities Act, by freeing up the APMC market and supporting contract farming. Rural India’s economic recovery is also being supported by a good monsoon season. Good monsoon is likely to result in surplus agriculture output, which should support growth in the rural economy.
In case of urban India, things may not be as good, but showed some signs of recovery in last week of June, 2020. Indicators like power consumption, e-way bill generation, petrol & diesel consumption and electronic toll collections showed improvements in June. India’s unemployment rate fell rapidly from 27.11 per cent as of May 3, 2020 to 8.59 per cent on June 28, 2020.
Rural unemployment rate is better than urban unemployment rate, indicating that Bharat may be doing better than urban India. GST collection is an indicator of what’s happening on the ground. In March, GST collection dipped below Rs 1 lakh crore. It was at Rs 32,000 crore in April, Rs 62,000 crore in May and came in at Rs ~91,000 crore in June against all expectations.
India’s manufacturing PMI Index has also improved from 27.4 in April to 47.2 in May, indicating that entrepreneurs are turning bullish about the future.
Overall, the corporate performance in the corona-induced economic crisis has been worse than the 2008 Global Financial Crisis. Revenues of more than 60 per cent companies’ have declined (YoY) more compared with the 2008 crisis.
Nifty at the current level is discounting lower gold and oil import bills and narrowing trade deficit with China. It is discounting a rebound in economic activity, fiscal and monetary stimulus that will work on the ground to support GDP growth in FY22. It is also discounting potentially higher FPI flows. MSCI and FTSE indices are looking to increase India’s weightage, and this is expected to bring in a potential passive inflow of about $7 billion to the domestic equities. More importantly, it is discounting a medical solution to Covid-19 emerging by the end of this year. If these things materialise, Nifty will continue to do well. However, if any or all of these do not materialise, then Nifty will probably correct.
About eight Covid-19 vaccines have progressed from Phase II trials to Phase III trials in July. This is going to have a material impact on the way markets and economies function.
India’s credit growth decelerated in June 2020 to 5.82% from 10.73% in June 2019. This needs to accelerate for the economic recovery to sustain, which is where the government’s MSME & NBFC credit guarantee scheme will be useful.
While Nifty topline has bounced back, the broader market is still trailing historical valuations. For example, a single stock Reliance Industries alone contributed more than 60 per cent in the Nifty move from 7,600 level to 10,300. It can be noted here that today, Nifty50 is available at three-year before prices, at 2017 level. Nifty Midcap is available at four-year before prices at 2016 levels, and Nifty Smallcap at nine-year before prices at 2011 levels. The market cap-to-GDP ratio fell from 79 per cent in FY19 to 56 per cent by around April 2020. The same has bounced back and is now at around 71 per cent. This is still marginally lower than the long-term average of 73 per cent. The forward P/B at 2.4 tomes is 10 per cent lower than the long-term average.
In this backdrop, we believe it is time to be go marginally overweight on equities. Investors can look at increasing their risk one level up to capture the long-term market potential. However, short-term risks remain on account of rising Corona infections, impending lockdown or geo-political standoffs.
On the debt fund side, we believe it is time to be long on duration. The long-term inflation is on a downward trajectory. RBI has adopted a benign and accommodative stance. In this scenario, investors can look at dynamic bond funds from a three-year plus perspective. Investors can also consider investing in banking and PSU funds to capture the relatively high yields in the perpetual bond space. This is the time to take one step on duration, as interest rates are soft and likely to come further down. We continue to remain conservative on the credit side and our liquidity position remains comfortable across debt schemes.
The average AUM of the mutual fund industry stood at Rs 24.62 lakh crore during the April-June quarter, marking a 3 per cent de-growth over the same period last year. This blip can be attributed to the Covid-induced panic among debt investors. In the same period, at Kotak Mutual Fund, our average AUM grew 3.8% year on year to Rs 1.67 lakh crore.
We believe our partners can deliver value to investors in the current market through a three-pronged strategy: one, they can communicate the past market experience to develop long-term investment perspective, two, we will have to help investors ignore social media rumours with facts and opportunities; three, we need to convince investors of the need to maintain and increase SIP/STP at lower market levels. This way, the investor would stay invested and allow the market necessary time to generate a better investing experience in the times ahead.