The global equity markets continued to rally, led by USA. Indian markets however had a negative return with Nifty losing 2.8%, BSE Midcap and BSE Small cap indices losing 1.4% and 1.9% respectively. 13.7%and 15.5%. Among large sectors in market, Auto, Pharma and FMCG gave positive returns, while financials lost nearly 10%. In a way, high weightage of financial stocks in Indian indices (Nifty and Sensex) is a significant reason for underperformance of Indian indices vis-a-vis the S&P, Dow and Nasdaq indices in US
Globally, the market sentiments are being influenced by a multitude of factors namely; 1) spread of coronavirus and research going on for a medical solution to virus, 2) economic losses and the compensating stimulus on fiscal and monetary front in every country, 3) geo-political discussions regarding implications for China going ahead, 4) equity as an asset class in a scenario of negative or low interest rates over a medium term and 5) expectations about revival of economic activities post lockdown being opened up by a majority of countries in June, 2020.
Coming to Indian economy and markets, some additional variables are
- Extension of moratorium on loan repayments by another 3 months. While this can provide help to some borrowers who are experiencing financial difficulties, it is likely to put stress on lenders and equity markets (financials constitute nearly 35% weight in Nifty/Sensex)
- Expectations of far severe impact on economy vis-a-vis earlier estimated. In a major revision CRISIL in May 2020, put estimates on FY21 GDP at a –ve 5% from a +ve 1.8% in April 2020. The change in estimates reflect both the supply-side constraints (interlink of supply chain) as well as demand issues (reduction in employment and income). From various growth estimates on global as well as India, it seems economic implications of lockdown are likely to be heavier on India vis-a-vis many other countries.
- Stimulus route adopted by Government that focusses more on structural reforms rather than immediate relief to industry. While the headline number of stimulus at 10% of GDP is impressive, the finer details show a direct fiscal impact at around 1.2% of GDP, monetary action by RBI at 3.8% of GDP and other support (guarantees, loans, etc) at 5% of GDP. The focus of the stimulus package when seen on time-horizon front:
a. Short-term : easing the pain in the most vulnerable sections of the economy, simplification of process, 1 year deferment of insolvency proceedings etc.
b. Long-term : Reforms in core areas of land, labour, laws and liquidity to address key sectors like agriculture, coal mining, electricity and privatization of PSUs. In a way, the Government has utilized the current crisis to take those bold initiatives that are required on a structural basis. Going ahead, some of these initiatives, implemented in true spirit can attract active participation by private sectors/FDI and support economic growth and employment creation in the long run. The only constraint here is that these reforms would benefit the economy only over a medium to longer period of time.
Indian government announced “Unlock 1.0” as a path towards gradual re-opening from June 1, 2020. The measures announced include opening up of all activities outside of containment zones. For containment zones, the lockdown is extended till June 30, 2020. While state governments do have a role in imposing any restrictions, the Central Government has virtually removed all restrictions including the red, green and orange zone classifications.
The fiscal data declared on May 29th, reported a GDP growth of 3.1% for Q4FY20 and 4.2% for full year FY20 with fiscal deficit at 4.6% of GDP. The economic activity in Q4FY20 was impacted by nearly 2 weeks of lockdown. The output of eight core sectors was down by 38.1% on a Year-On-Year basis in April, 2020 against 9% Y-O-Y dip in March, 2020.