Navigating through clueless Atma Nirbhar markets
- The economic stimulus package—claimed to be 10% of India’s GDP—turned out to be not more than a great cry and a little wool. Markets are up on their own now—Atma Nirbhar.
- As compared to the historical readings, India’s Market Cap-To-GDP ratio of 55 appears cheap at present but the Market Cap-To-GDP ratio of China is around 35 and that of Russia and Brazil is 18 and 44 respectively. This makes India one of the most expensive markets amongst BRICs, even now.
- While you buy stocks, make sure that there’s a valuation comfort to accommodate negative earnings surprises, if there’re any.
Just as you do, markets hate uncertainty. Coronavirus pandemic, lockdowns, loss of economic activity and lull in consumer confidence have been weighing heavily on markets. Ever since the lockdowns began and markets recovered from the March lows, the investors have been pinning their hopes to government’s economic stimulus measures.
In reality, the economic stimulus package—claimed to be 10% of India’s GDP—turned out to be not more than a great cry and a little wool. While the government introduced some big bang structural reforms, such scrapping APMC and ending the monopoly of Coal India, which may have far-reaching effects, the stimulus package failed to address the immediate concerns of various sections of the economy, including that of investors.
In short, markets are up on their own now—Atma Nirbhar. The intensity and spread of coronavirus pandemic, social distancing, momentum in earnings growth and balance sheet strengths of companies would affect the market performance, going forward. Macroeconomic environment may either facilitate recovery or aggravate gyrations.
How to deal with such uninspiring market conditions?
To help our readers navigate through hot waters we have been inviting market stalwarts and visionary fund managers to our platform regularly now. Over the last few weeks, we Spoke to Nilesh shah, MD of Kotak Mutual Fund, Prashant Jain, ED &CIO of HDFC Mutual Fund and Ritesh Jain—Ex CIO-BNP Paribas Mutual Fund.
While every guest shared a unique view, below are some highlights:
- The impact of coronavirus pandemic would be long lasting unless governments across the globe pump in billions of dollars.
- Indian markets appear cheap on Market Cap-To-GDP ratio basis.
- India is likely to witness a shift in consumer preferences, post-pandemic.
- Diversification of global supply chains away from China might help India gain advantage.
- India’s external economy would be least affected among major economies.
It’s time to check where we stand on aforementioned points since the economic package is out now.
Has government pumped in enough money in the economy?
Indian government is going to spend just about Rs 2 lakh crore thus, it remains unclear how the demand is going to revive. The fact that banks have parked Rs 8 lakh crore in reverse repos suggests that, they are reluctant to lend, even though the FM has claimed that many borrowers have voluntarily asked banks to keep loans on hold.
Moreover, India’s external economy might do well if oil prices continue to remain down; but the benefit of it won’t be passed on to the consumers as they will be utilized to cut back the shortfall in government revenue.
Are states going to spend more?
As you might be aware, Indian government had planned to borrow Rs 7.8 lakh crore in FY21; however, a few days ago, it decided to borrow additional Rs 4.2 lakh crore.
Similarly, states can now borrow upto 5% of GSDP—200 basis points higher than 3% allowed earlier. As a result, the states might get the elbowroom to borrow additional Rs 4.28 lakh crore. However, of this, only 0.5% is unconditional and the rest is linked to the implementation of reforms such as one nation-one ration card, ease of doing business reforms, power sector and utility reforms, and their progress thereof.
The loss on account of constrained economic activity during lockdowns is massive. Therefore, it remains to be seen whether the increased borrowing just covers the loss of revenue due to falling economic activity or indeed helps drive reforms. Manufacturing PMI nosedived to 27.4 in April 2020, from 51.8 in March and 54.5 in February. Similarly, the Services PMI fell sharply to 5.4 from 49.3 in March and 57.5 in February.
Monthly GST collections of the centre averaged Rs 1 lakh crore in FY20. The government has deferred the announcement of GST collections for April. However, generation of e-way bills has fallen more than 80% in April, according to a media report. Going by this number, the GST collections are likely to be uninspiring for April as well May. After lockdown 4.0, if strict social distancing norms are followed, which is likely the case, overall GST collections might come well short of expectations.
This gives little room to the government to spend incremental borrowings on reforms.
Is consumer spending going to accelerate?
Since consumers might prefer to save more than spend; revenue growth among MSMEs as well as listed corporate might remain muted. However, due to distressed business conditions many unorganized players might lose market share to their formal sector counterparts who have stable business operations and stronger financial muscle.
Atma Nirbhar Bharat and FDI
As remains the question of attracting multi-nationals moving out of China to places such as India, it’s easier said than done. Recently, the US president too became vocal for local and threatened to slam American MNCs with a new tax for not shifting their manufacturing bases back to the US.
India’s decision of manufacturing defence equipment in India may not go down well with countries that rely on exports to India. Although the government has increased the FDI limit in defence from 49% to 74% so that foreign companies might invest in India, how many foreign companies will opt for it remains to be seen. Since vocal for global is likely to become a global phenomenon now, only high-quality exports or those having a huge cost arbitrage would remain intact. Lure of India’s huge domestic markets to global manufacturers would trigger only when there’s consistency in policy making and business policies of the centre and states are in sync.
Are markets really cheap?
Indian markets have always remained one of the most expensive markets amongst major emerging economies because they are deep and diverse. India’s demographics plays its part too.
As compared to the historical readings, India’s Market Cap-To-GDP ratio of 55 appears cheap at present but Market Cap-To-GDP ratio of China is around 35 and that of Russia and Brazil is 18 and 44 respectively. This makes India one of the most expensive markets amongst BRICs even now.
If India’s GDP growth drags and markets don’t fall correspondingly, Market Cap-To-GDP ratio might go up, despite not witnessing any rally on the indices. In contrast, if GDP growth stays more in line with expectations but the markets fall further, the valuations will become even cheaper. Thus, you shouldn’t rush to buy just because markets are cheap. What’s cheap can become cheaper. Invest in 2-3 tranches or take the SIP route.
Perhaps markets are as clueless as the investors are hence, they are taking every day as a new day without giving any clear indication.
It seems markets are working with an assumption that Q1FY20 will be a whitewash quarter but would start building a case for FY22 in the coming months. Therefore, while you buy stocks, make sure that there’s a valuation comfort to accommodate negative earnings surprises, if any. Taking highly leveraged positions might also be an unintelligent strategy under current market conditions.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.