INSUBCONTINENT EXCLUSIVE:
By Jyoti VaswaniEquity markets have fallen sharply across the globe over the past few weeks
We are in unprecedented times as fear has become the dominating emotion and there is a crisis of confidence all around.
While the Covid-19
situation remains grim in most parts of the world, what comes as a huge solace is the sharp drop in additional cases at the very epicenter
of the endemic breakout in China, as it demonstrates the ability of the human race to overcome any grave situation.
While market reactions
toward the health crisis is justified to a large extent, at the same time a lot of it is driven by fear and overreaction, which is probably
the most common trait of human behavior in capital markets.
People are wired to react to situations of fear and greed
This thought stems from the fact that while the number of infections has topped 1.2 million, the death toll stands at 64,734, about 5 per
cent, exemplifying that the virus is more contagious and less fatal in comparison to previous episodes of HIV, small pox, Ebola, swine flu,
etc, where the mortality rate toll was much higher
The sharp correction in the market clearly shows that investors remain fearful.
Of course, the world is in contraction mode and will
continue to be in same phase for some time thanks to Covid-19
While the rapid spread of the disease surely demands one to be aware, prepared and cautious, but there is no need to hit the panic
button.
If one were to magnify the demographic statistics of the people infected by the virus, it appears to be linked to co-morbidity, as
the most affected are people of over 60 years
This indicates that the healthy can fight the virus like any other viral flu
We strongly believe this too shall pass.
Market Correction: An Opportunity in DisguiseEquity markets globally have corrected 25-35 per cent
from their peak levels due to multiple reasons, including the outbreak of Coronavirus (COVID-19), significant correction in crude oil prices
due to failure of talks between Opec and non-Opec producers on increasing/extending production cuts to balance the global oil market
Domestically, we have also seen the unfortunate episode of YES Bank being put under a moratorium
But the key positive is the proactiveness with which the government and RBI have been handling the situation to prevent the negative fallout
of the situation.
While the global macro backdrop turns increasingly beneficial for India, the current correction in the Indian equity
market is the result of the risk-off sentiment, that has impacted all equity markets globally.
ET CONTRIBUTORSHuman Behaviour and
MarketsSome things never change
One must invest when everyone turns fearful and assets are available at a reasonably good prices
Markets never give returns in a linear fashion
No matter how sound a market/company is, its return would always rise in a non-linear manner.
Though we must admit that investor behaviour
is changing gradually and they are willing to ride out the storm and even add more money during the bad phase of the market.
We believe the
From a historical perspective, we are hopeful that the impact of Covid-19 will smoothen out within three months, as observed during ZICA,
IBOLA, and SARS crises, which were more deadly than the Coronavirus
Even then, markets had corrected in the short term owing to panic, but then went on to rose ten-folds from there.
Market Correction: A
Historical PerspectiveET CONTRIBUTORSHistory suggests whenever markets have faced turbulent times, they has eventually been able to overcome
that and gone on to make newer highs
We have seen Sensex deliver a one-year average return of 50% in six similar instances earlier
There is no reason to believe that it would be any different this time.
What makes us bullish on markets in the current negative
environment? We remain extremely constructive on the outlook for the Indian equity market, as India seems to be a major beneficiary of the
reasons behind the current correction.
Although the Covid-19 started in Wuhan, China, and has spread to more than 160 countries with the US,
Italy, Spain and Iran getting impacted significantly, it is heartening to see significant improvement at the epicenter of the virus and the
first casualty nations i.e
China, and also in Hong Kong and Taiwan, and markets there are no longer as nervous as elsewhere in the world
While pessimists will doubt the authenticity of the Chinese data, what gives us comfort is the fact that Apple and Starbucks have already
opened more than 80% of their outlets in China, while Toyota has opened all of its factories in China.ET CONTRIBUTORSET CONTRIBUTORSIndia is
expected be a major beneficiary of the de-risking of supply chains away from China post this crisis
The Indian government has already cut the corporate tax rate to 15% for new manufacturing entities, making India globally competitive
This should enable the country to attract new investment
India also has a large trade deficit with China ($50 bn officially), which will come down as imports drop
This, in turn, should bode well for domestic manufacturing.India is expected to be a major beneficiary also of the correction in crude oil
India imports $115 billion worth of crude oil annually
A 1% reduction in crude oil prices saves India $1.2 billion annually
With crude oil price having corrected 40%, it offers Indian economy a potential $50 billion stimulus, and a part of it can be used to fund
the fiscal deficit by way of higher excise duty.Globally central banks, including RBI and the US Fed, have cut interest rates in an
emergency move and extended liquidity lines/QE program to ease the impact of Covid on economies
Central banks of India, Canada, Australia, New Zealand have also slashed rates and ECB has extended liquidity lines to support the economy
This flush of funds will find way to emerging markets once the health situation improves, and that will be a big push factor for Indian
equities.While there could be a hit on corporate earnings for one and two quarters due to Covid-19 outbreak, we expect normalisation of
earnings in FY21, if the virus is contained within a month or two
Nifty has corrected to 8,000 level, which is below the levels when corporate taxes were cut (implying a 12-15% increase in EPS)
Post the correction, valuations have become more attractive with Nifty trading at 14 times FY21 EPS.Importantly, with the fall in 10-year
G-sec yields, Nifty earnings yield have converged with bond yields, implying that the market is not paying any premium for future growth
Historically, periods like these have always been followed by significant rallies in equities.
What Should be the Action Point for
Investor?What we are currently experiencing is volatility, not absolute loss
As is always the case when markets correct, the prophets of doom and gloom have once again sounded the clarion call
A short while ago these very same prophets were flaunting India as the economy of the future - highest GDP growth among large economies,
youngest population, huge workforce, rapidly growing consumer numbers, growing purchasing power, fast developing infrastructure, and so
on.
Has all this changed in a few months? The answer is a resounding 'NO'
We know that markets do come back from every correction and eventually make new highs
Even the 2008 market collapse - the worst in recent times - was a testimony to this
From highs of 6,200 in January 2008, the Nifty collapsed to a low of 2,600 in March 2009
History has shown time and again the continued progress of mankind, and there is no reason that that trend will reverse this time
the opportunity and the way to harness it
One should keep investing as per her goals and leverage these falls
The current correction in the market provides investors a huge opportunity to increase allocation to equities with a medium- to long-term
view.
(Vaswani is Chief Investment Officer with Future Generali India Life Insurance
