Equity Markets Round Up: February 2020

During the month global markets were impacted by the news flow around Coronavirus (COVID-19) as cases spread beyond China to countries in East Asia and then to Italy, Iran and the US. The market falls were broad based as 38 of 40 major equity markets ended down. The MSCI All Country World index (USD) was down 8.2% during the month. There was a risk off sentiment and global sovereign bond yields fell and the quantum of negative yielding debt rose to USD 14.6 TN globally. Gold prices have rallied while crude prices have sharply fallen on fears of a slowing economy (down nearly 23% in the past two months).

The government of China has taken aggressive steps to support the economy, especially supporting SMEs and relaxing regulations for other key sectors (though not aggressive in supporting the housing sector). Local Chinese media report work resumption rate of industries of over 80% across 21 provinces (JPM report) with coastal provinces showing much better rates of resumption. The six commodity London Metals index which tracks industrial metals, after falling nearly 7.5% in January, was broadly stable in February. Incidentally, MSCI China (USD) equity index rose about a percent during the month though the move was likely more liquidity driven with hopes of more policy stimulus. Further, while published statistics in China have shown a reduction in number of new Coronavirus cases outside of Hubei, the situation is still very dynamic and uncertain.

The global authorities, especially central banks have been called into action as economists estimate global GDP growth rate for 2020 to come down by at least 0.5% vs earlier projections. The US Fed cut rates by 50 bps in early March though it is unclear how a supply side problem (people and firms not being able to work, or working in a limited way) can be helped by a rate cut.

For India, the negative impact of the disruption will be on the travel and tourism sectors and on consumer demand for certain services as people may tend to not go out and stay away from crowded places like malls. Supply chain disruptions could be there as a number of pharmaceutical and chemical companies source the bulk and intermediate compounds from China. The IT services sector could be impacted as business travel faces dislocation and on account of a second order effect as end clients may decide to restrict budgets as GDP slows. However, we do not know how long it will be before we see a reduction in number of new cases though the consensus is at 1-2 quarters as people take precautions and as the virus growth is expected to slow in warm weather.

In Indian news, inflation rallied to a six year high (food prices were up 13.6% YoY), and RBI came out with unconventional steps to bring down rates in the market while holding repo rates steady. Vehicle sales remain tepid, though residential property sales could be showing signs of bottoming out (they were up 12% QoQ across 14 cities) though the absolute unsold inventory remains high. Equity Market Outlook .

Concurrent data indicates that the economy is still slow and not much different than the previous quarter. Bank credit growth was at 8.5% YoY in January, and passenger vehicle and (especially) commercial vehicle sales are muted. There is no evidence of major pre buying ahead of BS-VI rollout in April.

It is too early to hazard a guess on the impact of Coronavirus on the economy. Our sense is that outside of the sectors mentioned above, the impact would be limited. Over the medium term, lower oil and commodity prices, and low interest rates are a positive for the economy. In the current volatility, valuation of many companies (across the market cap spectrum) have become reasonable making equity more attractive.

However, given the volatility and near term uncertainty, investors looking to invest can stagger their investments over the quarter.

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