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Below is the Views On Equity Market Strategy: Impact of Coronavirus and the way ahead by Motilal Oswal
Impact of Coronavirus and the way ahead
The novel coronavirus (COVID-19) has spread globally. This has led to sharp fall in equity markets, as it has become one of the biggest threats to the worldwide economy and financial markets. S&P500 fell more than 28% from its recent peak, ending one of the longest winning streaks of 11 years. Indian stock market too found itself in this grip and fell more than 35% from its peak in mid-January, becoming one of the top laggards globally. With number of cases surpassing 5lakh across the world, almost all the countries have announced lockdown to control the pandemic. Global activity has come to a halt, disrupting the economy in a major way.
India under lockdown for 21 days: Although India was affected relatively late compared to some other countries, the government has been quick to implement a nation-wide lock-down for three weeks (effective 25th Mar’20). The adverse effects on several sectors are already visible as most companies have shut their plants and wherever possible are allowing employees to work from home (WFH). Our calculations suggest that only 30-40% of the economy is currently operational at different intensities.
Economic impact of COVID-19: A sensitivity analysis of the adverse impact of lockdown on economic activity suggests that real GDP could decline ~3% YoY in 4QFY20 while it could decline 12.2% YoY in 1QFY21, assuming that things normalize from mid-May’20. With the first ever two consecutive quarters of GDP decline, the Indian economy could see its first technical recession since 1990s. The real GDP growth for FY20/FY21 could be 3%/3.8%. If the economy, however, remains affected for a longer period, the ‘self-employed’ people (~52% of all employment), and the ‘regular wage/salaried workers’ (~23%) would also be seriously affected. While it is difficult to gauge the exact impact on the different sectors, we believe around 20% of the economy (manfg. hotels & transport) is severely affected, around 48% (agri, const. & biz. Services) is moderately affected, while remaining 32% is mildly affected at this stage.
Government announced economic relief: The FM has announced an economic package worth INR1.7 lakh crore under 'Prime Minister Gareeb Kalyan Scheme', aiming to protect the poor from the ongoing COVID-19 crisis. It would entail both cash transfer and food security. PM Garib Kalyan Anna Yojana will cover ~80 crore poor people while direct cash transfer would include farmers, MNREGA, poor widows, pensioners and divyaang, women (with Jan Dhan Yojana, covered by Ujwala scheme, in self-help groups covered by livelihood missions), organized sector workers (registered with EPFO), construction workers and those under district mineral fund coverage. It also includes INR50 lakh insurance per health care worker as a medical insurance cover for them for three months. The FM had earlier announced several measures to ease the regulatory and compliance burden for taxpayers.
Corporate earnings for FY21 unpredictable; trailing valuations at multiyear lows: Given the nature of the crisis and the consequent containment measures, forecasting corporate earnings for FY21 has become difficult with existing earnings estimates facing sharp downside risks. In this scenario, it is prudent to look at trailing valuation metrics. The Nifty is trading at a trailing P/E of 15.8x, lowest in six years while trailing P/B of 2.0x is at its lowest since the Global Financial Crisis. Market-cap to GDP is at 49%, again lowest since the GFC. We highlight some important valuation exhibits inside.
Complete lockdown in an already sluggish economic growth environment of India, is leading to extremely volatile market conditions. If not contained well, the spread of the virus can have significant impact on the domestic consumption-driven economy. What makes this slowdown unique is that the policymakers’ intervention – monetary or fiscally – will be broadly ineffective in addressing the economic effects unless the COVID-19 forces subside naturally. The longer it takes for the situation to normalize, the more anxiety will lead to profound actions from the policymakers.
With VIX atsignificantly above the long-term average, it is a very alarming situation and traders should be wary of relief rallies. Till we see a semblance of normalcy returning, markets are likely to be under pressure and remain volatile. In such times of global volatility, retail investors should keep calm and not panic. Once the virus is contained, markets would stabilize. Long term investors with good quality stocks should hold on to their portfolios and see through the current storm. Traders should refrain taking long positions as all the global markets are in strong bear grip and all the small bounces have been used as selling opportunity.
However, we note that such significant corrections have opened up equally significant investment opportunities in the past for long term investors. Even in the past we have seen many major economic issues impacting the market, however we have recovered from most of them over time. Historically, there have been four instances, in the last two decades, of correction of more than 30%. In all four instances, six -month forward returns for Nifty were positive while in three instances returns have been minimum 35% and maximum 46%.
Volatility is the friend of long term investors by making good stocks cheaper and attractive. The best strategy for retail investors would be to accumulate good fundamental and quality stocks gradually over the next few weeks and months. While it is very difficult to predict the bottom of the market, it always rewards investors in the long term who take the benefit of such sharp fall. Markets may continue to fall in near term, and that’s the time to start becoming greedy. We suggest accumulating on a gradual basis.
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