Equity Markets Round Up: March 2020

Equity Markets Round Up: March 2020: Covid-19 contagion took centre stage during the month as the number of cases rose 9 fold to over 800,000 by end-March led by US (>160k) and Europe. Market moves were very sharp, taking just one month for the fall in asset prices that in previous cycles took a year or more. Global markets were roiled and the MSCI World Index (USD), which tracks developed markets was down 13.50% during the month. The MSCI EM (USD) index tracking emerging markets was down 15.6%. The emerging market currencies took a beating with the JP Morgan FX index for emerging markets down 8.4%. The Indian markets (Nifty -23% during the month) were not immune from the tremors either (the Nifty hit -10% lower circuit twice during the month).

The Indian Rupee was down about 4.7% during the month, significantly outperforming the EM currency index. FII outflows from Indian equity in March were substantial, with withdrawals of over Rs. 60,000 crores (USD 8.1 BN) during the month. According to IIF data, EM equity as a category saw withdrawals of USD 52.4 BN during the month, a significantly larger number than during either the Global financial crisis or the taper tantrum. Economic activity in many countries of the world has been impacted due to lockdowns and COVID related disruptions. Stay at home orders of varying intensity have been implemented in different countries. As a result, activity seems to have fallen off a cliff mid-March onwards. This is likely to lead a deep contraction in global growth in Q2, CY 2020. This was reflected in US jobless claims data for the weeks ended March 21 (3.3 MN) and March 28 (6.64 MN). As a precaution, India too launched containment measures in the form of a 21-day nationwide lockdown despite the number of confirmed cases being so far fairly under control.

Globally, a number of central banks launched stimulus actions given the ongoing pandemic. 23 of 31 leading central banks cut rates during the month. Many governments also announced fiscal measures as well, topped by the US, where the size of the headline stimulus is over 10% of the GDP. The RBI also took aggressive measures to release liquidity in the system by cutting the repo rate by 75 bps to 4.40%, reducing the Cash reserve ratio to 3% from 4%, launching targeted LTRO (the banks have to invest the monies made available from RBI under this facility to buy CPs and corporate bonds) and further increasing the amount that banks can borrow from the RBI under the so called Marginal Standing facility. It has also permitted FPI investment in certain sovereign bonds without any caps on holdings.

The government has also taken targeted measures to help farmers and the population in the lower income strata. The expectation is that they will likely take further measures to support business, especially small and medium sized enterprises. The failure of Saudi Arabia and Russia to strike a deal to balance a market which was facing a demand cut led to crude falling to sub-$25 / bbl levels (Brent crude was down 55% during the month).

This fall created further stress in the high yield bond market as many small, independent energy producers would have an unviable business at these levels of oil. In India too, the rating agencies have been proactive in downgrading many corporates whose businesses would be impacted by the situation caused as a result of the Coronavirus. In terms of sectors, automobiles, financials and metals underperformed the benchmark index during the month (these sectoral indices were each down over 30%, while the Nifty was down 23%).

Financials suffered as a slowing economy was expected to hurt both their balance sheet (riding NPAs) and their income growth as credit demand would also likely slow. Autos were hit as sales fell sharply (40-50% YoY for passenger cars and 2-Ws and much higher decline for CVs). In addition to the above, sectors which have been particularly hit are companies in the services sector viz. aviation, travel, retail, entertainment etc.

IT and pharmaceuticals did relatively better during the month. Outlook The current base case assumption is that the spread of the virus would likely peak in April/ early May and slowdown thereafter due to the proactive and tight social distancing measures. Since the impact of Coronavirus is an external shock to the economy, the economy should begin to get back on track as the virus is contained. However, a prolonged period of low economic activity due to the lockdown will also prolong the recovery.

We expect the recovery to be gradual and initially at least to be impacted by risk aversion among banks and finance companies. Forecasting earnings growth for FY 21 is very difficult but it could be flat vs FY 20 numbers. The downturn will not hit all companies equally, with business consolidating in favour of the stronger among them. Currently as the market focuses on the near term issues and meaningful volatility likely over the next few months, it is a good time to look at equity investment for a medium to long term perspective given the fairly attractive valuations in the market.

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