Equity Markets Round Up: April 2020 After a very poor performance in the month of March, when global equity markets were almost all down (the MSCI EM index (USD) and the MSCI World index were both down over 13% in March), equity markets staged a smart rally in the month of April. The MSCI EM (USD) index rallied 9% during the month. However, India outperformed meaningfully, with MSCI India (USD) up 15.5%. The global up move was driven by a flattening of COVID-19 infection rates in some major countries, an unprecedented set of monetary and fiscal measures and some relaxation of lockdown protocols. The worldwide promised support from the governments to the economy is now estimated at about USD 8 TN.

While the growth rate of COVID-19 cases has slowed in developed markets, most EMs are showing increasing spread of infection. In India, while the number of COVID cases is rising, the lockdown has helped reduce the rate of increase. While Foreign portfolio investors remained net sellers in India during the month, the quantum of their net selling came down sharply to Rs. 6,883 crores (approx.) from Rs. 60,321 crores in March. According to JP Morgan data, EM equity had net outflows of USD 4.6 BN during the month (till April 29).

The outflows from EM equity in 2020 to date have been USD 29 BN (JP Morgan data). As expected, the macroeconomic and physical data for the month for April was very weak given that a large part of the economy was shut. Both electricity (-22%) and fuel demand (-50%) fell sharply. Merchandise exports were down about 34% YoY. The prolonged lockdown and the very gradual reopening of the economy means that a ‘V-shaped’ recovery is very unlikely.

The return to normalcy will be impacted due to issues around availability of migrant labor, productivity decline while maintaining social distancing protocols, disruptions in supply chains and slow comeback in demand. Anecdotal information from companies suggests that those who have started operations are currently operating at around 40% of normal capacity. Ramp up will be gradual. Although only 18% of the districts in the country are in the Red Zone, it is estimated that they contribute to nearly 48% of India’s GDP (Citibank estimates). Most importantly, the risk aversion among banks and the relative inability of most NBFCs to raise funds will lead to a credit crunch for the relatively smaller and weaker borrowers.

The banks who have raised money from the RBI in the LTRO window, are also learnt to have given such funds to AA and higher rated, relatively stronger entities. The liquidity in the system is ample, as the banks are daily lending over Rs. 7 Lac crores in the reverse repos window of the RBI. This is despite the RBI cutting reverse repos rates to 3.75% to disincentivize banks from parking money with itself. In this context, the talk of either the government directly, or through some government entities guaranteeing part of debt of existing solvent businesses is important as it can free up the credit delivery mechanism to some extent.

During the month, healthcare stocks were among the best performing as investors bet on increased healthcare expenditure over the next few years, and the US FDA fast-tracked approvals for some key products that were likely to play a role against Covid-19. Financials continued to have a tough time as investors were cautious both about potential delinquencies and slowdown of growth.

Outlook In terms of economic recovery, rural areas are likely to recover sooner, as the harvesting continues (esp. in cereals etc., though vegetable farmers have been adversely impacted) with the states facilitating price support operations for such crops. Also, the spread of COVID-19 cases is relatively lesser in rural areas.

The markets are going to be volatile as there is some degree of disconnect between the underlying economy and the markets. Markets are currently more reflective of liquidity and global central bank support to economies. However, these volatile conditions also give scope for stock picking in quality, well run businesses as risk aversion leads to stock prices of even good companies undergoing sharp corrections.

The markets in the near term will be impacted by the news flow on a possible cure / vaccine for COVID-19, the opening up of the lockdown and the recovery in manufacturing and services, increase in credit flow and potential demand pick up from end consumers.